Why is identifying risk so important in a business?

Use our risk analysis template to identify the potential risks your business might face and how you can control or minimise these risks.

Risk analysis template

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Every business model and operation comes with some level of risk—some much more than others. Any time you embark on a new business venture, the possibility of risk is inevitable. It’s how you plan for and manage potential risks that determine the overall success of your business. In fact, risk management in business process management (BPM) is paramount to keeping costs down, protecting your bottom line, maintaining a good reputation in your industry, and improving the overall operational efficiency as your business grows.

What Is Risk Identification?

Essentially, risk identification is an opportunity for you to take a step back and truly assess your business to identify potential problem areas that you should be aware of or that can be improved upon to prevent future losses.

As mentioned, every business faces some level of risk. But the types of risks that could affect an organization’s efficiency and profitability differ depending on the nature of the business and other extenuating factors or circumstances. For instance, if your business is launching a program that is affiliated with a specific political party or ideology, you run the risk of alienating customers who don’t share the same ideology as you, especially if it involves a controversial or heavily debated subject.

Other potential risks are related to your brand reputation, in which case you’d be responsible for ensuring all your staff receive the proper training and resources so that they can effectively represent your brand. That includes ensuring all customer queries are responded to in a timely manner, all communication is conducted in a polite and diplomatic manner that reflects your brand values, and so forth.

At the end of the day, it’s up to you as the business owner to determine what protocols and standards apply to your business and how strongly they need to be enforced. This is all part of coming up with a feasible business plan that includes risk identification, assessment, preparation, and prevention of losses.

The cornerstone of an effective risk identification and management process is the business owner’s ability to not only predict the types of risks their company might face in the future, but also the likelihood and frequency with which that risk could happen.

Why Is Risk Identification Important for BPM?

The importance of risk identification stems from the fact that as a business owner, it pays to be prepared for all possible risks that could occur for your business. Businesses that are proactive in implementing stringent inlying and outlying risk identification protocols are more like to gain a valuable understanding of the evolving needs of their operations. Whether that has to do with future expansions, upsizing, downsizing, or relocations, there are a lot of potential risk factors that need to be taken into consideration. As the saying goes, hindsight is twenty-twenty, but foresight is better. That’s where risk identification and management come in handy. Here are some of the benefits of risk identification.

Saves Valuable Resources

Taking a proactive approach to risk identification, assessment, and management can help save your business a lot of time, money, manpower, and other valuable resources in the long run. Experience is and will always be the greatest teacher, so be sure to take what you can from it.

Always pay your due diligence when researching new markets, demographics, and climates. Learning everything you can about these factors is the best way to prepare for everything they have to throw at you and respond accordingly without maximizing the use of your allotted resources.

Reduces the Risk of Unhappy Customers

Actively working to retain customers and keep them coming back reduces the chances of them having a negative experience with your business and, in turn, leaving negative reviews about your company online. As long as you take proactive steps to ensure your customers are happy like following up with customers, sending them personalized e-mails or gifts, and responding to all inquiries or complains in a timely manner, then you shouldn’t have anything to worry about.

Of course, mistakes can still happen and it’s impossible to please everyone, but part of having a risk management strategy is mitigating these negative reviews and customer complaints by showing customers that you care about their experience with your brand.

Boosts Employee Efficiency

Working to minimize your employee turnaround rate can significantly boost productivity, employee morale, and efficiency in the workplace. Employees will be able to take more pride in their work knowing that they work for a company that truly appreciates and respects them enough to provide them with comprehensive training and resources about your company values, return policies, and protocols.

Company personnel are an invaluable asset to your business and their well-being should always be a top priority. Proving to them that you’re doing everything in your power to create a productive and rewarding work environment will make it easier for them to work harder and smarter at the same time.

Gives You More Bang for Your Buck

Ultimately, the goal of implementing a solid risk management program for your business is to protect your company, your employees, your customers, and above all, your bottom line. Companies with a proven and tangible risk assessment and management plan in place are far more likely to maintain strong customer relationships and retain more customers in the long run.

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Life is full of unexpected events – and it is the same for individuals and business organisations. While some are positive (and, indeed, rare), however, others are negative and may occur with enough frequency to warrant your attention as a business owner. 

If an unforeseen event catches your organisation unawares, the impact could be minor, such as a small impact on your overhead costs. In a worst-case scenario, though, it could be catastrophic and have serious ramifications, such as a significant financial burden or even the closure of your business.

