The recent pandemic induced recession has been very stressful and led to many businesses either closing their doors or, at the very least, losing a significant amount of money. This, in turn, has resulted in many businesses refocusing on managing risk, rather than on making long term business decisions that can be disrupted by rapidly changing circumstances, such as snap boarder closures.
This change in strategy is important uncertain times. Reviewing risks, which include both internal and external risks is key. An example of external risks are those that are not under the business’ control, such as fluctuation in exchange rates, financial failure of customers and natural disasters. Internal risks include dishonesty by employees, ineffective managers or non-compliance with work, health and safety or employment laws.
The ability to make long term plans depends on mitigating the effects of external risks and managing internal risks, which some businesses do well and others not so well. For example, businesses that actively manage their risks during the recent recession had options which enabled them to pivot from making dresses or suits, to face masks. Those that didn’t manage their risk well, are still struggling or have closed their doors.
What are the goals of risk management?
Risk management helps you make better business decisions. It involves reducing the things that could have a negative effect on your business. The Australian Government provides free guides and templates to help you to put risk management plans into, from Emergency Management Plans, to dealing with consumer complaints under the Australian Consumer Law and managing Work, Health & Safety. These are free and can be found at: https://business.gov.au/risk-management/risk-assessment-and-planning/business-risks
Whilst external risks cannot be easily predicted, such as the effects of climate change, interruption in your global supply chain or trade restrictions, they can be mitigated if you manage them.
Risk management empowers you by assisting to develop a range of strategies to deal with risks and turn threats into opportunities. This allows you to make informed business decisions, especially during times of crisis such as the COVID-19 pandemic.
There are generally three ways to approach risk management. These are to eliminate, mitigate (which includes buying insurance) or accept the risk. When you eliminate a risk, you simply remove the cause, so that it never becomes a problem for your business. You need to eliminate risks that threaten the survival of the business. However not all risks can be eliminated. Not accepting the lease clauses from your landlord or not dealing with clients is not a real option. Next, you may mitigate the risk. This is where you decide to accept and manage the risk. The main aim is to reduce the possibility of it occurring, as well as the impact on your business. For example, you can install a burglar alarm to prevent a break-in or buy fire insurance to mitigate the financial impact from a fire, if it occurred.
If you accept the risk (retain the risk), you need to create contingency plans that allow you to deal with the consequences of the risks as they arise. These retained risks have a smaller impact on the business and can more easily be managed out of cash flow. For example, you may decide to retain the risk of cyber hacking and upgrade your firewalls, not buy insurance. Cash reserves should be set aside, to pay the costs of the retained risks, if and when they occur.
All this can be easier said than done, but managing risks will help you achieve your business goals, which is why risk management is so important to the success of SME’s.
We recommend you speak to your insurance adviser who can help you to identify your business risks and create a workable plan to manage them. For tips on managing risk for your business, talk to an insurance specialist today and find your local adviser.
General Advice Warning
The information provided is to be regarded as general advice. Whilst we may have collected risk information, your personal objectives, needs or financial situations were not taken into account when preparing this information. We recommend that you consider the suitability of this general advice, in respect of your objectives, financial situation and needs before acting on it. You should obtain and consider the relevant product disclosure statement before making any decision to purchase this financial product.