Risk is an unavoidable part of life. Uncertainty shrouds every action, threatening even the best-laid plans. Risk management practices help businesses predict and quantify dangers as precisely as possible to avoid them or minimize their impact.
Every organization should have a risk management plan in place, offering guidance to employees and executives on the proper procedures for qualifying and mitigating hazards at critical business touchpoints.
Below you’ll find strategies for formulating and improving your plan. If you haven’t given risk management a thought before, we hope this article opens your eyes to the value.
It Starts With Your Company Culture
Risk management is only useful if everyone in the company is committed to rooting out dangers wherever they’re hidden. If people fear they will be negatively-judged, or worse, blamed for revealing endemic threats, they’re likely to let them fester until it’s too late to avoid the worst effects.
To create a constructive culture that values risk management, make it clear that employee feedback about potential issues is welcomed and rewarded. Encouraging employees to take ownership of their projects will increase the chances that they’re analyzed for potential hazards. Couple ownership with unambiguous management processes and your culture will grow to embrace risk management as second nature.
Reward Prudent Behavior
“Nothing ventured, nothing gained” can be understood to mean that taking risks is always preferable to inaction. This leads organizations to reward those that take bold action, even if it puts the group at undue risk.
Responsible risk assessments must balance possible gains with potential losses. When a proper analysis is conducted, the conclusion may be that possible bad outcomes overshadow potential benefits. In this case, prudent behavior should be rewarded. The risk for its own sake should never be valued above measured consideration of every possible outcome.
Keep Company Goals in Mind When Assessing Risks
As stated earlier, every action contains an inherent risk. Many times, opportunities for growth are also risky endeavors. When performing a risk assessment, it’s essential to keep the organization overarching goals in mind.
Managers and employees should ask themselves how likely it is that a given action will benefit the company, and to what extent potential risks are trumped by greater upside potential. This can help prevent overzealous risk restrictions that deter employees from engaging risks that may help the company reach its objectives.
Identify Risks as Early as Possible and Monitor for Changes
Risk management is an attempt to foresee future events and prepare for them to mitigate bad outcomes. The sooner your staff engages in this process, the more time they’ll have to alter plans and timelines.
The irony is that the earlier this process is engaged, the less accurate it will be, simply because the events its predicting are further out in the future. More can change between prediction and resolution. Therefore it’s critical that risks are monitored and reevaluated periodically as situations unfold.
If a customer is delinquent on a bill for more than 90 days even after repeated follow-ups by your staff, transfer this account to a collection agency. The older an account gets, the harder it becomes to recover money from it. Too many accounts receivable is a red flag for any organization that can restrict the cash flow.
Expect Full Transparency About Risks From Every Level of the Company
Senior management may sometimes feel it’s prudent to withhold knowledge of potential risks in order to prevent panic. However, in the long run, this harms positive risk management cultures, because middle management and their direct reports will model behaviors exhibited by company leadership. Instead, engaging full transparency regarding risks at all levels helps promote that behavior company-wide.
Secondarily, when risks are withheld, employees are operating with incomplete information. They may take actions that they wouldn’t otherwise if they knew the true position of the company. As a result, cloaked risks breed other risks, a situation that must be avoided.
Risk management is only as strong as its weakest link. Effective policies require full compliance, from every participant, at all times. If you create a culture that values this basic premise, you’ll be well on your way to effective risk management.