Do’s and Don’ts for Successful Risk Management

It’s often said that businesses don’t like uncertainty. But companies face new risks and challenges every day. That’s why risk management has evolved into something of a corporate discipline. Now companies must take an active role in managing and mitigating the risks that they face. But, of course, this is easier said than done. Effectively managing risks involves a lot more than the average business thinks. Here are some of the do’s and don’ts for successful risk management.

Do Identify And Assess Risks

In the modern world, risks are everywhere. And because the world is more highly integrated, there’s now nowhere businesses can hide. The financial system is now truly global. A problem in one part of the world can affect stock prices and profitability in another. Input prices are volatile, just as they always have been. But increases in input prices can put a strain on company cost structures. And many businesses that operate in different countries have varying levels of legal exposure. They have to tailor their operations to the host country.

Thus, there are many different types of risk to which a company is exposed. These include legal, financial, regulatory and even political. And you need to be aware of them.

Do Quantify The Risks

Once you’ve set out the risks that your company faces, the next step is to quantify them. Ultimately, you want to know your level of exposure to any particular risk. Of course, this is easier said than done. Measuring risk is a tricky business. But measuring risk is essential if you’re going to manage risk effectively. Many companies use risk management software as well as valuation models to inform their decisions.

Don’t Ignore Interrelated Risks

Because the world is now so interrelated, many risks are related with one another. And that means that risks can work together to create greater hazards than the sum of their parts would suggest. In fact, it’s these types of related risks that can prove to be the most damaging because they’re the least obvious. For example, back in the financial crisis of 2008, companies faced credit risk. Banks stopped lending, and for a while, the economy looked like it was going to seize up. But what is often forgotten is that price risks also came along for the ride. During the recession, prices of many goods dropped. And many companies facing falling prices struggled to stay profitable.

Do Commit Resources

Many companies are under the impression that risk is just something that is out there in the ether. It’s not something that they can do anything about, they think, so they just ignore it. But that is not the truth. It’s the companies that commit resources to managing risks that are ultimately the most successful.

Of course, managing risk doesn’t come cheap. You have to hire the right people with the right experience. And you have to invest significant resources into analysing data and so on. But the costs of not doing so are often far greater. Sometimes companies can be hit with a black swan event – something that they totally didn’t expect. And usually, it’s because they didn’t invest any effort in risk management. A good example of this is when a company gets disrupted by innovation.

Take local newspapers. Local newspapers were doing a roaring trade in the 1990s, perhaps better than ever before. But soon the internet arrived, and people could read the news online. Many news outlets didn’t make the switch to Internet-based news. Instead, they carried on with their old business models. It was this that spelled the death knell for many local newspapers. They missed the boat and didn’t see how the market was changing.

Don’t Ignore The Risk Return Ratio
One of the pitfalls of risk management is becoming too risk averse. The goal of risk management should be to ensure the company achieves successful outcomes. It should not be to make sure that the company is not exposed to risk. Too many companies fall into the trap of believing that they have to eliminate risk. But this just isn’t the case. The trick is to figure out which risks the company can tolerate and which it can’t. The risks it can tolerate are those that could lead to significant returns in the future. Things like expanding into new markets abroad is a good example. Risks it can’t tolerate are those that have big downsides and small chances of improving profitability. That might include things like inadequate worker safety and the risk of lawsuits.