Are you wondering what’s the best way to protect your business in these ever-changing times? If so, we have the answer for you, risk management.
Using risk management within your company to identify what could go wrong so you’re prepared later can help save your business money and resources. Keep reading below to learn more about risk management and how to implement it within your company.
What Is Risk Management?
No matter your business size, you’ve probably run into issues with insurance, claims, and even general risks. For example, a fire can take down your office building, or someone could slip and fall on the job. These situations can significantly impact your business if you don’t adequately protect yourself and your work culture.
The word risk is well-known in the English language. Every day people take risks in many aspects of their lives, and sometimes we take risks without even realizing it.
When it comes to risk management, it’s the process of carrying out and making decisions that will lower the effects of risk on your company or organization. These risks can be objective, like claim costs and insurance premiums. They can also be subjective, like a decrease in productivity or even damage to the organization’s reputation.
When you focus on the risk, you can commit to the necessary resources to lower and control risk. You can help to protect your business from uncertain things that may happen and even increase the chances of having a successful business. Overall, risk management helps with workplace safety and workplace security.
When a risk exits, it’s usually due to the opportunity for a loss or profit. When discussing failures, we refer to risks as exposure to losses. This can be a fire or even defective products.
Know the Risk Equation
You should be aware of the equation if you’re unsure about your risk. The extent of risk can easily be expressed by using the following formula:
- Risk= Probability x Severity
The probability you’ll include in this formula is the likelihood of an event happening. Severity is the extent and cost of the loss.
Risk can easily be broken into two different categories. The first is pure risk.
Pure risk is when the possible outcomes are a loss or no loss. This includes an office being robbed and an employee involved in a car accident.
The second type is speculative risk. This is when the outcome is either a status quo, profit, or loss. This includes things like investing in the stock market and decisions within the business like creating new products and even opening recent locations.
Why Should I Manage Risk?
Managing risk within your business is a great idea. When you start managing risk, you will help your company have the resources to grow and flourish.
Managing risk can help you save resources. It can help you to see if you have too many people on the payroll, what your income is, to keep an eye on your properties, and even if the time your company is putting in is worth it.
What Is the Process?
When implementing risk management for your organization, you should know it is a process. This process is vital to any organization and shouldn’t be challenging.
Good risk management doesn’t have intensive resources and shouldn’t be hard for insurance brokers to provide to your company. You will need a bit of structure, some formalization, and a solid and educated understanding of your business or organization.
With this said, we should point out that risk management will require time and money investments. The amount of time and money you invest in risk management doesn’t need much to be effective.
In truth, risk management is more effective when it’s implemented and maintained gradually over time. The key to successful risk management is a basic understanding of the 5 step process.
Step 1: Find and Identify Risks
In this step, you should look at your company and ask yourself what could go wrong at any given time. When executing this step, think about the four main risk categories.
The first category is hazard risks. Hazard risks include fire or injuries your workers may obtain on the job.
The second category is operational risks. Operational risks are things such as high turnover rates within the business or even supplier failure.
Financial risks are the third category. Financial risk is something such as an economic recession.
The fourth and final risk category is strategic risks. Strategic risks include your brand’s reputation and can even cover electronics like computers.
Identifying your company’s risks is an essential part of the risk management process. Usually, businesses can identify these risks by looking at their experience and internal history. You can consult other industry professionals if your company isn’t too old.
Another way you can help to identify risks is by doing external research. See what similar organizations in your niche have run into and if that risk applies to your company.
Step 2: Measure Severity and Frequency
After identifying your risks, you should think about the likelihood of the risk happening. What would impact your business if you encountered the risks you identified?
To make this step easier, companies usually use a heat map. This map helps to measure risks on a scale basis. These maps use visual tools to help identify which chances are frequent and which will be severe to your company.
You can even have your map show you what risks will require the most resource loss and how many resources you will need to use to get the company back to running correctly.
This map will help you to see which risks have a lower impact and are unlikely to happen. On the other hand, it will also help you see which risks will happen more often and significantly impact your company.
Step 3: Look At Other Solutions
Now that you know what risks will impact your company most, it’s time to consider how to treat the trouble. You will also want to consider how much these treatments will cost and how much time they need to be implemented.
Your treatments for risks should have a balance of being affordable and effective. Remember that as an organization, you have the power to transfer, avoid, accept, and control any risk that may come your way.
When you accept the risk, you know that some chances are a part of doing business. This also means that the benefits of this risk are more significant than the risks.
Avoiding risk is not involving yourself in an activity that could cause a hazard. To control risk, you will need to reduce the chances of the risk happening. This is also known as mitigation or reducing the impact of the risk if it does arise.
Transferring risk is when you give the responsibility for any adverse outcomes of the chance to another party. An example of this is when a company or business buys insurance.
Step 4: Decide What’s Best and Do It
After you have listed all reasonable solutions, you will need to select one. You should choose a solution that will most likely achieve your desired outcome if the risk were to happen.
After selecting the best solution, you will need to gather resources together. This could be things such as more team members or even funding. After this, you must obtain the buy-in necessary for this step.
Higher-ups should approve the plan. After approval, the team members must stay informed and be trained in certain areas.
A formal process should be set up to make the solution active. This process should be logical and consistent across the entire company. An effective strategy will also encourage every employee involved every step of the way.
Step 5: Look At the Results
It’s good to remember that risk management is a process. It’s not a project that can be thrown together, completed, and forgotten. Your business, the environment in which your business and workers are, and the risks that your company can encounter are constantly changing.
With this said, you should do all five steps frequently and revise where needed. After going through steps 1 to 4, evaluate your process. Ask yourself if it was effective and where it could use some improvements.
Don’t let this step be discouraging. Sometimes you may need to start from scratch to find the best solution for the risk if this process doesn’t work out.
If you gradually work with your business on risk management, you will develop a risk culture quickly. This culture will be adaptable whenever it needs to be changed and more resilient. It will lead to better-informed decisions when looking at the bigger picture of your business’ operating environment.
Tips for Risk Management
Now that you’re ready to work on your business’s risk management protocol, you should remember some tips to make the process run smoothly. Below you will find our top tips.
Keep Old Insurance Policies Locked Away
Keeping things such as older insurance policies will be valuable to you in the future. You should keep it to consult what’s covered in your insurance plan and use it for reference when needed.
Don’t Over or Under Insure
You should insure for the actual value of the risk management process. This means you shouldn’t insure for less or more than what you need because it can cost you money in the long run.
Loss Control Is Worth It In the Long Run
You should be spending money and time on loss control. You need to spend money on the risks that will impact your company most. Another tip to remember is that you should invest in your budget.
Work on Building Relationships
Make sure you’re cooperating with your adjuster, broker, and insurer. This will help to build stronger relationships as long as you are transparent with them.
Protect Your Company’s Image
One of the most significant underestimated risks is image risks. Your company’s brand and image are substantial, so they should be protected.
Consider how each one will affect your image when considering your risks. From there, develop solutions to help with the risk and protect your vision.
Now You Know All About Risk Management
You are now well-educated in risk management. From knowing what it is and how it can help your business to understand the 5 step process, you should be a risk management pro. For more insurance tips and information, check out the rest of our website.
Should you have any questions, please don’t hesitate to call or email us here at Team AIS in Denver, CO. We’d love to hear from you.