4 1/2 Ways to Manage Risk in your business

4 and a half Ways to Manage Risk

Every business faces risk. How companies manage risk will generally determine a company’s profitability, competitiveness and longevity in their markets. Business leaders must assess the risks that their companies face and then manage the risks so that they don’t negatively impact the business. The goal of managing risk is to turn uncertainty to the company’s benefit by constraining threats. There are 4 ½ ways to manage risk.

The 4 ½ ways to manage risk in your business are:

# 1  Tolerate the risk

The exposure to the risk may be tolerable without any further action being taken. Even if it is not tolerable, ability to do anything about some risks may be limited or the cost of taking action may be prohibitive. Once you have assessed what the potential financial impact that this risk can have on your business, determine the cost to negate that risk. If the cost to fix or contain the risk is greater than the total impact to the business, then tolerate the risk. This first option is possibly the least expensive solution that your company might have and it should be the first step in deciding how to handle the risk.

# 2  Treat the risk

This is the way that most risks will be treated. This is where an action is taken to constrain the risk so that the risk is at an acceptable and tolerable level. If you can’t tolerate the risk, then the second option is to take action and spend the capital or deploy the resources to mitigate the risk. Monitor the costs associated with bracketing this risk and then confirm that the measures implemented to treat the risk are effective and responsive.

# 3  Transfer the risk

For some risks the best response it to transfer them. This might be done by conventional insurance or it might be done by paying a third party to take the risk in another way. This is a great method for mitigating financial risks or risks to assets. One of the simplest forms of transferring the risk outside of the insurance solution is to determine if one of your supply chain partners has the capabilities to manage the risk more effectively than your company does. If they do, then consider modifying your agreement or scope of work with them so that they can manage the risk for you. You might end up paying a bit more for their work but the cost could be significantly less than what your company would have had to pay to solve this risk problem.

#4  Terminate the risk

Some risks will not be treatable, or containable to acceptable levels unless you simply terminating the activity. Therefore, if all other methods are not viable then it is time to cut your losses and terminate the risk.

# 4 – 1/2     Take the opportunity

This option is the ½ option and it falls under the category of the best defense is a good offense. It might also be seen as a hedge. If you see can generate enough capital to weather the risks that your business faces, then consider taking advantage of opportunities to build the hedge that you need to conduct the business and continue taking calculated risks knowing that you have some gas in the tank in the event that things go wrong.

Understanding and applying these 4 ½ ways to manage risk for your business should be a high priority when it comes to leading and managing your business. Take the risks necessary to conduct business. If they are assessed and managed well then they should not threaten your company’s financial or operational stability.

 

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