Every business will be presented with risks. From natural hazards, inflation, employee relations, market changes, and more, every business—large or small—will have to deal with the consequences of possible risks becoming actual events. Therefore, it is important to acknowledge the presence of threats within any organization and create strategic plans to prevent them from becoming a reality.
The solution: risk mitigation.
Read on to learn more about this solution, as we’ll unpack the definition, benefits, strategies, and more.
What Is Risk Mitigation?
Risk mitigation is the process through which businesses prepare for threats and minimize their effects on business operations. With a risk mitigation strategy in place, organizations can ensure business continuity and prepare in advance for the aftermath of a negative event.
Mitigation is not about avoiding risks. However, its purpose is to support business owners in their ability to deal with the presence of threats as they arise and minimize disruptions.
Risk Mitigation Examples
These are all examples of risk mitigation—business tactics used to decrease risk and remain sustainable. These potential threats can be specific to an industry due to a natural disaster or a transforming business climate. Therefore, investing the time to consider risk is just as important as developing and rolling out a business plan—it’s a part of an ongoing effort to prioritize strategic decisions and optimize for growth.
Top Risks for Small Businesses
There are many variables related to business risk. While some are specific to an industry and others are related to a location, there are some common risks that many small businesses face. Here are a few:
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Operational. Internal and external factors can impact a business’s daily activities. Operational risks include:
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- An employee making a mistake that can compromise a company’s financial viability, equipment safety, or performance efficiency.
- A natural disaster such as a hurricane or extreme snowstorm impacts a business’s ability to operate effectively.
- Fraudulent activity, such as stealing money or emergency scams, will create uncertainty and put a business at risk.
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- Security. Cyber experts often say, “it’s not if you’ll be breached; it’s when.” One of the greatest risks businesses consistently face is having their data compromised. Thus, customers’ information is exposed and this raises liability concerns. Customers can hold businesses legally liable for cyber breaches—which is why many companies opt for cyber liability insurance as part of their risk mitigation efforts.
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Financial. Businesses must consistently review their financial statements and evaluate their financial projections. When a company does not commit to managing its finances effectively, it is experiencing financial risks such as profit loss or market changes that could have been avoided. Three specific types of financial risks include:
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- Default. When a business takes a loan for a large sum of money, they are placing the company at risk of not being able to pay the loan.
- Liquidity. If a business cannot turn its assets into cash, it will experience liquidity assets.
- Currency. When a company does business internationally, they have to consider the value of the foreign currency as well. If it depreciates, this leads to exchange rate risk, which can harm the profitability of a company.
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- Compliance. When a company’s reputation or financial standing is compromised due to not following external or internal laws, this is an example of compliance risk.
- Legal. When a company does not follow local, state, or federal laws, this can have economic as well as reputational consequences. Examples of legal risks include contractual, disputes, and regulatory.
- Strategic. Any business with a faulty strategy is bound to face risks such as unachieved goals and financial strain.
Why Is Risk Mitigation Important?
Profit-driven activities are not the only way that businesses remain sustainable. Business organizations must acknowledge that servicing their customers and remaining competitive within their industry also rests on their ability to be prepared when disasters strike. A risk mitigation plan can provide a cost estimate of impending risks and help businesses stay afloat in case of interruptions.
Here are some reasons a risk management process is so important to a business’s bottom line:
- Just as the world is ever-evolving, so are businesses. Factors such as employee turnover, climate change, and business interruptions all translate to enhanced risks. The key is to take the necessary steps to protect a business from jeopardy. As risks increase, so does the threat of it becoming a reality.
- For entrepreneurs, catastrophes—big or small—are often not anticipated but can have a lasting impact on their viability. Risk mitigation helps businesses identify and prioritize problems that could arise in their business. All it takes is a strategy and a plan.
- When entrepreneurs ignore risk factors, they increase the likelihood that they will experience a problem that will negatively impact their business. Risks becoming a reality without a continuity plan can cost time and money and, in some cases, impact a small business’s short- or long-term viability.
- Proper risk mitigation reduces stress within an organization. When a business is experiencing severe stress, it can negatively impact the organization’s members. Ultimately, this impacts an entrepreneur’s ability to innovate and focus on growth.