The Importance of Risk Management

This is where risk management becomes an essential part of your wider business strategy. By identifying and analysing potential threats to your organisation, such a process mitigates the impact of any negative events or changes that could otherwise be disastrous. To illustrate how, let's take a closer look at the importance of risk analysis and identification in business.

1. It Helps to Reduce Uncertainty

Uncertainty in any form is bad for business and, by its definition, is difficult to quantify. As Warren Buffett once said, though, "risk comes from not knowing what you are doing." Therefore, understanding the internal and external aspects of your business organisation is an integral part of knowing how to protect it. 

The more knowledge you have about such factors, the lesser the threat posed by uncertainty to your business, which is where a thorough PESTLE analysis can be useful. This is because companies generally exist in a complex ecosystem of constant political, social, economic, and environmental upheaval. Unexpected events arising from any of these spheres can have a damaging impact on your organisation. 

Knowing how to identify when your business is likely to be affected is a core component of risk management. While, of course, you can never truly remove the element of risk in business, many adverse events can indeed be accounted for and mitigated. After all, the maxim that "prevention is better than the cure" is as valid for the health of a business organisation as it is for any human condition.

2. It is Crucial for Successful Planning

Success in business rarely arrives by chance – more often than not, it is a product of meticulous planning and diligent execution. Unforeseen events can affect the success of your business if you do not have built-in countermeasures in your plans.

If you ignore risk management entirely, everything that you do will carry with it a high chance of failure. For instance, imagine a situation where you fail to identify a workplace safety hazard. If any accident does occur, it could lead to worker injury, reduced productivity, and, likely, a costly lawsuit. 

These events could effectively end your chances of achieving the initial targets as set in your business plan, yet with adequate risk management, it is something that could easily be avoided. When done correctly, risk management identifies threats, minimises their likelihood, and allows you to insure your strategies with suitable precautions and countermeasures. 

3. It helps Reduce Expenses and Losses

Risks can be divided based on the nature of their impact on your finances: income risk and expense risk. Any events or mishaps that reduce your productivity – or your ability to provide services to your clients – will result in a loss of income.

Developments that raise the cost of your production or other parts of your overhead also come under expense risk, and can present in many forms. For example, a change in legislation might result in increased taxes or compliance expenses; alternatively, additional competition could lead to a rise in marketing expenses. 

If you can anticipate these risks, then you can prepare strategies to deal with them well in advance – or even avoid them altogether. For instance, keeping a portion of your budget aside for such expenses can help you avoid costly interest payments from sudden loans if and when the need arises.

Another positive impact of risk management is on your assets. You can avoid costly expenses that can arise due to damage or destruction of assets if you take precautions. Loss of critical assets can have a huge impact, especially if your business is an SME.

4. It Helps Improve Your Reputation

Having a proper risk management strategy in place helps to convey a positive message about your business. Internally, it instils confidence among your employees about the capabilities of your leadership; after all, having a safe workplace also helps to boost morale.

When disaster does inevitably strike, your organisation's ability to continue delivering to clients will also have a significant impact on your brand. It demonstrates that your business is robust and reliable, and that you emphasise a professional culture that can continue to get the job done even in the face of setbacks.

Implementing a Risk Management Strategy

Traditionally, risk management has been seen as a prerogative of larger corporations, particularly given their size and financial resources. It's generally true that the larger an organisation is, the bigger its exposure to risk. 

Huge corporations also possess multiple assets and are spread across numerous sectors and geographical locations. Each of these factors has unique risks associated with them, while, by contrast, a smaller organisation will have relatively limited exposure. 

However, this does not mean that, as a small business owner, you should disregard risk management. Even smaller organisations face many risks, whether it be theft, natural disasters, workplace accidents, lawsuits, new government regulations, or simply the rise of better competition. 

While big corporations may be able to weather most of these events, the same cannot be said of startups; for instance, a lengthy and costly lawsuit would make a small dent in the coffers of a corporation. In the case of a small business, though, the outcome of a proportional fine, or a protracted court case, would be drastically different. It could cripple the organisation for some time, or even spell its doom. 

Therefore, the takeaway from this is obvious – you should not ignore risk management just because your organisation is too small to have a dedicated team for it. Business owners should improvise their strategies, with the help of their employees, and be sure that they factor in risk assessments to everything that they do – or face the consequences of failing to prepare.

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Why else is risk management so important in business? Let us know your thoughts in the comment section below.