With the advent of the COVID-19 Pandemic managing risk in your business has become both more acute and should be an essential part of your business strategy.
Warren Buffett reminded us that “Risk comes from not knowing what you are doing” a message that is critically important at present as no one knows what’s going to happen next.
The risk profile of many businesses has shifted dramatically as they have been forced to adopt different operating strategies such as home delivery, employees working from home, and changed supply chain circumstances in order to survive.
In general terms managing risk falls into three distinct categories:-
- Preventable risks.
In principal these are internal risks such as employee errors, unethical conduct, illegal and incorrect actions, and breakdown in routine operational procedures.
All businesses should manage these risks through active monitoring and prevention processes. There is literature and resource available to assist in setting up risk management processes.
- Strategic risks.
These are risks that occur from adopting strategies that involve the acceptance of risk, for example, a bank assumes credit risk when it lends money. In the general sense the higher the anticipated return the higher the risk profile.
These risks can not be managed through the use of rules-based control models rather a system of risk mitigation that reduces the probability of any risk actually materialising should be adopted.
- External risks.
These are risks that arise which are normally outside a businesses area of control. These can arise from political interference or decisions, natural disasters (such as the current pandemic), and significant macroeconomic shifts (Global Financial Crisis).
As a business can not prevent these risks from occurring managers should focus on early identification and mitigation strategies. In summary, we are currently experiencing a significant external risk event that has proven to be difficult to manage. In our case, our state government appears to have managed the risk more effectively than our counterparts in other states and territories.
Whilst life and business in WA have basically returned to normal this is not the case particularly in Victoria where risk management was poor, ineffectual, and inadequate.
This simply highlights the importance of early identification and the adoption of appropriate risk management strategies.
A good example of this type of strategy is Beach Energy where CEO Matt Kay adopts what he refers to as his rock-throwing exercise, where he gathers together his team and works out what it would take to break the business. In so doing they develop a sound strategy of risk management.
Many small to medium businesses either do not have a risk management strategy in place or have not adequately analysed the risks that can impact their business. It is incumbent on all managers to develop sound risk management procedures in order to survive.