Dr. Rick Franza, Dean of the Hull College of Business, discusses a different, timely business topic each Monday in this column. This week, he talks about risk management practices. The interview has been edited for clarity and impact.
ABD: Being in business, even just starting a business, always carries risks. That requires some way to manage them. So how does one assess and manage those risks?
Rick: Risk management is important in business because you can never think of everything. So you identify the potential risks that can undermine your business – look at both the probability of that risk and the impact of that risk.
Then you assign low, medium, and high values to the probability of it happening and the same for the impact. A lot of companies do it that way, but some will color code them green, yellow, and red, or put some numerical number on them. Some risks may have a low probability but a high impact, or a high probability but a low impact. If it’s low probability and low impact, you’re not going to spend much time on it, but if it has high probability and high impact, you will.
ABD: What are some of the risks a company may face?
Rick: If we look back at the recent past, the supply chain issues were not properly addressed. So supply chain issues is one of them. What is the risk of losing one of my suppliers? Having alternative suppliers is one way to mitigate the risk. That’s not just a risk from another pandemic. It could be a natural disaster, weather events, or strikes.
Inflation is another risk. It raised costs on everything, from labor to raw materials. Interest rates rising is also a risk if you were planning on expanding your business or purchasing new equipment. Weather events can cause issues. And labor shortages, or a lack of a trained workforce, is another risk.
ABD: Once you’ve identified the risks, then what’s the next step?
Rick: All risks need to be managed and have a mitigation plan. You can’t eliminate risks, but you can plan what you’re going to do to address them when they happen.
When you identify what bad things are that could hurt your business, then think about what could happen to cause those bad things and develop a mitigation plan. Mitigation plans are where some creativity must come in.
For example, one of your risks if you’re in manufacturing is, “What happens if my machine breaks down?” One mitigation step is to do more maintenance on it to keep it running longer.
Having cash on hand is also a mitigation plan. You’re not taking all your money and reinvesting in the business, but holding it back to cover the risk of having a poor quarter.
Investing in your labor is also critical. It can reduce risk if there’s a labor shortage.
But some risks you can’t avoid. There are going to be times when you have to respond to a low-probability event. Covid is a great example of people responding to a low-probability event with creativity. For some low-probability events, it would be too costly to have a plan in place but having an awareness that, “If this happens, then I need to do this,” is important. But what a good risk management plan does is help you be proactive rather than reactive.
ABD: Do you need to hire someone to do a risk management plan?
Rick: If you’re a small business owner, you should be able to do your own assessment. It’s not that hard. But bringing in someone with experience could be very helpful in thinking through risks, so someone like a business coach or a retired project manager to consult with.
ABD: When should you start developing a risk management plan?
Rick: Yesterday. You can’t do it too soon. It’s something really important, but often, people don’t think about it until it happens. Just the fact that you’re aware of the risks is a benefit in itself. If you’re anticipating it, at least your reaction time will be faster.
