We can define a risk as a potential threat to the continued success of your business.
It would be something which, if left unchecked, would have a detrimental effect on your overall profit or even the ability to keep your doors open.
So let’s take a look at the two things we need to think about to manage Business Risk:
- Firstly, we need to identify the top 3 risks to our business success, those things that will have a direct effect on our bottom line.
- Then, we need to figure out how to mitigate that risk as far as possible, to either prevent itoccuringor allowing us to have a plan of attack should it arise.
Let’s look at each of these separately.
There are both external and internal risks to your business.
- External risks are those that would impact your operations, environment, or industry from the outside of your business ie environmental disaster like flood or fire, government policy changes, the downturn in the industry as a whole, etc.
- Internal risks are those that are generated from inside your business ie bad planning, loss of reputation, under/over staffing, inefficient processes, etc.
We only tend to include external risks in your Business Plan if the potential of them occurring is very high.
For example, all businesses are at risk of fire. Having a good insurance policy in place to protect yourself is a given and does not need to be considered one of your top 3 critical risks. However, if your business is in a geographical zone that is frequently at risk of forest fire, you may consider it a critical risk and want to draw up a more complete mitigation plan than just “get insurance.”
Let’s look at the example in the slide.
Our business owners writes:
The reputation of my hairdressing business will be based on providing superior colouring services. However, attracting excellent colourists is extremely competitive. It is, therefore, a risk to my business reputation if I cannot attract the right staff and maintain those high standards.
So this is a very serious risk to the business owner. They are demonstrating that they understand how the quality of staff experience directly correlates to the happiness of their clients, and therefore the continued positive reputation of their business. In a competiive market, it may be difficult to attact these experienced staff.
Let’s look at their solution or mitigation plan.
This business owner has put together a well constructed mitigation plan that falls into multiple action points.
Let’s take a look:
- Put in place a significant staff attraction and retention plan prior to business launch.
- Budget to pay 20% above market wages.
- Ensure additional training is available to develop staff skills and to be able to keep in line with trends.
- Build relationships with local training programs to identify the best candidates prior to graduation.
- Offer work experience program.
- Use only superior colouring products.
As an analyst, I feel this is a really strong plan of attack.
The business owner is anticipating the problem and building mitigation into multiple areas of their overall business strategy: their financial plan, personnel training, marketing, etc. They are not just looking at the current situation, but also planning for the future, so that as time goes on, this risk becomes less worrisome.
Adding a Risk Summary or Critical Risk Plan or Risk Mitigation Plan (it can be called many things depending on the template you are using) into your Business Plan demonstrates a full understanding of the potential threats to your business. By having a plan in place to counter them should the worse happen, or erradicate them altogether, will raise the confidence of any reader of the plan.
If you are not working a physical Business Plan, but simply want to consider areas of Risk to your business, I suggest brainstorming your top 3 risks and then automatically build a mitigation strategy into other elements of the plan – your rollout strategy and timeline, your financial plan, purchasing of insurance, etc.
Finally, let’s take a look at some Tips and Tricks for Financial Planning.