Business risk response strategies

Dear Readers

I hope you are well and that it is going better this year with your entrepreneurial initiatives than last year.

We have added last week new cartoons to our web site. These cartoons address business risk response options (strategies) available to entrepreneurs.

We realized that entrepreneurs need guidance on how to mitigate the risks they are facing and to know what strategies are available under which circumstances.

We added two cartoons on this subject. The one cartoon addresses risk transferring or sharing and the second cartoon addresses risk impact reduction. Our intention is to create cartoons on the other risk response options, available to entrepreneurs, later on.

What are the risk response options?

You need to decide how to respond to each threat (risk) and you have the following choices:

Avoidance

Risk avoidance is NOT the same thing as treating your business risks as an afterthought! Risk avoidance is a conscious, rational decision by a business owner to avoid the occurrence of a serious threat by suspending the business activity that poses the risk to his business. By avoiding the occurrence, the impact as well as the consequential negative financial impact could also be avoided.

In other words, you might decide to stop manufacturing a specific product, or to stop delivering a specific service because of the high risk involved.

Example: A pharmaceutical company could decide to withdraw a specific drug from the market after it had become known to increase users’ chances of cancer.

Change the nature of a business activity

You can change the nature of a business activity in order to minimize the risk associated with it. By changing the nature of a business activity, so as to avoid the occurrence of a threat, the impact as well as the consequential negative financial impact could also be avoided.

Example: A business owner could decide to change from a cheque payment system to an electronic payment system in order to avoid the occurrence of cheque fraud.

Take note that when you change the nature of an activity to avoid its inherent risks, your business’ risk profile could also change. In this example, payments over the Internet pose complex security risks to a business, like confidentiality issues, the manipulation of electronic data and banking details of customers etc.

Reduction

The most popular risk response is reduction. You can reduce/minimize a threat’s possibility of occurrence or potential impact.

Sharing/transferring

Sometimes it is quite feasible to share a risk with a third party or transfer it to them.

Example: You could obtain insurance cover for the negative financial impact of fire, natural disaster, or legal liability threats. Or, in order to counteract the risks regarding certain business activities, you could decide to outsource problematic non-core business activities to specialists outside your business (e.g. your Human Resource function).

Acceptance

As with risk avoidance, risk acceptance is also a conscious, rational decision by a business owner. He accepts the fact that he cannot counteract a specific risk by avoidance, change, reduction, or sharing/transferring, although, at the same time, he acknowledges the need to continue with the business activity that poses the risk to his business.

The difference between risk acceptance and avoidance is that with risk avoidance a business owner avoids the occurrence of a very serious threat that could damage his business’ financial position forever. However, with risk acceptance, a business owner decides to accept a risk, and the consequential financial impact, and the fact that it cannot be counteracted with additional controls.

While writing your business plan, you need to consider your business risks too. It is also a good idea to set the tone of your business’ attitude towards relevant risks as well as to establish the risk management culture. For more information you can download our Business Plan Guide to read more about the risk response options available to you as entrepreneur.

If you have any questions, you are welcome to contact us at blog@business-around-the-globe.com

Warm regards

Michiel Jonker, CISA

Tags: Business Plan, Business Planning, business risks, business strategies, risk response