Dealing with risk is an inherent aspect of business management. The way you prepare for risk is the most important factor in determining the longevity of your enterprise. Businesses of all sizes have to contest with the possibility of unexpected events occurring, but it’s how you plan for and react to such scenarios that influence your handling of them. These five methods of controlling risk will provide you with the options needed to better control the fallout from unplanned events or scenarios.
1. Avoidance
Avoidance of risk is a naturally occurring precaution taken by most businesses when they’re aware of the possibility of a perilous or unpredictable event unfolding. The key to avoiding risk is forward thinking and comprehensive planning. If you can gain access to information that identifies risk in a timely manner, you can often avoid the situation altogether.
Plan ahead and conduct extensive research to ensure you have access to all the relevant information that could inform you of impending risk. When it comes to avoiding risk, knowledge really is power. By identifying risk early, you can alter your plans and pursue a course of action that steers well clear of unnecessary exposure to volatile situations.
2. Acceptance
The acceptance of risk is also built on a base of knowledge and information. If your research suggests the risk involved in a given scenario is relatively minuscule when compared to the possible benefits, then accepting the risk may be the best course of action. Accepting risk should only be advised when you’ve conducting sufficient research and identified the relative potential of problems occurring.
Commit resources to calculating the pros and cons of accepting risk in every individual scenario and make a decision based on objective data. Once you’ve ascertained the potential negative effects of a decision, don’t proceed unless your business can definitively handle the situation if it goes wrong.
3. Mitigation
To mitigate risk is to take steps to minimise the impact of a negative event occurring through careful planning. If you can’t avoid the risk altogether, or you can’t afford to accept it entirely, then mitigation is the next logical step. Precautions like insurance are common methods of risk mitigation. If the negative event does transpire, you have provisions in place to reduce the severity of the impact.
Other ways of mitigating risk include additional staff training and the formulation of contingency plans. By teaching your staff to work more safely and efficiently, they will be better prepared to handle the fallout of a negative situation. Fire safety drills are a common and often mandatory form of risk mitigation.
4. Transferal
Risk transferal involves shifting the risk to an entity that you perceive to be more resilient or better equipped to handle the situation. If you identify an impending risk, delegating the task of dealing with it can help to transfer the risk to a department or staff member that is better qualified or more experienced.
Transferring financial risk among several separate entities reduces the chance of a company being irrevocably damaged by unforeseen losses. The key to effective risk transferral is knowing which entity would be the best equipped to deal with the situation. Diversify your revenue streams and ring fence your most lucrative departments in order to more effectively transfer risk.
5. Exploitation
Risk and opportunity often go hand-in-hand. One of the best methods of controlling risk is to look for ways to exploit the situation. Assess each example of risk for any opportunity of which you can take advantage. Every financially volatile situation brings with it the chance to make money. The best way to exploit risk is to find a way to leverage the situation to your own ends. Obviously, each scenario is different but if you assess each example with a critical eye, you may be able to improve your financial performance. Controlling risk is a difficult task but it is immensely profitable if done correctly. The money a business could lose from uncontrolled risk could put the long-term health of the enterprise in jeopardy, so it makes sense to attempt to control it at every opportunity.
