Only take the risks you can afford.
Most business management is risk management. Growth, reward, and profits all only occur on the other side of taking risks.
Successful business leaders, therefore, learn the skill of assessing and understanding risk and identifying what risks to take and when. Essentially risk management is about weighing the downsides against the upsides with regard to their impact and likelihood.
Here are 6 steps to take to help you better manage risk.
1) List out potential risks – The only place to start when approaching risk management is to brainstorm and list out all the potential risks you and your team can think of. Documenting your risks creates transparency and an agreed understanding of what they are.
2) Assign a likelihood to each risk – The first stage of then assessing the risks is to assign a likelihood of each risk occurring. The scale you choose is up to you, but it is commonly either 1 to 5 or low, medium, high, and critical. To keep it accurate and realistic focus on the likelihood of the category of the risk and not a single event type.
3) Estimate the impact on the business – With the likelihood of the risk understood and agreed it is now time to determine the impact the risk occurring will have on your business. Use the same scale you selected for likelihood as this will then allow you to plot the risk on a matrix.
4) Discard anything low impact – Regardless of the likelihood of them occurring any low impact risks can be discarded. Trying to eliminate these risks is likely to cost more resources than the impact is worth.
5) Outline plans for unlikely risks – Risks that are high impact, but low likelihood should be taken seriously. Contingency plans should be documented and ready to be deployed if and when these risks occur. These contingency plans can take the form of backups, different strategies or insurance.
6) Where possible eliminate high-scoring risks – Risks that are classified as high-likelihood and high impact should be avoided wherever possible. This includes changing strategy and plans. If unavoidable however then a considerable effort should be spent on mitigation and managing these risks.
TAKEAWAY: Understanding how to appropriately manage risk is an important skill for any business leader. By identifying, classifying and where appropriate addressing the risks, you can minimise the downside and take advantage of the opportunities they present.