How to Identify and Reduce Risks in Small Business?

If you don’t attack the risks, the risks will attack you.– Unknown

Identification of risks in small business is an important task to sustain from any untoward incidents that may arise in the future, but many failed to attempt and give least priority for it. Though we take some precautionary measures in terms of money aspects, most of the required fields are remain unattended. Remember, if you want to sail through rough and tough conditions in the current environment, risk mitigation is mandatory.

What is Risk?

There are definitions to understand the ‘Risk’, but what I simplify here, for you are;

“Risk is what you expect, not to happen in the business”

How to capture it?

When you think what not to happen in your business, many issues will emerge. Without avoiding anything, capture all the risks. If you don’t know where to start, start from the beginning of production or service process. Walk through all the process by yourself and identify it. For example, if you check your material ordering process, you can think in terms of how this supply order can go wrong? Or what if our suppliers not meeting the timely delivery?

It goes on…

Prioritize it!

Capture all the risks without any prejudice. Wherever possible put the frequency of event and how much that affected your business. For example, if a supplier not dispatched the material in time, then the risk is delay in receiving the material. You may have faced the cases once in a month or more frequently, so be it. But capture it. Also, look into the effect of that delay in your business. Because of the delay, Did you lose your customer? Had the order been cancelled? Did you face any penalty / legal issues?

This type of approach will help you to know the severity of the event. Severity can be rated between 1 to 10, by considering 1 as low and 10 as maximum. Now multiply the severity and occurrence.

Risk Priority Number (RPN) = Severity * Occurrence

There is another term ‘Detectability’, but I would suggest to leave this aspect for small business.

You can prioritize the risks by the value of RPN, by simply putting in ascending order.

Act on it!

Once you have prioritized the risks, you can take first five risks as your major risks and act on it.

‘Remember you cannot remove all the risks from your businesses’

You can do any of the following, depending upon the nature of your business;

  • Reduce the severity to minimize the risk impact
  • Reduce the frequency to minimize the risk impact
  • Transfer the risk to somebody
  • Accept the risk and act on it

If you take the same example as given above, if material timely delivery is an issue. Then following can be done with your supplier

  • Understand his concern and remove the hurdles in his business to maintain mutual relationship (Reduce the frequency to minimize the risk impact)
  • Pre plan your work accordingly (Reduce the severity to minimize the risk impact)
  •       Identify a new vendor (Transfer the risk to somebody)
  • Increase the delivery time of your service, and inform to your customer (Accept the risk, if nothing can be done)

Remember! Risk Mitigation in Small Business is not optional, it is a Prerequisite!

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