Dealing with business risk is an inevitable part of our business lives

Risk is a part of life. For entrepreneurs, self-employed professionals, and small business owners, risk is unavoidable and part of our business lives. Whether it's the risk of losing money on a new venture or the risk of not being able to meet customer demands. Furthermore, we face risks every day. Knowing how to deal with business risk is essential for success. In this episode, we'll explore some tips for managing risk in your business. Stay tuned!

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Conclusion

So in this podcast in Dealing with Business Risk I talk about what risk is and why it matters so much to businesses, namely

• What risk is
• How to group and categorise risk
• The different actions available to us when it comes to mitigating that risk.

In the next episode, we'll be looking at specific examples of risks and how best to deal with them. If you're interested in finding out more, make sure you subscribe to my YouTube channel so you don't miss out! Thanks for listening!

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Risk, like love, as the song goes, is all around us. It's an inevitable part of our business lives and we cannot avoid it. We cannot put our hands over our eyes and ears, go la la la and sit disappear. Even if you hide under the duvet, dug out your house, that risk will still be there. In this week's podcast on I Hate Numbers, I'm going to be talking about what risk is, why it matters so much and why we should be dealing with it, how we should categorise in group risk, and the actions and options available to us to actually deal with risk. This is part one of a two-part series on business risk. In next week's podcast, we're going to be looking at some more practical matters of categorised and identifying risk and what we need to do as a follow-up action when we've identified the risk to our own business.

You're listening to the I Hate Numbers podcast with Mahmood Reza. The I hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks. Welcome to this week's episode on I Hate Numbers. My name is Mahmood. I'm an accountant, educator, mentor, and now proud author of the book I Hate Numbers. It's a book that's going to revolutionise your relationship with numbers. And if you don't believe me, check out the show notes, get a free chapter, download, read it for yourself and hopefully you'll be tempted to buy a copy of yourself. It will be an excellent investment. The purpose of this podcast is to improve your financial awareness, improve the battle between your ears, your awareness, your mindset, help you and your business fundamentally make more money, save tax and save time. That's a fantastic aspiration.

Let's crack on with the podcast. Firstly, what is meant by this concept of risk? Now, risk is anything (activity, impediment, event) that is likely to stop you achieving your end goal, getting to your northern star, reaching your objectives. Risk fundamentally consists of three key elements. Namely, you have a choice, the likelihood of the occurrence and the impact and consequence of that event. Some choices needed in the situation. If we have no choice as a business, then we don't have a risky situation. It's what's called a bounded one. Sounds impressive, doesn't it? Beyond your control. Likelihood infers some level of uncertainty and some unwanted consequence must exist in one or more of the choices available to you as a business owner or your management team.

Haven't seen what the idea of risk actually is - Why is it such a big deal? Well, we know it's a big deal because risk, if not managed correctly, if not managed effectively, if we don't focus on the key risks that will affect our business, then not only will we not reach our northern star, not only will we not reach our end goal, it could be quite catastrophic, depending on what the nature of that risk actually is. The next thing we need to consider is how do we go about identifying the risks in our organisation? Typically, risk can be broken down and can be categorised into one of four groups.

What are those groups I hear you asking, let me go through them with you. The main types of business risk you will encounter are strategic risk, compliance risk, financial risk and operational risk. Let me examine each one in turn. Strategic risk can occur at any time. So, for example, you as a manufacturer of face cream, may suddenly see a decline in your sales because people's habits, people's nature, people's preferences have actually altered and instead of using the face cream that you're producing, they might want natural alternatives which your business does not supply. So you need changing the macro, you change in the big picture that affects your buying base is going to be a strategic risk. Having dealt with a strategic risk, what about compliance risk? Now, the word compliance indicates some obedience, some form of regulation that's out there.

Now, that regulation could be by your regulatory body, it could be a local bylaw, it could be a national regulation. If we look at things such as minimum wage, if we look at regulations that dictate the state of your premises, what the health and safety regulations should be, then you have what's called a compliance risk. And compliance risk, obviously we don't want breaches of those because there will be a financial consequence and it could impact the ability of our business to continue, as well as the credit risk that it creates. Financial risk is the next thing we're going to look at and that's something that's going to affect the cash flows, the financial profitability and the financial wellbeing of your business.

This could be poor cash flow, which is created by customer credit control not being managed effectively. Anything that's likely to affect your cash flow is going to represent a financial risk. Lastly, let's consider this idea of operational risk. And operational risk is concerned with the day-to-day running of your organisation. By organisation we can mean a private, not for profit, your business. A business is a convenient umbrella term that covers all the different organisations, all the different businesses we may encounter. Now, this is something that occurs within your own systems or your processes. So, for example, you may have staff absences which affect the ability of your firm to continue.

