Why it’s Important to Identify Risk in Business

man on a high wire balancing himself No business is without risks, but the key to any business is understanding the importance of preventing, minimizing or eliminating risks whenever possible in order to prevent losses. After all, less risk should theoretically create more success for the business.

For any business, risk can be defined as an internal or external factor which may ultimately affect objectives by either lowering the projected profits or even causing a loss. Whether the risk is due to economic issues, financial rates, industry regulations, business costs, breaches in information or political influences, risks can cause a business to lose money or ultimately go under.

That’s where risk management comes in.

Risk management is important because it allows a business to control – and often times prevent – the financial, political, social and cultural ramifications associated with risks. Not only does risk management allow a business to identify potential risks ahead of time, it also allows a business to react accordingly and minimize or even prevent losses. Without identifying risks using risk management, a business cannot successfully define objectives. By minimizing or even eliminating risks, a business should see an increase in productivity by now wasting time and resources, as well as protection from any possible legal repercussions.

In order to enact risk management, a business must create a risk management plan. To create a plan, a business must first identify all external and internal risks, such as the examples noted above. Depending on if the risk is determined to be low, medium or high impact, the business can adjust its risk management plan accordingly and properly identify business objectives. Regardless of the risk level, the business must determine the potential impact the risk would have on its bottom line.

Next, the business needs to perform a risk analysis, which will determine how any potential risks would affect the business. By putting a numerical value on potential threats, the business can analyze the impact on costs, productions and other variables which may be deterred by risks.

After analyzing the potential risks, the business needs to figure out a course of action for how to control the risks. For the business, this will answer the questions of what it should do in the event of risks occurring, including how to prevent the risk and how to recover from it.

For the risk management plan to be useful for a business, the plan needs to clearly establish and define policies and procedures for staff members to easily follow and understand. This helps employees understand how their responsibilities and roles tie into the risk management plan. Having all employees on the same page also will ensure they respond adequately when necessary.

There is no guarantee which – or if any – risks will occur for a business, but the key is to be prepared for any possibilities and understand the importance of properly managing these potential risks. With the proper understanding of risk management and an effective risk management plan, a business can operate confidently in knowing that they are prepared for any and all potential circumstances that could negatively impact the bottom line.