Thomas M. Bragg on Business Risk Management

In our last conversation about risk management how-to’s, we finished up the discussion on evaluating risks. If you are able to utilize some sort of financial model to estimate risk impacts during your evaluation, you now have a rather lengthy list of risks with their probable impacts. That list can now be sorted.

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How you sort the data depends on your desired approach. You can sort the data in order of probable impact. (This sort order will put the risks with the greatest potential impact to your business at the top of the list.) Or you can sort the data in order of probability of occurrence. (This sort order will put the risks that are most likely to occur at the top of the list.) Each sort order has its benefits. Personally, I look at the data in both ways. I obviously want to deal with the biggest impact risks. But I also want to deal with the most probable risks. Call it selfish, but I like the idea of reducing my future stress levels by eliminating the most probable risks.

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So we’ve got a sorted list of risks. It’s probably somewhat overwhelming. There is no way you can deal with all of them. Where do you start? Which risks do you work on and which do you leave alone? That’s where the 80-20 rule comes in…

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The 80-20 Rule (aka Pareto Principle) is nothing short of amazing. It says that 80% of the effects come from 20% of the causes. The 80-20 rule applies in many places, but let’s talk about how it can help you out with your risk management.

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Look at your risk inventory, sorted in order of impact. Count the total number of risks. Now take 20% of the total number. Add up the probable impact of those top 20% of risks and you’ll see that it accounts for about 80% of the total probable impact. Think about that for a minute…. You can address 80% of your total risk exposure by working on 20% of the risks facing your company. How cool is that? If you have 50 risks identified, you can address 10 of them and cover the lion’s share of your risk exposure. Now it’s not so overwhelming, eh?

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So now we have a manageable number of risks to think about and plan for. That leads us into the final step of risk management – planning for your risks. That will be my topic for the next how-to posts.

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Coming up

So far, I’ve done a lot of writing about how to do practical business risk management. That’s all fine and good, but I know it’s difficult to apply how-to text to real life. Over the next few weeks, I’m going to introduce you to Fred. Fred owns his own coffee shop and actively manages his risks. I’ll share some of Fred’s experiences with you and show you his risk management spreadsheet. I think the example will be helpful in seeing how all this information I’m spewing at you can be applied in your business.

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Also in the works… I think it would a glossary of terms might be helpful. I use a lot of terms that can be confusing. Plus some of my terms are “tom terms” – a little different than the industry standard, but easier to understand (in my humble opinion). The glossary will be a living page on the blog. Stay tuned…

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What else would you like to see from me? Is there different content or more of a certain category that you want to see? What can I do to help? I’m happy to accommodate. Let me know your opinion.

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Disclosure: I now have a disclosure page. Click here or click the “Disclosure” tab at the top left of the page to read my full disclosure that I really have nothing to disclose.