FD’s guide to smarter risk management

February 2nd 2016 | Posted by phil scott

FD’s guide to smarter risk management

Risk lurks around every corner, and no business is invincible. The dangers may vary with an organisation’s size, sector and more, but the path to survival remains the same: reduce the probability, insure against losses and plan the response.

Our guide to risk management will walk you through the stages of risk management best practice, putting you in the best possible position in the event that something goes wrong.

Identifying risk

Imagining ‘worst case’ scenarios might not be everybody’s idea of fun, but it’s an essential part of protecting your business. Every aspect of your operations, from the production process to your people, your records and data to outside events, needs close analysis. Ask questions: how does this specific thing work? What would stop it from working? It’s an exercise worth a serious investment of time, and it’s best to involve a range of people. Talk with shop floor employees, bring in health and safety experts, soak up stories from industry publications and online forums. Ask your fellow directors and advisors for their thoughts.

Consider the following:

Are buildings safe from fires and floods? Can any machinery cause injury or damage, and are all users appropriately trained? Is storage stacked safely? Are there adequate exits? Are your people safe? What if they turn to theft? Do you operate vehicles, have they all been serviced and are all operators trained? What happens if a key customer goes out of business? Or a key supplier? What if exchange rates swing against your favour? How long could you survive a power cut, downed phone lines or lack of internet?

Evaluating the dangers

This exercise will probably present you with a long list of possibly disasters. It might be grim reading. But remember: not all risks are equal. Give risks a score each in the category of likeliness, and severity if they occur. This should highlight any areas that need immediate attention.

Reducing the probabilities

Armed with the knowledge of what could go wrong, it’s time to prevent the avoidable disasters. This can be done by working to reduce the probability that problems will occur or, where that’s not possible, mitigating the damage done. Reducing risk can include ensuring all staff are fully and regularly trained, having a buildings inspector ensure your premises are best protected against arson, flood and theft, making regular backups of data and putting into place emergency procedures.

Other incidents may be out of your control. Key staff, no matter how much you look after them during work hours, could do something less than ideal in their own time. Customers and suppliers may end their relationship with you for any number of reasons of which you have no influence. Plan for these eventualities. No matter how important an individual is, ensure that the business wouldn’t collapse if they could no longer come into work. Make backup plans in case machinery breaks down, or there’s a power cut. Try not to rely too heavily on third parties, or at least plot what would happen if things fall through.

Buying appropriate insurance

Buying insurance can be a balancing act. It’s often too expensive to protect against every eventuality, but far too risky to plump for the bare bones deals. To ensure you get the best coverage for the best price, list all the areas that absolutely need coverage. Some, such as public indemnity, are required by law and others are required by industry-specific groups.

In addition to insuring against damages in the event of an accident, it’s also possible to insurance against trading losses. For example, buildings insurance will cover the repair costs of a fire. Business interruption insurance covers any income you lose while the building is being repaired. Once you know what you need, and also what you’d like, consider employing an insurance broker to negotiate a deal that works in your favour. They often have access to extra discounts, or just have more experience shopping around and negotiating. The better price you get, the more coverage you can buy.

Accepting the risks

Planning, mitigating and insuring is a vital part of business survival, but no plan is completely immune. It may be a disaster deemed so unlikely that it was too costly or time-consuming to prepare for may actually strike. In this case, have a backup plan. Maybe you need some public relations help, or assistance from another company. There may be disasters that, despite a wealth of expert insight, still could not have been predicted. This is where a catch-all response and recovery plan comes in handy. Nobody wants a disaster to befall their business. But if it does, those that are best prepared are those that come out ahead. To borrow a well worn phrase: if you think risk management is expensive, try suffering an incident. And as with all plans of this type, make sure all analysis, plans and policies are updated regularly to ensure your hard work remains relevant.