Once the domain of large corporations, risk management is becoming an important discipline for even the smallest of organizations. That’s partly because mistakes in small companies are more likely to be lethal, and as companies grow, so do their exposures to risks. Just as each new project, customer, vendor, or resource brings value, each can make you vulnerable. Good risk management is absolutely essential to protecting you from irreversible consequences. It’s also a way to turn uncertainties into profits.

Create a risk-intelligent organization

Most companies and managers do not fully understand the risks they take in the many business and financial decisions they make daily. Others are so risk averse they sacrifice innovation, and along with it, your company’s competitiveness. Improving risk management requires a conscious integration into everyone’s day-to-day decision-making processes.

The classic approach to risk management, whereby top-level executives simply develop policies addressing various risks or regulatory issues and then hand them off for business execution, doesn’t work. Today, effective risk management must rely on an enterprise-wide system to identify, prioritize, diminish, measure, and report on risks. Success hinges on developing a culture in which all managers instinctively weigh both risks and returns. It also depends on establishing and communicating your organization’s risk strategy to instill in them the confidence to do their entrepreneurial best for the company.

Assessing risk

Risk can be any event that holds the possibility of negatively impacting financial performance. Determining the type of risk you face, for instance whether it’s a market risk or an operational one, is a starting point. From there, you can get as sophisticated or keep it as simple as your resources allow. On the simple side, create a model for each risk that outlines the potential costs at stake, whether the probability of occurrence is low, medium, or high, and develop strategies for addressing each risk.

Otherwise, there are several good statistical tools for assessing and projecting risk, such as probability models, profiles, decision trees, and simulators. They range in price and complexity but all have one thing in common: they arm you with information, your best weapon against risk and uncertainty. 

Even without the most sophisticated tools, simply constructing the best-case, worst-case, and most-likely scenarios is a good risk-management habit to get into. In that respect, diversification can be an extremely advantageous approach. The more differing opinions you can assemble, the better your chances of uncovering potential uncertainties and various unforeseen circumstances. In addition to revealing risks that may not be obvious, listening to conflicting opinions affords you the opportunity to weigh which risks matter most. Therefore, any assessment process should involve as many employees and perspectives as possible. That includes your most pessimistic employees who will ask those off-the-wall-what-if questions that can help prepare you for anything.

Leading with information

A risk analysis won’t provide concrete answers. However, it can give you sound information along with the confidence to make better economic decisions. In the end, the best decisions depend on prudent leadership willing to take informed risks that capitalize on your organization’s strengths.