Risk-free business ventures do not exist. Projects can fail, clients can default and workplaces entail physical danger, to name just a few potential problems small business owners face. A balanced approach is essential for effective risk control. Failure to take proper preventative steps can lead to project failure, but instituting too many risk control measures also can doom a project.
Understanding all of the risks involved in a business venture or project, as well as their probabilities, is vital. Risk analysis starts with studying historical precedent, expert opinions and other sources to become familiar with the scope of potential problems. Next is identifying the specific risks involved, including the positive and negative consequences that could ensue and their likelihood. Armed with this predictive data, you can begin to design a relevant and comprehensive risk management plan.
The best risk control measure is avoidance. For example, a factory owner who learns that a chemical used in the manufacturing process is dangerous to workers might avoid the risk entirely by eliminating that step from the manufacturing process or by finding a safe substitute chemical. Risk avoidance might work in some cut-and-dry scenarios, but being risk-averse also can cause you to miss out on benefits, such as innovation, that derive from overcoming challenges.
Loss control has two basic incarnations, according to the book “Managing Life Insurance,” by Shashidharan K. Kutty. First, loss prevention is taking reasonable steps to lower risk probability. For example, the factory owner in the previous scenario might alter the manufacturing process to isolate the dangerous chemical from workers. Second, loss reduction minimizes the severity of a negative outcome. The factory owner might design mechanical shutdown procedures to quarantine dangerous chemical leaks, for instance, as well as publish evacuation procedures for worst-case scenarios.
At a certain point, taking further risk control measures becomes infeasible. For example, if the factory owner has no option but to use the dangerous chemical and has taken appropriate safety measures in accordance with governmental regulations and best practices within the industry, nothing more can be done to avoid risk other than shut down the business. Risk financing then becomes a viable means of risk control. This can take the form of reserving money in your budget for worst-case scenarios or, if possible, purchasing insurance to help your business recover from a loss.