How to manage risks in a business?

A business is constantly exposed to several types of risks, and these regularly vary throughout its existence. What form can they take and how can a strategy be implemented to manage them effectively? myLIFE provides you with some insights. Don’t take the risk of not taking advantage of them!*

Payment delays, human error, cyber attacks, bad buzz on social media, etc.: your company is constantly exposed to threats that could affect its smooth operation. To ensure the sustainability of your business, you will need to assess them and implement appropriate preventive measures.

Risks in business, what is it about?

Business risks refer to events that can impact your company and threaten its performance. They may stem from internal decisions or operational processes or be caused by external elements that you have little or no control over. Here is a non-exhaustive list of some of the risks a business may face:

• • Strategic risks: poor market positioning, lack of product diversity, dependence on a single supplier, product not meeting market expectations, etc.
  • Financial risks (liquidity and solvency): unpaid customer invoices, debts, changes in interest rates, rising raw material prices, market fluctuations, etc.
  • Operational risks: human error, technical failure, procedural flaw, etc.
  • Human risks: recruitment difficulties, departure of key employees, insufficient training of some employees, etc.
  • Technological risks: cyberattack, data hacking, IT system failure, etc.
  • Legal risks: commercial dispute, regulatory non-compliance, contract breach, etc.
  • Reputational risks: criticism on social networks, scandal, ethical failure, etc.
  • Political risks: restrictive government decision, conflict, trade embargo, etc.
  • Environmental risks: natural disasters (flood, fire, etc.), pollution, non-compliance with environmental standards, etc.

Not all risks can be avoided, but it is possible to prevent some and prepare to face them effectively.

As you have understood, the threats a company may face are numerous. While some can be anticipated, others remain unpredictable. It is therefore essential to establish a solid risk management strategy.

Not all risks can be avoided, but it is possible to prevent some and prepare to face them effectively. Let’s explore together the steps to consider in order to establish an action plan aimed at protecting your business. To illustrate these, let’s take the example of John, a young pastry chef, who opened a shop for the production and sale of artisanal cookies in Luxembourg.

Identify and assess risks

The first step is to conduct an internal diagnosis of your company to anticipate what might disrupt its smooth functioning. You have to identify potential internal and external risks and measure the likelihood of them occurring. Feel free to use strategic analysis tools such as the SWOT method (strengths, weaknesses, opportunities, and threats) and PESTEL (political, economic, social, technological, environmental, and legal factors) to identify factors that could jeopardize the smooth operation of your business.

John, our young entrepreneur, has identified several types of risks for his business: health-related, supplier delivery delays, machine breakdowns (oven, mixer, etc.), online criticism, client data hacking, competition, flooding/fire in his premises, employee absence, new product that doesn’t appeal, errors in recipe preparation, unsold stock, etc. So many threats that could have a significant impact on his image, sales, and the smooth operation of his shop.

Once the risks are identified, evaluate the impact each of them could have on your company’s performance. Then rank them by priority, not only according to their likelihood but also their level of severity: minimal, with no real impact on the daily functioning of your activity, or significant, potentially affecting its operation in a lasting way.

In the face of a threat, there are fundamentally four types of approaches depending on the situation: mitigate, transfer, avoid, or accept the risk.

Design and implement strategies

Risk management strategies will depend on the significance of the threats and the costs they may potentially entail. In the face of a threat, there are fundamentally four types of approaches depending on the situation: mitigate, transfer, avoid, or accept the risk.

Mitigate risk

This approach either involves reducing the likelihood of the risk occurring or decreasing its potential impact by implementing preventive measures.

Examples:

• • Health risk: John has rigorously selected his suppliers (product traceability, labels, etc.), trained his staff on the current hygiene standards (hand washing, cleanliness of premises and equipment, etc.), and established strict rules for managing food products (cleaning, storage methods, etc.).
  • Delivery delay risk: The young entrepreneur has created a reserve of essential ingredients for making his cookies. He has also established a list of several alternative retailers capable of delivering quickly.
  • Equipment failure risk: He has entered into a contract with a local repairer who regularly maintains his equipment and responds very quickly when needed.
  • Error risk in recipe preparation: John has organized training sessions and provides his employees with precise instructions for the recipe preparation steps. The regular checks he conducts also allow him to verify that procedures are correctly applied.
  • Competitive risk: To stand out from the competition, he offers innovative recipes, makes his cookies with local products, etc. He has also established a customer loyalty program.

Share or transfer the risk

In the face of risk, it is possible to transfer the responsibility or the repercussions to a third party by taking out insurance or delegating certain activities to subcontractors.

Examples:

• • Natural disaster risk: The young craftsman has taken out insurance to cover his premises, equipment, stocks, and business interruption losses.
  • Reputational risk: John works with an external expert who monitors online reviews, responds to comments, and helps develop his community on social media.

Avoiding risk

If you consider the risk to be too high or its potential consequences too significant for your business, you may choose to forgo certain actions or modify the operation of your business to eliminate it completely.

Examples:

• • Risk related to e-commerce: John decided not to offer sales on his website and to focus solely on in-store sales. In this way, he avoids issues related to deliveries, customer data hacking, or managing online payments.
  • Human risk: He chose to train several of his employees for key positions, thus protecting the continuity of his business in case of prolonged or repeated absence of an employee. He also developed procedures to follow to ensure the continuity of production and sales.

Accept the risk

You may be aware of a risk and decide to ignore it, choosing to accept its potential consequences if it materializes. This option is generally chosen if the risk has a low chance of occurring, if its repercussions are minor, or when the preventive measures would cost more than assuming the risk itself.

Examples:

• • Risk of product launch failure: John wants to offer new products but is aware that it may not work. He still attempts the experience by starting with tastings to gather customer feedback and adjust his production based on their responses.
  • Risk of unsold goods: By offering a wide range of products to his customers, the young pastry chef knows that the day’s production might not be completely sold. He has therefore established end-of-day promotions and decided to donate the unsold items to a local association.

While it may seem tedious to plan measures for threats that might never materialize, anticipating and preparing various scenarios will allow you to be more responsive and efficient in the event of an unforeseen circumstance.

The best way to anticipate and quickly react to problems is to establish risk monitoring indicators.

Monitor and adjust

The final step involves monitoring. The best way to anticipate and quickly react to problems is to establish risk monitoring indicators. These indicators must be regularly checked and adjusted to prevent potential complications and take appropriate measures in case of alerts.

For instance, the young business owner meticulously tracks the sales trends of his flagship products to ensure they continue to meet customer expectations. He regularly checks compliance with food hygiene standards. He records delivery delays to prevent potential degradation of the service offered by his suppliers. He monitors average ratings of his brand on customer review platforms to identify potential malfunctions, etc.

Regardless of the size of your business or its sector, establishing a risk management plan is essential. Identifying potential threats, assessing their impact, and anticipating responses not only protects your business but also allows you to better control your environment. This way, you strengthen your company’s ability to develop sustainably. Do not hesitate to consult your bank advisor for anything related to financial risks. He is there to help build tomorrow!

* Content translated from French by the BIL GPT AI tool