Identifying, mitigating and managing business risks

All enterprises – from local, small businesses to giant, global corporations – need to be aware of potential risks. Why? In order to stay relevant, sustainable, competitive, and profitable.

Risk management aims to identify, assess, and control different risks (including internal risks and external risks) that can impact a business. With potential threats stemming from a wide range of sources – spanning natural disasters, stock market crashes, power outages, and more besides – leaders need to remain aware of vulnerabilities and act fast to manage and mitigate damage.

What types of risks do businesses encounter?

American Express highlights the most common risks organisations face:

• Financial risks. This refers to the cash flow within a business – and the potential risks (credit risk, currency risk, and liquidity risk) associated with sudden financial loss and insolvency. Organisations without sufficient capital to manage debt obligations and overheads can quickly find themselves in trouble. Plus, those with higher levels of debt financing are regarded as being of greater financial risk by lenders.
• Cybersecurity risks. Cyber-related risks are becoming more and more common. With many organisations now relying on digital and cloud-based channels to conduct business, cybercriminals are taking advantage of the increased attack surfaces and threat vectors to steal data and assets and undermine infrastructure.
• Operational risks. These risks – such as natural disasters, technological faults or employee errors – threaten to disrupt everyday business operations and business continuity, impacting productivity and profit.
• Reputational risks. Dissatisfied customers, faulty products, and negative publicity are all examples of risk factors that can damage organisational reputation. This can result in financial loss, a shrinking customer base, damage to business partnerships and stakeholder relationships, and more.

The Allianz Risk Barometer, an annual global report that identifies the main corporate risks for the year ahead, shares the top 10 risks for UK businesses in 2024:

1. Cyber incidents – including cybercrime and cyberattacks, data and identity theft, IT network and service disruptions, malware/ransomware, data breaches, fines, and penalties.
2. Business interruption – including supply chain disruption.
3. Natural catastrophes – including storms, floods, earthquakes, wildfire, and extreme weather events.
4. Shortage of skilled workforce
5. Climate change – and the physical, operational and financial risks that result from global warming.
6. Political risks and violence – including political instability, war, terrorism, civil commotion, strikes, and looting.
7. Changes in legislation and regulation – including tariffs, economic sanctions, protectionism, and Euro-zone disintegration.
8. Macroeconomic developments – including inflation, deflation, monetary policies, and austerity programmes.
9. New technologies – including the risk impact of artificial intelligence (AI), autonomous vehicles, and the Metaverse.
10. Market developments – including intensified competition, new entrants, market stagnation, and market fluctuation.

So, how can businesses accurately assess which possible risks they are most likely to encounter?

What is the risk management process?

Any risk mitigation plan or process should be systematic, structured, collaborative, and cross-organisational. It’s a constant process, and one that should evolve over time in line with changing contexts and business needs.

There are a number of key components to the risk management process leaders should work through before they can arrive at a solid, considered risk management strategy:

• Risk identification. Identifying risks highlights any threats that could affect an organisation’s operations and workforce – sometimes referred to as the ‘risk universe’. It should account for current, as well as emerging and future, risks.
• Risk analysis and risk assessment. Assessing risks involves gauging the probability that an identified risk event might occur (its prominence), as well as examining any potential impacts of such an event (its magnitude).
• Risk mitigation and risk monitoring. Mitigating risks requires planning and developing various measures and methods to minimise identified risks. Continuously monitoring mitigation techniques and processes can deliver maximum coverage of known – as well as unknown – risks, and deliver better results.

There are numerous risk management templates, frameworks and resources available – such as SWOT analyses – to support leaders in managing risk within their businesses. From an informed position, leaders can then decide on their approach: risk avoidance, risk reduction, risk sharing, risk transfer, or risk acceptance.

How can risk and reward be balanced in decision making?

Business decisions revolve around the need to make choices. How high-risk is the decision? Should we act, or should we hold fire? Which of these options is the right one? Will the potential pay-off be worth it? What happens in the worst-case scenario – and are we comfortable with that?

Strategic risks are often necessary in business – and can yield high returns. However, there are a number of factors and constraints to take into account before leaders can arrive at a decision with a comfortable level of risk. Exactly what these factors and constraints are will vary according to the individual business.

Adopting a balanced approach to risk might be a sensible route forward. It involves assessing possible outcomes, understanding the inherent risk associated with each option, determining an agreed level of risk tolerance, and ensuring decisions are aligned with organisational objectives and resources. Implementing risk mitigation strategies/risk management plans will help ensure decision-makers maximise opportunities for success while minimising any negative potential impacts.

Remember, there is no concrete right or wrong when it comes to judging risk and reward, it simply depends on what business leaders are comfortable with – and what they’re willing to lose or gain.

Design and implement robust risk management strategies that safeguard businesses

If you want to develop a skill set that will help you excel in senior leadership, business administration and management roles, choose Abertay University’s online MBA programme.

The global focus enables you to gain a solid grounding across the entire business discipline, preparing you to lead companies to success in markets across the world. Learn how to shape and drive strategy, inspire and develop others, handle complex challenges and decisions, and achieve business goals, on a highly flexible, online-based master’s that fits around your existing commitments. You can expect to explore topics such as risk management, financial planning, project management, business strategy, sustainable operations, economics, and more.