Poor risk management by an investor or fund manager, such as failing to identify risk, sub-standard analysis, inability to adequately mitigate and so on, can lead to a loss.
Poor risk-management decisions can escalate rapidly with catastrophic consequences. The financial crisis of 2008 can be traced back to the poor decisions made in the subprime mortgage market.
One key example was extending mortgages to those with poor credit ratings, which were then compounded by the repackaging of those mortgages and excessive investing in those repackaged mortgage-backed securities. If it can try to make below of factors the poor management control itself.
Risk management has always been an important tool in running any business, particularly when a market experiences a downturn. In any economic environment, an unexpected surprise can destroy your business in one fell swoop if you didn’t have the right risk management strategies in place to prevent, or at least mitigate, the damage from that risk.
External risks are out of your control. These include, but are not limited to, interest rates, exchange rates, politics, and weather. Internal risks are in your control and include information breaches, non-compliance, lack of insurance, growing too fast, and many more.
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The following are some of the areas that business owners can focus on to help manage the risks that arise from running a business.
1. Prioritize
The first step in creating a risk management plan should always be to prioritize risks/threats. You can do so by using a somewhat universal scale based on risks/threats that are:
- Very likely to occur
- Some chance of occurrence
- Small chance of occurrence
- Very little chance of occurrence
Of course, a risk that falls into the top category should take priority over the others and a plan to prevent, or at least mitigate, these risks should be put into place. However, there is a catch. If a risk falls into a lower rung yet presents the potential for more financial damage, then it should take priority.
2. Buy Insurance
Assess liabilities and legal regulations to determine what types of insurance will be required for your business. This might include:
- Life insurance
- Disability insurance
- Professional insurance
- Completed operations insurance
Buying insurance allows you to transfer your risk to insurance companies for a small cost, especially when compared to the potential cost of uncovered risk.
3. Limit Liability
If you’re a sole proprietor, limit your liability by changing to a corporation or limited liability company (LLC). In this type of structure, the owner of the business is not held personally liable for the company’s debts or other liabilities.
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4. Implement a Quality Assurance Program
A good reputation is imperative if you want a sustainable business. Customer service is key to success. Be sure to test your products and services in order to assure the highest quality. By testing and analyzing what you’re offering, you will have an opportunity to make necessary adjustments. Also, strongly consider taking it a step further, which is to evaluate your testing and analyzing methods.
5. Limit High-Risk Customers
If you’re just getting started, immediately implement a rule that customers with poor credit must pay ahead of time, which will avoid complications down the road. In order to do this, you must have a procedure to identify poor credit risks far in advance.
6. Control Growth
This has everything to do with employee training. If you’re selling products and/or services and you set lofty goals for employees, they might be tempted to take unnecessary risks, which can lead to a bad reputation for your company. Instead, train your employees to focus on quality, not quantity. By doing so, you will avoid the risk of declining sales due to high-pressure sales tactics that customers don’t appreciate.
On a related note, while innovation is a key to success, you don’t want to innovate too fast. If your company is constantly relying on the next innovation for growth, then a hiccup is inevitable because not all new products and services will be successful.
7. Appoint a Risk Management Team
If you want to save capital by not having to hire an outside firm, and there is time available, you can appoint current employees to head a risk management team. However, this would only be wise if someone within the team has experience in this area and can act as a leader.
Otherwise, paying for an outside risk management team will be a worthwhile investment. They will be able to map out all the risks/threats to your company based on your type of business and set up strategies to implement immediately if any of those risks become a reality. This should lead to the prevention, or mitigation, of those risks/threats.
The Bottom Line
Risk management is a form of insurance in itself and is an imperative step for sustainable success. The seven steps above should get you started in shaping a risk management plan, but they are just starting points. A deep dive into your business and industry will help you better shape a risk management plan that could save the business you worked hard to create.
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Myanfx-edu does not provide tax, investment or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors.
