Small business best practice: Risk Management

Running a business is a balancing act. You're in charge of handling every aspect of the company, hiring the right people, and keeping everything on the right side of the law.

One of your most important roles as the company's founder is managing the money. Capital is the lifeblood of a business, and if you don't learn to manage your money, your company will most likely die.

Properly handling finances can extend your runway and give you more time to work on your business.

As a small business accountant who have worked with over 10,000 SMEs throughout the last four years, the team at Accounts and Legal have a knowledge of succeeding, and we are ready to share that with you.

As part of our new “Best Practice” series, we will be talking you through a range of topics, all designed to help you fully understand your business, evaluate it against our views on best practice, and ultimately arm you with the knowledge you need to take your business to the next level.

In the series, we will take you through the likes of budgeting, financial forecasting, management reporting, debtor control, project evaluation, stock control and fixed assets, to name a few. This week we focus on Risk Management.

What is Risk Management?

Risk management is vital to any small business. While the majority will assume it refers only to how a company's money is spent or invested, and the return on said investment, the truth is every element of a business carries risk.

It can involve staff retention, your target market, the identity of your customers, and the management of money, to name just a few examples.

As a business owner, one of your core responsibilities is to identify and mitigate risk on a daily basis. Therefore, it is vital that a small business owner knows how to apply a systematic approach to managing risk.

A common definition of risk is an uncertain event that if it occurs, can have a positive or negative effect on a project’s goals. The potential for a risk to have a positive or negative effect is an important concept.

Why? Because it is natural to fall into the trap of thinking that risks have inherently negative effects. If you are also open to those risks that create positive opportunities, you can make your project smarter, streamlined and more profitable.

Think of the adage –“Accept the inevitable and turn it to your advantage.” That is what you do when you mine project risks to create opportunities.

Uncertainty is at the heart of risk. You may be unsure if an event is likely to occur or not. Also, you may be uncertain what its consequences would be if it did occur. Likelihood – the probability of an event occurring, and consequence – the impact or outcome of an event, are the two components that characterise the magnitude of the risk.

All risk management processes follow the same basic steps, although sometimes different jargon is used to describe these steps. Together these 5 risk management process steps combine to deliver a simple and effective risk management process.

Identify the Risk

You and your team uncover, recognise and describe risks that might affect your project or its outcomes. Record any perceived risks in a new excel document to keep track of the risks surrounding your business and your progress in dealing with them.

Analyse the risk

Once risks are identified you determine the likelihood and consequence of each risk. You develop an understanding of the nature of the risk and its potential to affect project goals and objectives.

Evaluate or Rank the Risk

You evaluate or rank the risk by determining the risk magnitude, which is the combination of likelihood and consequence. You make decisions about whether the risk is acceptable or whether it is serious enough to warrant treatment. These risk rankings are added to the excel document mentioned above.

Treat the Risk

This is also referred to as risk response. During this step you assess your highest ranked risks and set out a plan to treat or modify these risks to achieve acceptable risk levels.

How can you minimise the probability of the negative risks as well as enhancing the opportunities?

You create risk mitigation strategies, preventive plans and contingency plans in this step. And you add the risk treatment measures for the highest ranking or most serious risks to your excel document.

Monitor and Review the risk

This is the step where you take your excel file and use it to monitor, track and review risks.

Risk is about uncertainty. If you put a framework around that uncertainty, then you effectively de-risk your project. And that means you can move much more confidently to achieve your project goals.

By identifying and managing a comprehensive list of project risks, unpleasant surprises and barriers can be reduced and golden opportunities discovered.

The risk management process also helps to resolve problems when they occur, because those problems have been envisaged, and plans to treat them have already been developed and agreed.

You avoid impulsive reactions and going into “fire-fighting” mode to rectify problems that could have been anticipated. This makes for happier, less stressed project teams and stakeholders.

The end result is that you minimise the impacts of project threats and capture the opportunities that occur.

Keep an eye out for our "Best Practice" series as it comes online every week, filled with information specifically tailored to help your business perform at its greatest level.

In the meantime, if you'd like to learn more about how our London accountant can help you, please get in touch.

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