Risk in Business Re-defined
As a small business owner knowing and managing risk an important factor to being successful. In addition to managing all the other affairs of your company. Such as, the complexities of your external environment whether favorable or harmful – on your bottom line. Also, internal factors to your business.
Your company needs to assess all parts of your “quality chain.” Including supply chains, distribution channels and your market share. Or, in laymen’s terms – what is your risk, exposure and what is your comfort level. Your supply chain is going to be a challenge during this crazy global pandemic. The challenge of filling your requirements are going to become even more difficult as the pandemic negatively affects your sources.
Uncertainities Associated with Risk
Uncertainty remains at the heart of any business idea and as business owner you are not the exception. The randomness factor is the highlight of any company wishing to make profit. As your own policy maker, you own the task of finding key ingredients for your strategic success – fast! While, also systemically being able to figure out operationally the best value that is also sustainable. All of these elements then turn into supporting an improved perceived value of your company. While also maintaining your overall competitiveness in your industry.
The uncertainty most small business owners deal with can be seen as a dichotomy inherent in daily decisions. These decisions are related to the the question if you are making the right decisions. And, whether those decisions will generate the best results. Right now, it’s all a best guess scenario as there is so much uncertainty.
Having good results is essential to the financial success of your company in the short term. However, good decision making is essential for a successful long-term strategy. During this world ‘shut down’ your decision making is not shut down. We’ve discussed it in our Facebook live conversations. A small business owner needs to be looking to the future of their clients. Client purchasing decisions combined with present day decisions will be successful if they are structurally sound. The most effective procedures create an advantage in the competitive balance. How are you going to come out of this shut-down successfully?
Random vs Epistemic
The risk associated with short term versus long term decisions can be broken in two ways: random and epistemic. The random risk refers to a situation of pure chance. While the pure epistemic risk is a conflict whose resolution depends on the level of experience of the decision maker.
Uncertainty is an integral part of your business, therefore risk will always be present. The economy today is the most uncertain it’s ever been. It is the perfect opportunity to flex this business muscle. Take this opportunity to incorporate new procedures to the support the discovery, analysis and limitation of risks in your business.
Create a risk management framework that is suitable for any type of risk. The strategic framework your management team will need to develop must meet a variety of risky business:
- both internal and external
- economic sectors
- market conditions, and
- competitive position (monopoly or oligopoly, monopsony or oligopsony or perfect competition).
Types of Conventional Risks
For many entrepreneurs like yourself, the type of conventional risk comes in three main areas. The three areas that are quintessential business processes are: operational, market and credit.
Operational risk is in the execution of business processes of a company. It covers an incredibly wide scope of functions of internal processes to human resources through computer systems.
Credit risk is the borrower defaulting on a loan or line of credit due to bankruptcy or credit problems temporarily. The epithet “country risk” is preferred when the borrower is a country or sovereign entity.
Market risk is the loss resulting from fluctuations in financial instruments such as equity prices, interest rates, foreign exchange and commodity prices. These individually or collectively can have adverse financial effect on your investment bottomline.
Additionally, there is another risk – political risk. This is present in the external environment of your company. It may or may not be relevant to your specific situation. But, we are moving through a presidential election year and global pandemic. The financial loss risk resulting from a change in political landscape begins to explain why underdeveloped countries receive smaller direct foreign investment. Today’s federal decisions can directly impact your business. Politics play a part. So,the big question for you is – how are you going to push out the political noise, read your business impact and adjust your risk managment policy?
Managing New Risk
Whether you admit it or not risk is the Achilles heel of your company. Thus, incorporating an effective risk management solution is essential to avoid financial or reputation loss. The individual(s) supporting you in managing risk must bring effective tools with them. These tools need to detect, analyze and mitigate any potential risks at all levels of your company. Risk modeling and computer simulation has been proven to draw the “cloud of risk” of the company. Chapman and Ward (1997, page 169, English) also identified eight phases in more detail in the risk management process. These are: define, focus, identify, structure, ownership, assess, evaluate and plan.
There is a string of complex methods and systems for risk control. Which is associated with the importance of certain events. As a small business owner, it is important when making decision you take into consideration these eight phases. This will go a long way to supporting proper planning while reducing your exposure to risk.
In conclusion, remember you are in business for yourself to earn an income and make a difference to your clients. Knowing where your risks lay will allow you to better serve not only your customer but earn more. The current pandemic is scary and can throw even the largest companies into a tail spin. Reviewing and creating a plan to limit your risks will be key to coming out of the shut down successfully.