Risk management can be confusing for entrepreneurs and small businesses, but it is necessary to codify risk management for any sufficiently large organization. However, we can simplify the risk management process by following these six simple routes.
It is important to understand the aims of risk management before we look at these rules. The biggest mistake which new business owners make is thinking of risk is purely a bad thing. The reality is that risk is inherent in almost every action taken by a business or an entity and that is why it is so important to manage risks as much as possible. Some of the most successful businesses that we have in the world right now are not successful because they avoided all the risks. They are successful because they saw the opportunity in taking the risk and it took the rest which no one else was willing to take.
The question then is not how risk eliminated, but how it can be controlled and exploited in a way that is helpful for the organization. That is why the process is called risk management and not risk elimination.
1 – It Is Impossible to Eliminate Risk
risk is like energy; it is not destroyed, it is only transformed or transferred. Therefore, when facing a risk there are only three possible actions: mitigate (carry out internal actions that soften or lessen the impact of a risk), assume (do not take actions to manage the risk) or transfer to a third party, such as an insurer (for example life insurance).
2- Follow the Process
An adequate prevention plan starts from making a good diagnosis of the situation, knowing first-hand what events or external or internal variables affect the company and based on that, carry out actions to mitigate or transfer the risk or make the decision to assume it, since the company is able to face the losses due to the materialization of this risk without major setbacks.
3 –Risk must be managed in terms of probability:
managing risks generally involves the use of resources, so risks must be evaluated and managed in a risk-return or risk-cost framework. As an example, suppose that traditional insurance for a building located in the city of Bogotá costs 100; If you want the insurance to also cover a tsunami, it costs 110. Given the low probability of the event occurring, it would be preferable not to incur that additional cost.
4 – It Is Better to Be Approximately Opportune Than Exactly In-opportune
The perfect is the enemy of the opportune. It is preferable to implement a phased plan rather than not managing risk for long while waiting for a robust and sophisticated model. Over time, that risk management model and policy will mature and grow stronger.
In finance, the term cash is king has been coined, referring to the fact that the value of the company is determined by its ability to generate cash. In that order of ideas, starting by managing the risks that significantly impact the liquidity and cash flow of the company is relevant and later evolve to risk management including the income statement and the statement of financial position (balance sheet).
5 – Avoid fear of regret
One of the biggest challenges in incorporating a risk management policy is the fear of regret. In business, this fear is accompanied by the phrase “I’ve never covered myself and I’m still here.”
To illustrate, imagine that you buy the same lottery number each week and someone suggests that you change it the following week. Even though the odds of each number are the same, if you keep the lottery number and the winning number turned out to be the suggested number, your regret would be less than if you changed the number and the winner turns out to be the one you played. for a long time. That fear of regret causes emotional decisions to be made, making mistakes.
6 – Consider interrelated geographic risks
Some of the largest companies in the country today include a more rigorous market risk management module in the due diligence when evaluating investments in another country. As an example, due to globalization, a setback in the Mexican economy has repercussions on Colombian exports, which is transmitted to Colombian domestic demand (consumers) affecting the businesses that these companies have locally, therefore, it is relevant to know how much the risk of the company increases if they make an investment in Mexico and review strategies to manage it.