What Are Four Types of Risk Mitigation Strategies
Risks are present in every business. There’s no way to avoid their existence. However, every business owner must create a strategy and plan to deal with risks and consequences. After all, effective risk management distinguishes smart entrepreneurs from those who are irresponsible.
The best way to manage risk mitigation: using an effective strategy.
Mitigation strategies support businesses in acknowledging the presence of risk and then creating a plan to deal with the associated costs. Below are four risk mitigation strategies.
1. Risk Acceptance
Businesses acknowledge the presence of a risk but take no action to mitigate it. This strategy is used when the cost of mitigating risk has the potential to exceed the cost of the risk. However, if the risk does occur, the business owner will have to manage its presence. Acceptance can be presented in ways such as:
- Financial
- Compliance
- Security and fraud
- Operations
- Competition
- Reputation
2. Risk Avoidance
What better way to eliminate a risk than to change plans? When businesses use the risk avoidance strategy, they understand that there is potential for a huge impact on the organization or a specific project. Instead of dealing with the risk, the organization decides to avoid it by shifting gears in its operational plans.
3. Risk Transference
Using a contract or policy, a business will shift its risk from itself to another party. For instance, a company that purchases cyber security insurance takes away the risk of being sued by customers impacted by a data breach. If a company experiences a data breach, it can use its cyber security insurance to cover legal liabilities. This is just one example of risk transfer, and the costs associated with it depend on the type and frequency of the risk.
4. Risk Reduction
Businesses can limit the effect of a risk by taking specific steps to understand its potential threat to their business. For example, a company with offices in a flood zone would have an evacuation plan and necessary insurance to protect its ability to bounce back in the event of a flood. Or, to further avoid the risk of a flood and its consequences, a company may decide to relocate.
How to Mitigate Risk
Once a business has identified its risk mitigation strategy, it is time to develop an action plan. In a risk mitigation plan, there are several distinct steps that every business should follow. Here’s why: every business needs a plan that is unique to its business model.
Step 1: Identify and Assess the Risk
The first step in mitigating risk is identifying a company’s vulnerability. Risks associated with a business exist for various reasons, such as industry, location, and employee needs. Therefore, identifying risks and assessing their impact is essential to estimate costs and secure business viability. In a risk assessment, a business will assess the risk and measures that can be taken to reduce the impact of a threat.
Step 2: Prioritize Risk
Once a business has identified and assessed its risks, it’s time to move on to the next step. Businesses will rank their rinks in order of severity. Often, a business will be willing to accept certain risks to protect from other liabilities. This allows a business to prepare for business continuity and effectively mitigate risks to benefit future projects.
Step 3: Track Risks
As a business evolves, so will its liabilities. As a result, monitoring risks is vital to a company’s livelihood and must be tracked to meet business continuity requirements.
Step 4: Evaluate Progress
How effective is a business risk mitigation plan? In this step, businesses must analyze the effectiveness of their plan. As businesses evolve, it is important to evaluate their plan. The evaluation process will support the needs of the business when managing risks. Businesses must regularly evaluate and analyze their plan to ensure that they will meet the needs of the business.
Tips For Successful Risk Mitigation
When a business is developing its risk mitigation strategy and action plan, it is crucial that your team practices equitable decision-making. Here are some tips to make the process solution-based:
How Legal Templates Can Help You
It is not uncommon for new business owners to ask, “what is risk mitigation” and “do I really need to do this now?” The short answer is yes. Every business needs to identify and evaluate risks that could possibly impact their livelihood.
Risk mitigation supports business owners in being prepared for events that they do not expect to occur. By identifying risks associated with your business and developing an action plan, you will protect your business’s ability to remain viable.
Taking the necessary steps to acknowledge potential risks will support entrepreneurs by saving them time, money, and stress when problems arise. Not to mention, every business needs to protect its reputation and customers.
So why not start with a business continuity plan? Legal Templates provides intuitive templates that can help you draw up your document in minutes. It’s a small and important step to help you mitigate risks and minimize business disruptions.
