There are six ways to deal risk

Every business faces risks that could present threats to its success.

Risk is defined as the probability of an event and its consequences. Risk management is the practice of using processes, methods and tools for managing these risks.

Risk management focuses on identifying what could go wrong, evaluating which risks should be dealt with and implementing strategies to deal with those risks. Businesses that have identified the risks will be better prepared and have a more cost-effective way of dealing with them.

This guide sets out how to identify the risks your business may face. It also looks at how to implement an effective risk management policy and program which can increase your business' chances of success and reduce the possibility of failure.

The risk management process
The types of risk your business faces
Strategic and compliance risks
Financial and operational risks
How to evaluate risks
Use preventative measures for business continuity
How to manage risks
Choose the right insurance to protect against losses
The risk management process
Businesses face many risks, therefore risk management should be a central part of any business' strategic management. Risk management helps you to identify and address the risks facing your business and in doing so increase the likelihood of successfully achieving your businesses objectives.

A risk management process involves:

methodically identifying the risks surrounding your business activities
assessing the likelihood of an event occurring
understanding how to respond to these events
putting systems in place to deal with the consequences
monitoring the effectiveness of your risk management approaches and controls
As a result, the process of risk management:

improves decision-making, planning and prioritisation
helps you allocate capital and resources more efficiently
allows you to anticipate what may go wrong, minimising the amount of firefighting you have to do or, in a worst-case scenario, preventing a disaster or serious financial loss
significantly improves the probability that you will deliver your business plan on time and to budget
Risk management becomes even more important if your business decides to try something new, for example launch a new product or enter new markets. Competitors following you into these markets, or breakthroughs in technology which make your product redundant, are two risks you may want to consider in cases such as these.

The types of risk your business faces
The main categories of risk to consider are:

strategic, for example a competitor coming on to the market
compliance, for example the introduction of new health and safety legislation
financial, for example non-payment by a customer or increased interest charges on a business loan
operational, for example the breakdown or theft of key equipment
These categories are not rigid and some parts of your business may fall into more than one category. The risks attached to data protection, for example, could be considered when reviewing your operations or your business' compliance.

Other risks include:

environmental risks, including natural disasters
employee risk management, such as maintaining sufficient staff numbers and cover, employee safety and up-to-date skills
political and economic instability in any foreign markets you export goods to
health and safety risks
Strategic and compliance risks
Strategic risks are those risks associated with operating in a particular industry.

They include risks arising from:

merger and acquisition activity
changes among customers or in demand
industry changes
research and development
For example you might consider the strategic risks of the possibility of a US company buying one of your Canadian competitors. This may give the US company a distribution arm in Canada. You may want to consider:

whether there are any US companies which have the cash/share price to do this
whether there are any Canadian competitors who could be a takeover target, perhaps because of financial difficulties
whether the US company would lower prices or invest more in research and development
Where there's a strong possibility of this happening, you should prepare some sort of response.

Compliance risk

Compliance risks are those associated with the need to comply with laws and regulations. They also apply to the need to act in a manner which investors and customers expect, for example, by ensuring proper corporate governance.

You may need to consider whether employment or health and safety legislation could add to your overheads or force changes in your established ways of working.

You may also want to consider legislative risks to your business. You should ask yourself whether the products or services you offer could be made less marketable by legislation or taxation – as has happened with tobacco and asbestos products. For example, concerns about the increase in obesity may prompt tougher food labelling regulations, which may push up costs or reduce the appeal of certain types of food.

Financial and operational risks
Financial risks are associated with the financial structure of your business, the transactions your business makes and the financial systems you already have in place.

Identifying financial risk involves examining your daily financial operations, especially cash flow. If your business is too dependent on a single customer and they are unable to pay you, this could have serious implications for your business' viability.

You might examine:

the way you extend credit to new customers
who owes you money
the steps you can take to recover it
insurance that can cover large or doubtful debts
Financial risk should take into account external factors such as interest rates and foreign exchange rates.

Rate changes will affect your debt repayments and the competitiveness of your goods and services compared with those produced abroad.

Operational risks

Operational risks are associated with your business' operational and administrative procedures. These include:

recruitment
supply chain
accounting controls
IT systems
regulations
board composition
You should examine these operations in turn, prioritise the risks and make provisions for such a risk happening. For example, if you are heavily reliant on one supplier for a key component you should consider what could happen if that supplier went out of business and source other suppliers to help you minimise the risk.

IT risk and data protection are increasingly important to business. If hackers break into your IT systems, they could steal valuable data and even money from your bank account which at best would be embarrassing and at worst could put you out of business. A secure IT system employing encryption will safeguard commercial and customer information.

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