With the current business failure rate in the UK at around 60% (according to Startup Genome) there can be no doubt that running a business is ‘a risky business’! However, I’m sure you’ve heard the phrase ‘no risk, no reward’ so it’s also clear that if we aren’t prepared to take at least some risks, we invite the larger risk of failure. Having survived (somehow!) several financial crises and recessions over the last few decades, I put together this blog to examine some of the best ways to manage risk in business.
Identify your risks.
The first step to managing risk in your business is to identify the risks that your business faces in the first place. Conduct a risk assessment and list out the potential risks that could impact your business, as well as the likelihood and impact of each risk. Don’t forget to consider both internal and external factors, such as financial conditions and market trends.
Evaluate your risks.
Once you have identified your risks, the next thing you need to do is evaluate them. How likely is each risk? And what kind of impact would it have on your business if it came to pass? Score each risk on both scales from 1 – 10 to help you identify those that are the highest likelihood and those with the highest impact, so you can clearly see your priorities.
Develop risk mitigation strategies.
Your next move is to develop risk mitigation strategies, where you define the necessary steps to reduce the likelihood or impact of each risk. Here, you have four main choices, which I like to call the 4 ‘A’s of risk: avoidance, abatement, acceptance or accession.
- Risk acceptance: This means simply accepting the risk, as it stands! Often, simply being aware of potential risks is enough.
- Risk abatement: This means reducing the likelihood or impact of the risk. For example, in my work with my clients, much of what I propose to include in a Heads of Terms document is akin to an insurance policy. If you’re taking on an existing building rather than a new one, ensuring you commission a full schedule of condition ahead of time and having it attached to the repair covenant, will help to reduce the risk inherent in an older building and ‘insure’ you against potential repairs in the future.
- Risk avoidance: This means avoiding the risk altogether. For example, you could avoid the risk of product liability by not selling products that could be dangerous. For example, I often ensure that any Rent revision clause in a commercial lease includes a cap. This ensures they avoid the risk of future rent increases that fall outside of their planned budget.
- Risk accession: This means transferring the risk to another party. For example, subletting in part. Including this provision in your commercial lease terms provides you with an insurance policy against your business shrinking or needing to adopt a hybrid model and requiring less space. With this agreed up front, you can lease any space you don’t need, without being in breach of your lease. Of course, you could renegotiate your lease later on to include this – but it will likely come with a price tag.
Implement your risk mitigation strategies.
Once you have considered which of these risk mitigation strategies you might want to use for your high-priority, high-impact risks, you need to implement them. Consider the timeline for putting them in place, along with any external guidance or support you might need. Once they are in place, you’ll need a reliable way to monitor your risks and ensure your mitigation strategies are working effectively.
Managing risk is an important part of running a successful business but can provide interesting opportunities for growth, if done successfully. By assessing your potential risks and having strategies in place, you can help to protect your business from the unexpected and shore up your foundations for the future.