Risk is something all businesses face. Some threats, like network attacks and competitive pressures, are practically a given. Others, such as global pandemics and weather-related disasters, aren’t as easy to anticipate. Regardless, preparing for and reducing risks should be part of every company’s strategy. It’s how to go about preventing or at least mitigating them that’s a bit tricky.
One of the reasons is that every business’s situation is somewhat unique. For instance, a wireless carrier may face more information security and technology risks than a restaurant. That said, most companies deal with complex sets of threats in an increasingly connected world. In this article, we discuss ways business leaders can manage risks to reduce the negative impacts they might have.
Implement Governance, Risk, and Compliance Solutions
Walk into most organizations, and you’ll see distinct groups of people working on separate projects and tasks. While it’s common to assign job responsibilities according to specialty or function, this can create information silos. Say the finance, IT, and marketing departments need to collaborate to bring a company’s new online store to life. But each group has different visibility into and knowledge about the multiple pieces that must fit.
Likewise, various employees and departments may assess organizational risks differently. Finance may look at cash flows, while marketing focuses on lead conversions. Meanwhile, IT thinks about managing tech assets and network access.
Problems may seem to come out of nowhere if these departments don’t see how their separate risks interconnect. Governance, risk, and compliance (GRC) solutions give leaders and employees a holistic view of risk management. A GRC tool helps improve information sharing and collaboration among different teams.
Marketing may start to see how some converted leads contribute to late payments and threaten cash flows. There might also be some undiscovered security flaws in a few online forms. Increased visibility into how each department’s activities impact the organization helps leaders and employees close risk-related loopholes.
Improve Your Money Management
One of the top reasons small to midsize businesses go under is money management and cash flow problems. Only one-third of small companies make it to the 10-year mark. Survey research also suggests that 31% of small to medium businesses have just two months of working capital. About 58% of these companies have enough working capital to see them through three to five months.
Working capital can be a critical means of measuring a company’s liquidity. In short, working capital is a business’s current assets minus its current liabilities. The calculation can reveal whether an organization has more than enough to cover its short-term debts. You can think of it like a personal budget or balance sheet. Do you have enough income left over after paying all your bills? Usually, people who do can save for unexpected or major expenses.
Solid cash flow management is a way for companies to reduce risk. Establishing budgets, documenting revenues and expenses, and creating contingency funds make up the core of a cash flow management plan. As sales or costs fluctuate, business leaders may need to adjust their strategies. But like a personal savings account, a contingency fund can relieve cash flow problems during slower periods and prevent bankruptcy.
Buy Insurance
Insurance is a way to transfer risks to other partners or entities. Sometimes the unthinkable happens, and insurance policies mitigate the associated financial risks and fallouts. For instance, workers’ compensation insurance, which is mandatory in most states, manages risks linked to accidents.
The policy covers an employee’s medical bills and lost income from on-the-job injuries. Staff members who accept workers’ compensation payments usually agree not to sue employers for damages. Workers’ compensation insurance may also cover payments for staff who sustain short- or long-term disabilities.
Additional insurance coverage companies can take out includes liability, cybersecurity, and business interruption policies. Liability insurance helps reduce risks linked to customer accidents or injuries. Any business with a storefront may deal with injury claims from events that occur in or outside their location. Someone could slip on ice outside the door or on a wet floor while shopping. They could file a claim or lawsuit for medical expenses and emotional distress.
Cybersecurity insurance guards against the financial and public relations risks that often follow a data breach. The policies may help cover the costs of reimbursing victims for financial losses and ID theft monitoring plans. In a few cases, cybersecurity insurance policies might also pay for the services of crisis communications firms. Business interruption policies can keep operations afloat during unanticipated or major crises, such as global pandemics or natural disasters.
Become Familiar With the Law
Companies must follow various laws, depending on their business model and location. Knowing what legislation applies to your business and industry can prepare you for compliance-related threats. Another crucial part of risk management is paying attention to changes and minor tweaks to existing laws.
At times, news of conflicts between nations’ governments may signal upcoming changes that could increase a company’s risks. For example, an administration could sanction an overseas equipment supplier over national security concerns. Businesses using that supplier must find another source of that equipment and switch to the new vendor. That could mean increased expenses, service interruptions, and potential brand reputation problems.
Business leaders can better assess potential risks when they’re familiar with applicable laws and policy developments. The reduction of public policy risks stems from internal controls or initiatives that minimize their impacts. For example, businesses can diversify supply chains and vendors to reduce dependencies and potential disruptions.
Ways to Reduce Risk
Most businesses can’t avoid risk completely. But you can put measures and plans in place to ease negative effects and prevent worst-case scenarios. GRC solutions, contingency funds, insurance policies, and legal risk assessments are some of the mitigation tools companies can use. Strategically applying these approaches may help organizations avoid succumbing to the ultimate consequence of risk — business closure.
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