Develop a Financial Risk Management Plan for Your Small Business

Risks are common in business. You can’t always remove all the financial, material, or physical risks you might face in your business, but you can minimize the risk to a great extent through proper planning and management.

Unfortunately, quite a number of business owners think “risk management” is about buying good insurance protection; they rarely consider other ways to mitigate the risk. Well, managing risk in business is difficult, but not impossible. Here is a step to step guideline you can follow to develop a financial risk management plan to protect your small business:

Step 1: Identifying the risk is vital

Some risks are common, whereas other risks are very specific that can only be understood by the business owners. Until you know the problem, you will not be able to create a cost-effective and proper plan. Thus, you should maintain a standard risk checklist or database of risks that are related to your small business.

Know the probable risks

There are many risks that can arise in a small business. Some common risks are:

• Financial risks
• Liability risks
• Operational and environmental risks
• Strategic risks
• Privacy and information risk
• Business interruption loss related risk
• Injury or accidents to employees

How can you identify the risk?

Well, this is tricky. You have to find the risk. You can follow these methods like:

Avoiding the risk is also a part of developing the financial risk management plan. If you don’t avoid risk, then you will have to put your potential effort and time into developing the risk management strategy. Click To Tweet

1- Ask yourself as many “what if” questions as you can

For example:

• What if you get a complaint from a consumer
• What if the machines are damaged or not accessible
• What if the suppliers go out of business
• What if you experience a natural disaster in your area
• What if all the staff members resign all of a sudden
• What if you face a major scam
• What if your business documents are destroyed by a fatal fire

2- Arrange a meeting with the accountant and financial adviser to know about their perspective about risk.

3- Maintain flowcharts, checklists and inspect whether or not the risk is internal, external, or random.

Step 2: Analyse and evaluate the risk

After identifying and creating the list of probable risks, you should analyse them. You need to evaluate the risk to your business with 2 parameters:

1. The likelihood of risk occurring
2. The consequences of risk occurring

Now, you need to see how likely or unlikely the problem happens. You need to analyse the consequences how severe or low the losses are. Once you get the idea of the likelihood and consequences of the risk, you should create a risk rating table to evaluate it.

Doing so will help you manage the risk and make a decision about it. To calculate the risk rating, follow this popular formula:

Likelihood x Consequences = Risk rating

For example, the formula will help you to understand the likelihood of a fire is ‘unlikely’ but the consequences are ‘severe’.

Step 3: Treat the risk

You should find out options to treat the unacceptable risks to your business. Remember, some unexpectable risks need immediate treatment whereas some risks can be monitored later.

Before deciding which risks to treat, you should gather information about them. For example:

Calculate the costs required for treating the risk, benefits of treating the risk, how much time is required to treat the risk, etc.

Step 4: Review your financial risk management plan

The business environment is not static; it is changing constantly. The type of risks and its likelihood and consequences will change. You may also face new risk as the business develops. If you review your risk plan on a regular basis, you will be able to identify the new risk and loophole. By doing so, you can easily maintain the effectiveness of your risk management plan.

Step 5: Avoid the risks

Avoiding the risk is also a part of developing the financial risk management plan. If you don’t avoid risk, then you will have to put your potential effort and time into developing the risk management strategy. This way, you may not be able to get the desired success. So, try to avoid risk as much as possible.

How can you avoid risk?

Once you find out a risk, you should try to reduce the likelihood of it to reoccur.

• Introduce a quality control process
• Make sure there are no legal loopholes in your business
• Manage your business debt properly
• Provide training to the stuff
• Keep off-site data backup
• Value your target audience
• Don’t ignore a complaint against your business name

Lastly, you can transfer risk to another party through insurance, outsourcing, joint ventures, or partnerships. A risk related to a business can be avoided. reduced or transferred, but you have to accept the risk first. If you don’t accept the risk and try to ignore it, then you will have to be ready for a fatal consequence.

So, it is important to have plans to manage a risk; also, you need to have enough fund to cope up with it if it occurs. By doing so, you will be able to run your small business successfully.

360factors’ American Banking Association (ABA)-endorsed Compliance Management Software is a next-generation, cloud-based, highly-integrated solution for managing governance, risk and compliance (GRC) across an organization. Predict360 helps banks and financial services firms reduce manual effort by using its internal logic for helping to make decisions. Its AI looks at all the patterns, analyzes data, and learns from the system in which it is employed.

About the company

360factors, Inc. (Austin, TX) helps companies improve business performance by reducing risk and ensuring compliance. Predict360, its flagship software product, vertically integrates regulations and requirements, policies and procedures management, risks and controls, audit management and inspections, and online training and qualifications, in a single cloud-based platform based on artificial intelligence.

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