Protecting Your Company From Risk, Part 2 - January 2, 2017

It's not a matter of if, but when your business will have to deal with an outside risk. On Friday, Promotional Consultant Today shared key steps for identifying both internal and external risk factors that could significantly impact your business and your ability to serve your customers.

Today, we are taking the next key step to risk management—understanding and evaluating the impact of these risks. This is important to understand in order to help you recover quickly if an incident occurs.

Analyze the level of risk. The first step is to separate minor risks that may be acceptable from major risks that must be managed immediately. To analyze risks, you need to work out the likelihood of the incident happening (frequency or probability) and the consequences it would have (impact) of the risks you have identified. This is referred to as the level of risk, and can be calculated using this formula: level of risk = consequence x likelihood.

Level of risk can be divided into two types of analyses. The first one is the Likelihood Scale. Give each risk factor a level rating from one (least likely to happen) to four (most likely to happen). Then describe how often this risk could happen: once a year, once a day, only once. Period.

Next, create a Consequence Scale in the same manner. Describe what would happen if this risk took place. For example, the impact could be financial loss of greater than $50,000, or financial loss of $50,000 to $1 million. Then determine the level of consequence using the same one-to- four scale as above. And remember, your consequence does not have to be a monetary consequence. It could be a health impact or other type of outcome as well.

Evaluate the risks. Once you have established the level of risk, you then need to create a rating table for evaluating the risk. Evaluating a risk means making a decision about its severity and the ways to manage it.

For example, you may decide the likelihood of a fire is "unlikely" (a score of two) but the consequences are "severe" (a score of four). Using the tables and formula above, a fire has a risk rating of eight (i.e. two x four = eight).

Your risk evaluation should consider:

  • the importance of the activity to your business
  • the amount of control you have over the risk
  • potential losses to your business
  • any benefits or opportunities presented by the risk.

Address the risks. Once you've measured your risk factors, identify the ones that are absolutely unacceptable for your business, and make these the priority to address, then also prioritize the medium and low risk factors.

When you are developing a plan for treating the risks, consider the:

  • method of treatment
  • people responsible for treatment
  • costs involved
  • benefits of treatment
  • likelihood of success
  • ways to measure the success of treatments.

The following are different options for treating risks.

  • Avoid the risk. You may decide not to proceed with an activity that is likely to generate risk. Alternatively, you may think of another way to reach the same outcome that doesn't involve the same risks. This could involve changing your processes, equipment or materials.
  • Reduce the risk. You can reduce a risk by reducing the likelihood of the risk happening, for example, through quality control processes, auditing, compliance with legislation, staff training, regular maintenance or a change in procedures. You can also reduce the impact if the risk occurs, for example, through emergency procedures, off-site data backup or minimizing exposure to sources of risk.
  • Transfer the risk. You may be able to shift some or all of the responsibility for the risk to another party through insurance, outsourcing, joint ventures or partnerships. You may also be able to transfer risk by cross-training staff, identifying alternative suppliers or replacing old equipment.

Accept the risks. Some risks are unavoidable or too unlikely to treat. In this case, be sure to have a plan of action for recovery if and when it could occur.

It's important to know how you will manage these risks, and a risk management plan is the key roadmap for preparedness. Learn how to craft your risk management plan in tomorrow's issue of PCT.

Source: The www.business.qld.gov.au site is a portal to help Queensland businesses improve their operation at all stages, from starting and running, to growing a business. It provides information, support and tools for Queensland business owners and industry sectors.

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