Why Is Risk Management so Important to Entrepreneurs?

What would you do if you missed a deadline? What if your subcontractor fails to deliver on time? What do you do if you cannot come at par with your client’s expectations? How will you minimize your risk, if you haven’t yet perceived it?

According to an article in the Wall Street Journal,

“Most business plans fail to make much impression on potential investors. Most aren’t even read in full. Their shortcomings tend to be obvious even in a two–page executive summary, largely because they are written before enough real work has been done to create a solid foundation.”

Entrepreneurs, driven by vision and creativity and impulse, often paint the picture too bold with broad strokes and fail to focus on the details. With such tendencies, they are not only bound to ignore potential risks, but may add to the impending problems. Not only are the entrepreneurs unequipped to manage as the seasons change, but their actions may prove to be counterproductive. And hence, a poorly conceived Business Plan is enough to lead the enterprise down the drain.

The Risk Management Process

What are the risks for your business? After you identify them, you will need to know what impact they can potentially make on your business and what actions are needed to be put into place to control the damage. Planning for all this ahead of time would simply reduce your time, effort and capital which you would have otherwise invested to put off the fire.

Risk management is simply understanding and forecasting potential problems that an enterprise may face in future and finding the best way to mitigate the outcomes of if it. But in order to put this in action, we first need to understand the classification of the risks involved

How to evaluate a risk?

All the risks mainly have two dimensions attached to them: One, the odds of their occurrence. Second, the severity of the consequences they leave behind. Once we know how likely they are to occur and sever they would prove to be, we can decide on the correct plan of action to deal with them.

Quadrant A: Ignorable Risks

Not a big deal at all. Such odds may strike you maybe once in 10 years and leave you without doing any significant damage.

Quadrant B: Nuisance Risks

Nuisance – simple things going wrong very often but their impacts can be easily managed without any long-term effect on the organization. There are ample examples of such risks, and with a little common sense, they can be easily straightened out.

Quadrant C: Insurable Risks

Often insurable, such risks have high severity but are relatively unlikely to occur. Here are a few common forms of insurances and the risks they cover:

  • Property & Casualty Insurance can mitigate losses from fire, theft, and natural disasters.
  • Key Executive Insurance can mitigate losses from the death or incapacitation of a management team member.
  • Liability Insurance can mitigate lawsuits resulting from product defects or on-site injuries to visitors.
  • Errors & Omissions Insurance can mitigate lawsuits from disgruntled customers.
  • Directors & Officers Insurance can mitigate lawsuits in cases of negligence, harassment, or discrimination.

Quadrant D: The Company Killers

They keep the meaning of their name well justified. With a high probability of occurrence and major consequences, these risks can crush the start-ups and the market giants alike. And there are so many of these, you can never really distil your world off their chance. The main categories to be considered here are:

  • Strategic Risks: E.g. Entry of a competition in the market
  • Compliance Risks: E.g. Implementation of a new standard or regulation
  • Operational Risks: E.g. Breakdown of a machine or disruption in the supply chain
  • Financial Risks: E.g. Bad-debts by a borrower or hike in the interest rates of a bank loan

How to Manage Risks?

Eliminate it, by careful analysis of the business environment and back it up with needful efforts and finances

Accept it, maybe because the cost of eliminating is questionably too high.

Reduce it, by implementing new policies, safety measures etc.

Transfer it, by resorting to insurance.

Use Precaution! (For business continuity)

By far we have understood that risk management is to identify the chance and severity of the unfavorable circumstances and to find the correct course of action to mitigate their effect.  This could be as simple as keeping a backup of your mobile phone contacts, in case you lose your phone.

Such programs with referring  to threat assessment and risk management are often called Business continuity plans. They spell out what to do when something happens. As you can never really eliminate all risks, these processes will minimize their impact on your business cycle.

Choose the right Insurance

Insurance shares your burden. Not just that, you can use it as a tool to protect against losses associated with some risks. Although some costs cannot be insured, in some cases they are a necessity. However, insurance companies now are getting more and more particular to see that the risk is being managed.

Long term insurance plans here have tremendous use at a personal as well as at the business level. From a business owner’s perspective, they can be given as an executive benefit or an employee benefit, either way they can fetch up to 100% tax benefit for the organization and hence, have now become an important aspect of financial planning.

Plan your retirement

Yes, Retirement! Avoid future financial troubles. Entrepreneurs may have a hard time relating to this idea as planning and saving for retirement is contrary to the mentality of entrepreneurs. But hey! You cannot keep all your eggs in a single basket. Some attractive instruments which one can ponder upon are zero-coupon bonds, Cash-balanced Pension Plans, Individual Retirement Accounts (IRA), business valuation or transfer etc.

Most risk managers, consultants, and actuaries believe that proper management of risk is the key to the longevity of an enterprise. On the other hand, a poorly conceived business is bound to stop the train before it leaves the station. Hence, an entrepreneur must take all the time to make a good business plan.


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