…or, “A Risk Management Primer for Small Business, Part 2”.
In our last post, we looked at what risk is, general risk categories, and how we deal with risk on a general level. Today, we look at risk awareness, risk tolerance, and risk management planning.
The risks you know about are never a problem – it’s the risks you’re unaware of that often pose the greatest danger. Of course, we all know about the risks of doing business by the ocean or in an earthquake-prone part of the world – or both. The earthquake and tsunami that hit the island of Honshu last March made us painfully aware of the risks the Japanese people face constantly, but most of us were already aware of that risk.
The double blow to Japan’s most populous island also affected many who weren’t anywhere near the disaster site. Businesses that relied on Japanese manufacturers to supply not just automobiles but auto components, as well, found themselves reeling from the supply chain disruption. Up to March, 2011, the supply chain risk posed by globalization wasn’t even on most companies’ radar.
Funny thing about globalization, isn’t it? You get to spread some of the risks of doing business but you also have to absorb a few. Keep that in mind as you consider outsourcing and partnering.
“The policy of being too cautious is the greatest risk of all.”
Risk tolerance – also known as “risk appetite” and often defined as “degree of uncertainty an investor can handle with respect to a drop in the value of their portfolio” – impacts the small business owner as much as it does bankers, investors, and fund managers.
Think about it. When you can afford to put a little of your earnings into a bank account, a 401(k), a fund, or your mattress – how much risk are you willing to bear? The way you approach risks to your business will, in all probability, mirror your personal approach.
Too, you’ll tolerate some types of risk better than others. That’s natural – the greater the degree of uncertainty, the less likely we are to take on any kind of risk. Conversely, if we’re better informed about a particular risk – how likely the threat or opportunity will occur, what kind and degree of impact it will have on my business when it occurs, and the best course of action – the better we’re able to deal with it appropriately.
(Note: The old story about risk and opportunity being two halves of the Chinese word for “crisis”? Not true, apparently.1)
RISK MANAGEMENT PLANNING
“First, weigh the considerations. Then, take the risks.”
(Helmuth von Moltke)
To manage risk appropriately, you will need to:
- Clearly state your task or project.
- Identify the risks (seek assistance from others regarding unknown risks, unintended consequences).
- Identify possible outcomes (what happens if the risk occurs).
- Reject the least likely outcomes (begin to prioritize).
- Determine the likelihood of the threat.
- Determine the severity of impact, if the threat occurs.
- Using a risk matrix, determine the relative risk of each threat to your business and prioritize them.
- Decide whether you’ll accept, mitigate, transfer, or avoid the risk.
- Develop your risk management plans (RMP).
- Implement your RMPs and monitor their performance.
- Analyze the results and review your RMPs.
- Revise and re-prioritize your risk management plans, as needed.
“It’s not because things are difficult that we dare not venture.
It’s because we dare not venture that they are difficult.”
- Mair, Victor H., “Danger + Opportunity ≠ Crisis”, Pinyin.info, Sept., 2009 – http://pinyin.info/chinese/crisis.html.