The real rewards of risk management

When the holiday season winds down, it will be time to get serious about improving your business in 2012. There are many areas you can focus on to improve your business, but one of the most lasting fixes will come from getting better at managing risk.

Risk management may sound daunting, but why would you resist a discipline that encourages you to review all the risks your company faces - regarding your market and your products, technology, operations and safety, human-resources, and even environmental and social?

Risk management gives you a holistic view of the threats surrounding your business. You then look for ways to head off or reduce the impact of the most likely risks, a process that will prepare you for most challenges the world tosses your way.

Many big companies today have risk officers who oversee the evaluation and mitigation of risk. Most SMEs won't go to this expense, but that's no excuse for not getting the best handle you can on all your business risks.

Here are just a few benefits of a serious risk-management initiative:

* It empowers you to scrutinize your business to identify blatant risks that are easily managed - for instance, a weak cash-flow position, potential health and safety hazards, or key customers who could be wooed away by the competition. By grappling with these potential problems in advance, you can head off some of these problems and take the rest in stride.

* You can save a lot of workforce headaches. Succession planning is a key part of risk management; by reviewing the risk of having to replace each of your top people, you'll know exactly what to do when your controller retires or your top sales rep turns to the dark side.

* Risk management is good management. It ensures that you always know the defect rate of your products, the lifespan of your equipment, the age of your receivables, and what to do if there's a flood or a flu epidemic. As Holiday Inn used to say, the best surprise is no surprise.

* Your staff will be happier and more confident knowing the business is being well managed. A credible risk-management program will help you retain great people and attract new ones. It also ensures that all your costly talent will spend less time searching for information and more time making informed decisions.

You don't need a risk specialist if you involve your management team. Each member could start tracking appropriate risk areas. For instance, your HR leader could study the risks related to workforce accidents and the loss of key talent, while your production manager looks after equipment, workflow, supply chain and fire prevention, and your controller oversees technology, data and financial risks.
How do you get started? An SME Risk Management Toolkit developed by the U.K.-based Institution of Occupational Safety and Health identifies four stages of risk management.

1. Identification of hazards and evaluation of risk. This means making an initial assessment of all your activities and prioritizing the highest-risk areas for further study;

2. Risk control planning and measures. How can accidents be avoided, or their impacts be mitigated? (Example: to avoid workplace accidents, you might implement safer work practices and better training programs; but you should update your insurance policies, too);

3. Planning for actions to take in the event of an accident, and how to recover;

4. Review risk situations and learn from problems and accidents.

Some entrepreneurs argue there's no point getting involved in risk management,because you can't predict every calamity that can befall your business. Of course that's true. But you can adjust for predictable risks - and thus be stronger when unexpected disaster strikes.

It's rarely one problem that sinks a business, but a combination of setbacks. I know one entrepreneur who closed his business recently because of what he called "a perfect storm" of problems: the weak economy, cutbacks by one customer, another client who simply disappeared, and a key employee who quit just when another got pregnant. Good risk management gives you a plan for each of these eventualities, and a fighting chance to survive even the harshest storm.

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