Thomas M. Bragg on Business Risk Management

About a week ago we talked about how to identify your risks. I asserted that “almost every risk comes from assumptions” and we, as business owners/managers, make A LOT of assumptions. Where do we start?

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It may be helpful to think about all of those assumptions and associated risks by breaking them down into 3 broad categories.

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1. Budget (financial) Risk
2. Schedule (calendar) Risk
3. Quality Risk

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Let’s take a brief look at each of them…

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Budget Risk

I think it’s fair to say that budget risk is the first type of risk that comes to mind for business owners and managers. A budget risk is any risk that potentially impacts your financial performance. Some potential budget risks are: The risk of a new lower priced competitor entering the market; the risk of an economic downturn changing your customers’ spending habits; or the risk of a key supplier increasing your material costs. Pretty straightforward, right? Budget risks can lower your sales, increase your expenses or do other nasty things to your financial statements.

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Schedule Risk

Schedule risk can take several forms. It can be in the form of a cash flow risk. Examples are the risk of your customers taking 2 weeks longer than expected to pay up or your supplier insisting on cash up front instead of net 30 terms. Your overall financials really wouldn’t change much, but your cash flow would be impacted.  Another form of schedule risk can be an “external party” risk. An example here might be the risk of a state agency being slow to issue a sales tax permit or business license (a real stretch, right?). Or it might be the risk of a contractor slipping the schedule on a remodeling project. Do you see the distinction between schedule risk and financial risk? Can you think of other forms of schedule risk?

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Quality Risk

The Quality Risk category is the murkiest category to work with. In my experience many quality risks can be flowed down to financial risk so some judgment is required. Quality risk examples range from the obvious (e.g. the risk of increased warranty expense due to poor product quality or the risk of decreased sales due to poor customer service) to the more obscure (e.g. the risk of a poor first impression due to misspellings in marketing materials or the risk of a poor website design increasing your shopping cart abandonment rate). A good place to start with identifying quality risk is to think about anything that could impact your business’ reputation or your customer’s experience.

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It’s important to keep in mind that the categorization of your risks isn’t critical to your risk management success. The categories are just guides. They help break down the overwhelming universe of risks into more manageable buckets that you can get your head around. You will come up with some risks that fit into more than one category. Don’t worry about it. Just pick a category and move on. Getting the risks listed somewhere is far more important than the actual category assignment.

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Can you think of other categories of risks? I’d love to hear your thoughts on them.