Five ways to deal with risks in your business

All business involves risks. There is no such thing as a risk-free enterprise. But that doesn't mean you can't manage them. The first step is to identify your risks, and consider their probability (how likely they are to happen) and severity (what the impact would be if they did happen).

But once you've done all that, what options do you have for dealing with the risks in your business? Below are five general methods to run through with each risk you have identified. It won't tell you exactly how to deal with every situation - it's not magic - but it will give you a framework to come up with the answer yourself.

In other words, reduce their effects. This is for risks you either want to have to take. Find ways to make their effects less damaging. For example you can mitigate the risk of a negligence claim by improving you safety practices.

Most risks can be mitigated to some degree but there is a trade off between reducing risk and the cost of doing so. You should look at the risks you have identified (and consider their probability and severity) and look at the costs and benefits of your options for mitigating the risks. Sometimes it may be better to accept the risk if the cost of mitigating it is very high - but don't forget to consider the impact of the risk. Always keep in mind a (realistic) "worst case scenario".

One obvious way of transferring risks to someone else is by purchasing insurance. The insurer agrees to take on some of your risks (for example by paying you a set amount if your business premises is unusuable) and you pay them a premium. This turns an uncertain, unquantified large loss into a known definite small loss for you.

There may also be Government guarantee schemes for business (such as export cerdit guarantee schemes) where the Government has decided to take on some risks from your business because of the benefit to the economy as a whole.

Unfortunately you are unlikely to be able to transfer all risks. There are some risks an insurer won't take on. The contract might also include an "excess" so that you have to pay a small and certain amount of the cost. This makes the contract cheaper as it protects the insurer from frivolous claims.

This is a fancy way of saying "spread out your risks". Or as the old saying has it "don't put all your eggs in one basket". For example if you have just one key supplier consider finding some more. If you have just one employee who knows how to use the special machine that makes your business work get them to train some other people too.

Some risks can be avoided by changing what you do. You might decide that certain projects are too risky to take on at all. This is especially true for work that isn't a core part of your business.

Avoiding a risk is usually an extreme option, but can be a clean, sharp way of dealing with risks in the right situation. Unfortunately many risks in business (and in life) are unavoidable.

There will always be some risk you cannot mitigate, transfer, diversify or avoid. If there wasn't you wouldn't be running a business. Every business has to accept some risks. The key is to identify which risks you are willing to take and what the upside of taking them is for you and your business.

If you do accept risks you need to make sure you are being rewarded for them. If you were investing in someone else's business (for example in stocks and shares) you would expect to get extra reward in terms of better returns if you take more risks. Think that way about the risks in your business. Only accept them if they are worth your while.

"For each risk I've identified, what general methods are there to deal with them?"

1. Mitigate

2. Transfer

3. Diversify

4. Avoid

5. Accept

Some risks are simply part of your core business. If you are a company that makes ice cream, there is a risk that customers won't like your product and will buy rival ice creams instead. That risk is directly related to your core business, and so the cost of getting rid of is likely to be too high. Instead you might choose to accept that risk as an inevitable part of being in the ice cream business, and work to make sure that the returns on the business are enough to make up for taking on the risk.

On the other hand there are some risks which are very unlikely but would have a major negative effect on your business. These low probability, high impact risks can sometimes be insured. However it may not be possible or cost effective to insure against all these possibilities that may be very unlikely to happen. You might decide, for example, not to insure against the risk that the Government of your country decides to ban ice cream - even if you could get insurance against such an outcome.

We all take risks in business and in life. But knowing what your risks are and understanding how you can deal with them will keep you one step ahead.