Every business endeavor comes with some element of risk. Your ability to manage risk will not only affect your company's profitability, but it could also mean the difference between staying in business or not. There are five different techniques you can use to manage risk:
- Avoiding Risk
- Retaining Risk
- Spreading Risk
- Preventing and Reducing Loss
- Transferring Risk
1. Avoiding the Risk
Avoidance should be the first option to consider when it comes to risk control. For example, if you are transferring sensitive data from one location to another, you can avoid the risk of having it stolen if you don't leave it in your car overnight. Another, perhaps more obvious example, is paying clients with checks rather than mailing cash.
2. Retaining the Risk
Sometimes it's preferable to keep your level of risk as it is because the cost of avoiding the risk is more than the cost of damage or loss. Often, we retain risk without even thinking about it. For example, if you have $100 in petty cash in a locked drawer in your office, there is always the chance someone could steal it. However, the cost of a wall safe would greatly exceed the amount of money you would be protecting.
3. Spreading the Risk
Spreading the risk is often an inexpensive way of reducing the chances of a calamity. To protect digital information, for example, it's a common practice to back up computer storage. This protects the data from a drive error, viruses and malware. Moving the back-up drive to a separate building spreads the risk even more thinly, protecting the data from physical theft or a fire in one building. Companies with extremely valuable data often spread the risk even further by putting a copy of the data in a different city.
4. Preventing or Reducing Loss
When exposing yourself or your company to risk is unavoidable, you can often reduce or eliminate losses by taking safeguards against it. For example, if you own a hardware store, it's unlikely that you can eliminate the chance of theft when your store is closed for the night. However, purchasing an alarm system may be enough to make potential thieves avoid breaking in at night. If they do break a window, having an alarm sound and having the police dispatched to your store would reduce the amount the thieves could steal before they would be forced to flee.
5. Transferring the Risk
Transferring risk should usually be the last risk management technique you should use. Two common examples include transferring the risk to another party in a contract and the purchase of insurance. For example, a delivery company may contractually transfer the risk of damage to packages to either the shipper or the receiver. A second way this company could transfer the risk is by purchasing insurance so that if a package is damaged, the insurance company absorbs the loss.
Developing Risk Management Strategies
Every business has a unique set of risks, which can vary from year-to-year and even from one project to another. One method of managing risk and determining which strategies you should use is to list the potential risks, rate the probability of them occurring and then to decide which strategy is best to deal with each one.
In most cases, you should be able to use a combination of experience along with industry data to determine the likelihood of a risk. Of course, relying solely on experience in itself will seldom give you accurate data. If you're constructing a new building, for example, there is usually some risk of flood damage in the future. Just because there has not been a flood in recent years does not mean a flood is unlikely. Even if U.S. Geological Survey data indicates, there is only a 1-percent chance of a flood, that equates to a 26-percent chance over the next 30 years.