Risks are inevitable in any business. Yet, their occurrence can cause a lot of damage that can take a lot of time and money to repair. That is why it is important to anticipate risks and prepare on how to minimize the impact on operations, productivity and finances. However, you can’t be in a position to anticipate or prepare for a counter attack if you don’t really know what you are looking at. Identifying possible risks is the first step towards risk management for your business. Make sure to analyze all your business activities to identify possible threats in all areas of your business. You can then develop a risk management plan that includes preventive measures, management measures and a business continuity plan. Moreover, it is good to note that avoiding risk is the best insurance for your business. Here are 5 types of risks and the best ways to avoid them.
1. Human risks
Human capital is arguably the greatest asset for any business. While this is true, there are risks that accompany your human capital. Human risks areas are many including:
- High turnover that causes high costs of rehiring and reduction in productivity
- Employee dissatisfaction that can lead to poor performance and loss of engagement
- Bad behavior such as alcohol, drugs and corruption leading to errors, embezzlement, fraud and theft
- Bad hires such as unqualified workers or untrustworthy employees who risk smooth running of operations, errors, theft and fraud
- Workplace accidents that can hurt your employees or damage property
How can you prevent human risks?
The first step would be to hire right. Have a robust hiring process in place to ensure that you hire qualified employees who fit well with your company culture. The hiring process should be able to uncover individual personalities and behaviors. For instance, it is paramount to uncover past incidents that candidates were untrustworthy or struggled with drugs and alcohol. Well, these may not be valid grounds for dropping a candidate, but they inform the management on where best to place the individual. You may also find it beneficial to avoid risking the hiring process by outsourcing the process to an EOR (employer of record). Such experts have the necessary resources and networks to find the ideal employees for your business.
Another way to mitigate human risk is to keep employees happy by compensating them well, building a positive culture where everyone is heard and keeping them engaged. In addition, create a policy of double signature requirement for financial documents to prevent fraud and embezzlement. Also, ensure regular training on health and safety in the workplace to avoid accidents.
2. Strategic risks
Strategic risk refers to the risks posed by failed business decisions. Simply put, they are dangers your business faces in the process of implementing strategic objectives. Such risks could be due to internal choices such as developing products that the market doesn’t buy. They could also be due to internal forces such as the economic environment in which your products are released.
Preventing strategic risks starts with identifying all the risks involved in a particular strategy before implementing. It is paramount that you do an in-depth analysis on your target market, competition and business environment. In addition, diversify your products so that you can have income streaming in even after a product failure. It also helps to have a healthy cash flow to cushion you from financial hardship that the risk brings.
3. Technology risks
Technology risks include data theft and system compromises by hackers and malicious people. Power surges that can destroy electronic devices and power outages that halt operations also fall here. In addition, telephone and communication failure can lead to business loss and delays. How to mitigate this risk:
- Invest in a power generator that can provide power for key operations in case of an outage
- Use surge-protection devices to protect computers and other devices
- Utilize data online and offline data backups and have a remote storage for important documents
- Use firewalls, anti-spyware and antivirus to prevent attacks from hackers
- Train your staff on IT best practices, procedures and policies
- Have multichannel communication policy to expand ways of communication
4. Operational risks
Operational risks are threats or uncertainties that businesses face in their day-to-day operations and processes. Such risks mainly occur when there is a breakdown in internal procedures, systems and people. For instance, a process can be delayed if a machine stops working, a human error caused by incompetence or absence of key staff. Operational risks can also be caused by external causes such as a delivery truck being delayed due to harsh weather conditions. Here are some of the ways to avoid operational risks:
- Carry out regular maintenance of equipment and systems by qualified personnel
- Have a backup employee to step in when a key staff is absent
- Ensure that key roles are given to competent and qualified personnel
- Observing weather patterns and halting deliveries if there is a risk of harsh weather
- Streamline operations and automate processes to enhance efficiency and reduce errors
5. Financial risks
Financial risks refer to uncertainties that can crop up from financial decisions of a company. They boil down to credit and liquidity risks. Credit risks can be the risk of not being able to service loans or debtors defaulting on their payments. Liquidity risks could mean the risk of an inadequate cash flow that poses a threat to meeting the financial obligations of a business. How to avoid financial risk:
- Diversify income sources
- Build cash reserves as a cushion for hard financial times
- Follow up debtors to ensure that they pay on time
- Do an assessment on customers to ensure that only credit worth customers buy on credit
- Limit loans by taking loans only when you need to and be realistic on the amount that you can pay comfortably
- Conduct product surveys before manufacturing them on a large scale
Business risks will always be there as long as a business is operational. What is most important is being able to identify risks way before they become a reality. This way, you can know how best to avoid them, and if they do occur, have the best plan in place to manage and contain it. Listed above are practical ways to prevent different types of risks.