Risk management

To determine the most effective risk mitigation strategy for your business, you must first identify the risks, analyse them and evaluate their potential likelihood and impact. When you fully understand all the possible risks and their severity, you can begin to treat them.

The most common strategies for treating the risk are:

• transfer (sharing)
• reduction
• avoidance
• acceptance

Risk transfer strategy

Risk transfer or sharing helps you redistribute the impact of an adverse event over multiple parties. This could include partners or company members, an outsourced entity or purchasing an insurance policy. Sharing works best for risks that are unlikely to occur but could potentially have a big financial impact. Contracts with suppliers or contractors may provide a means to move risk away from your organisation, but keep in mind that this approach may not always suit. For example, if your product is faulty due to a supplier's error, customers may still associate it with you even if your supplier pays for damages.

Risk reduction strategy

Reducing risks involves taking measures to minimise the probability and the impact of the risk occurring. The aim is to reduce the risk to an acceptable level, sometimes called a residual risk level. Most businesses should try to reduce the risk whenever possible and economically advantageous. For example, you could introduce new safety measures, strengthen internal control or diversify your operations in order to mitigate the worst risks.

Risk avoidance strategy

If the probability and the impact of the risk are too high, it may be best to remove it altogether. This might involve changing the way you produce your product or deciding to avoid certain activities - for example, the launch of a new product or entering a new contract. Whether this is a viable option depends on your particular circumstances. Bear in mind that by stopping activities that carry the risk, you may also forfeit associated potential return and opportunity.

Risk acceptance (risk retention)

Accepting the risk assumes not taking any action to mitigate its impact and probability. This 'do nothing' approach accepts that some level of loss is likely to occur - usually the type of loss that can be easily absorbed within the business, at least at the beginning. However, if risk events occur regularly, business disruption and the costs for addressing it will likely mount. It's important to assess risk retention options alongside other possible mitigation approaches, to determine a suitable approach in the long term.

Choosing your risk management strategy

The best way of dealing with risk will depend on the situation, as well as the probability and impact of a particular risk. It is unlikely that you will be able to completely eliminate all risks, so your task will mainly be to determine whether the risk is acceptable and, if not, decide how you want to deal with it. Find tips to help you evaluate business risks.