30 March, 2012, by Francine Pickering
Business Risk for Small and Medium-sized Businesses
Speakers: Professor Stephen Diacon, Nottingham University Business School and Margaret Burrell, Contract Clarity
Post by Francine Pickering, Ingenuity
Risk. What does it mean to your business? That’s the first question you need to ask, according to Professor Stephen Diacon, because, since there is no standard definition, if you don’t define what risk is to you, you can’t manage it. With risk reporting being a requirement of the Companies Act 2006, it matters to every company.
Undoubtedly, risk is about the unknown future. And, certainly, it is thought about in terms of the threat of adverse outcomes. But you can also look at risk in terms of the opportunities that it might present for increased return and profit. Whilst Professor Diacon and Margaret Burrell came at the subject from different angles, they both agreed that managing risk is not only about avoiding threats to the business but that it can also bring clear advantages and improvements in business performance.
Margaret highlighted that by managing “non-critical” business risks you can make a big difference to your cash flow. With clear communication and contracts you can avoid “scope creep”, work more efficiently, minimise lost opportunities and more – all of which have a direct impact on your bottom line.
It’s an important lesson, and one that can also help make a business more resilient should they face a more critical risk. Significant risks inevitably incur costs that can be large, unexpected and not budgeted for. If your cash flow is already weak, this kind of cost can take your business under. So managing day-to-day risks is not only good practice with its own set of benefits but can also stand you in good stead to help manage those more drastic risks.
So how does a business go about managing risk? It’s important to understand that risk involves both an objective and measurable element – how dependent are you on your IT systems, how likely is it that something might go wrong, and what kind of impact would that have on your business? – and a subjective, emotional element – the human tendency to misinterpret where real risk lies. After all, losing a key member of staff is something much more likely to hit your business than a volcanic ash cloud, and it’s easier to pre-empt and control.
The Chartered Management Institute’s Business Continuity Management Survey 2011 (page 10) illustrates changes in the types of disruption experienced by businesses over time, with extreme weather, loss of IT and loss of people featuring highly in recent years. Other risks, such as loss of key skills, seem reduced in recent times suggesting that business might be getting better at managing these. Some risks are newly included in the survey – malicious cyber attacks, for instance – reflecting changing times and others record less changeable trends.
An objective approach to managing risk helps to identify and prioritise those risks that are most pressing It helps to generate the benefits of risk management and focus attention on preventing risk rather than relying insurance to cover the consequences.
Professor Diacon’s recommendations are to:
- Develop a risk register (which depending on the complexity of your business could be matter of using a simple list or using specialised software);
- Prioritise according to likelihood of occurrence and impact;
- Address those risks;
- Report on risks in accordance with the Companies Act 2006.
“Non-critical” risks can be managed by clear communication with suppliers, clients and employees and managing the relationship dynamics. Clearly setting out and managing expectations – through internal policies, marketing materials, and formal contracts and agreements – will reduce risk and improve profitability, as well as building better business relationship.
“What was most useful was the way the two speakers matched both ends of the risk management spectrum.”
“Clear cut and relevant.”
“The topic is very relevant to my business at the moment.”
The Ingenuity Knowledge Exchange breakfasts are free and open to all business owners. The next event is on the theme of Customer Stickiness and sees Duncan Shaw from Nottingham University Business School and award-winning local accountant, Linda Frier, sharing perspective on how to keep customers close and coming back.