You may have issues in terms of staff retention, machines breaking down for your manufacturer. Anything of those that occur will be an operational risk. So let's summarise where we are so far. We've talked about the idea of what risk is, we've talked about why it's such a big deal. We talk about the types of risk that we encounter if we're going to actually collate and identify the risk to our own organisation, then we've got to consider the nature of the sector that we operate in. Are there risks that are specific to our sector that may not actually exist elsewhere?

Are there risks from past experience? Are there risks that we can discover by talking to our staff team, our senior managers, our suppliers and the like? So having got those categories, you need to go off, investigate and make sure that you can actually put the wrists where they actually belong. The last thing I want to look at in this podcast is having identified what the risks are, having got it set in our minds as to why it's such a big deal and why we need to worry about that and why we need to be concerned and keep an eye on it. We now need to think of the options and the strategies and the tactics for actually dealing with risk.

Some of the ways in which risk can be managed once you've identified what those risks are, are avoidance, control and transfer. Now avoidance is probably an overlooked option and it's where you do not engage in the activity or provide the service concerned. It's probably the most overlooked and most misused strategy. But effectively, if your core activities post minimal manageable risk, then undertaking these ones that are very high risk may have a very negative impact on your ability. So avoidance may not be an option for obviously your business services where they form a core part of your existence, but again, a strategy should be considered where you avoid the activity completely.

Think of it both in terms of business terms and commercial impact here, but again, if the risk is unmanageable then obviously that is an option that should be considered. Risk control, on the other hand, is where you could decide to continue to provide that service, continue with the activity that creates the risk, but you manage it in such a way that it's less likely to occur or less damaging when it does. If you can't avoid certain activities, then decide what you must do at an economic cost to reduce the risk or soften the blow if it does actually go wrong. Such controls are very good practise and it will involve a training dimension, an understanding dimension and actually considering what you have to actually do.

The quality of your management team will play quite an important role here in helping you identify what to do. The risk transfer is where you might have a third party, an outsourcing party that performs a risk activity, or you completely transfer the consequences of the risk to another person, another business. Now insurance is sometimes seen as a default to compensate the risk. But insurance for me is not actually a risk management strategy, it's something there that might step in to compensate if there's any financial consequence if something goes wrong. But it's not really a risk management strategy. The problem still stays there.

Now there are two ways in terms of looking at that transference risk, that's indemnity or exemption from liability, and also when you subcontract the activity to an independent third party, an independent contractor. Typically if someone carries out the work on your behalf, you should be looking for indemnities from that third party that says if something goes wrong, then you will step in and compensate accordingly. Make sure that third party has adequate insurance cover. If that does happen, remember, you will not be walking away. You will not abrogate yourself with the responsibility. You're just stepping in a situation where somebody is going to compensate and support you on that.

Remember what we said, insurance does not make the risk disappear. It really helps mitigate the impact of that if it does actually all go wrong. I mentioned about risk transfer a few moments ago. Now, risk transfer, there's a couple of things we need to consider. Again, we said insurance may step in, doesn't diminish the overall level of risk, but it means that if it goes wrong, insurance will step in and compensate accordingly. There is a cost to that in terms of the premium and certain events that we carry out. We may not have much choice, but obviously do insurance only insurance is obviously a good thing to consider and we will do a risk evaluation exercise in terms of the cost versus the benefit.

Now overall folks, let's see what we've got. We've got a situation, we've identified what risk actually is, why it matters so much. We looked at categorising the risk in terms of those four brackets, those four buckets if you wish. We looked about some options for managing the risk. In next week's episode, we're going to drill down a little bit more here and we're actually going to identify specific risks, look at something called a risk register and what you need to do once you've identified what's important, what the key risks are to your business, and what we need to do armed with that information.

Hopefully you've got some value from this podcast on I Hate Numbers. I'd love it, obviously if you could subscribe, leave a review on all the many platforms this podcast is broadcast in, check out the show notes for the links and obviously you're going to make me a very happy guy. Have a look and check out the book I Hate Numbers. There's a sample chapter, so you get a feel. If you feel that it's for you, and I think it will be, then, you know, keep an author happy, keep an author fed, buy a copy. And if you feel you've got some value from this podcast, I'd love it if you could share with those who will get some benefit. Until next week, folks, have a good week.

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value if you did then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.