What is risk management?
Risk management is a process businesses use to identify risks or harms that could affect their operations.
Developing risk management strategies helps businesses make better decisions and operate more securely and confidently. It’s essential for any business, regardless of their size or sector.
Why managing risk is important
It’s important to manage risk to uphold business confidence and to protect profitability. Further, understanding and managing risk can help you to:
Achieve business goals
Risk management helps you determine what risks you’ll need to address and what strategies you’ll use to mitigate them so they don’t prevent you from achieving your business goals.
Improve customer retention
When you manage risk around your customer relationships, you may be able to improve customer satisfaction and increase retention.
Boost employee confidence
Implementing risk management strategies can help employees feel more confident in their roles, their workplace, and in the business itself.
Types of risk
You can do a business risk assessment based on the different types of risk that a company may face, such as:
Hazard-based
Hazard-based risks come from materials or actions that can potentially be harmful. Hazards may include:
bacteria, fungi, pests or viruses
bullying and harassment
discrimination
working at high elevation
carcinogenic, flammable, poisonous or toxic chemicals
extreme weather
faulty equipment
heavy workload
high noise levels
improper storage
poor workplace design
incorrect equipment use.
Opportunity-based
Opportunity-based risks arise from choosing one opportunity over another, like entering a new market or investing in a new product. When you invest your time and resources into an opportunity, you risk missing a better one or not getting the results you were expecting. That’s why it's important to assess every new opportunity based on the risk and reward.
Uncertainty-based
Uncertainty-based risks are unpredictable, like changes in consumer demand, fluctuations in the stock market or natural disasters. Other examples include:
financial loss when a business that owes you money files for bankruptcy
legal action
loss of customers or suppliers
a decline in market share caused by new competitors or products.
Operational-based
Operational risks arise in the day-to-day running of your business. They may be the result of flawed systems and processes or disruptions that can lead to financial losses. Other examples include:
employee error
equipment failure
fraud or other workplace-related incidents
Risks businesses must manage by law
While risk management is largely for businesses to decide for themselves, there are some risks that businesses must manage by law. These include:
Accidents and injury
Businesses must ensure the safety of customers and employees. They must do everything they can to prevent accidents or injury, and hold workers’ compensation insurance to protect employees in case they suffer a work-related accident or illness.
It’s also important to stay up to date with work health and safety (WHS) laws and regulations to maintain compliance.
Customer complaints
Businesses must comply with Australian Consumer Law, which:
explains the standards of business conduct
forbids unfair trading practices
offers consumer guidelines for products and services
regulates certain business-to-consumer transactions
protects consumers by regulating the safety of products and product-based services.
Businesses should establish risk management strategies to address customer complaints quickly and prevent customer dissatisfaction, which could lead to legal risk.
Environmental damage
The legal requirement to manage environmental risk only applies to certain businesses. Learn which environmental laws apply to your business and review them to make sure you’re compliant.
Getting an environmental audit is a good strategy to identify potential risks. This helps you determine your business’ environmental impact and find opportunities for improvement. The next step is to set up an environmental management system (EMS).
An EMS helps you:
identify environmental risk factors like hazardous waste and pollution
set clear objectives and targets
provide procedures for emergencies and everyday operations
define responsibilities and outline a reporting structure
monitor and review the system’s effectiveness.
What are risk management strategies?
Risk management strategies are systems and processes a business can use to identify, assess and manage risk. Your strategy should cover risk prevention, control and reduction.
4 risk management strategies for your business
1. Acceptance/retention
This strategy involves accepting risks associated with your business. For example, when you decide to invest money in the financial markets, you accept any loss that may come with it.
2. Aversion/avoidance
This strategy involves avoiding risky situations. For example, you might choose not to open a business in an area prone to natural disasters.
3. Reduction/limitation
This strategy involves reducing the likelihood of risk or severity of the associated losses. For example, you might instal sprinklers in your office to reduce the risk of fire damage.
4. Transfer/sharing
This strategy involves transferring the responsibility for managing a particular risk to another party. For example, you might move your software to the cloud so that your cloud service provider takes responsibility for your data storage and security.
Disclaimer: This is general advice not meant to replace professional guidance. When seeking out someone to help advise you on business decisions, find somebody qualified in your local area.
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Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.