Why is a Risk Management Plan So Important?

Do you need a risk management plan? In this article we'll look at the importance of a risk management strategy and the benefits of having one.

Find out what a risk management plan is and why it is so important
What is a risk management strategy?

What is a risk management plan?


A risk is the possibility of a situation or event to have a detrimental impact (usually financial) on an organisation.


A risk management plan refers to identifying, evaluating and mitigating risks in business. A risk management plan is a written document outlining potential risks, allowing stakeholders of the business to plan accordingly for, in an effort to minimise the impact.

‘Risk is uncertainty, whether positive or negative, that will affect the outcome of an activity or intervention. The term ‘management of risk’ incorporates all the activities required to identify and control the exposure’. - Gov.uk


Risk is an essential part of running a company, as without risk there is little reward. A balance however must be sought, with an acceptable level of risk to allow your organisation to grow from strength to strength.


What types of risk are there?


If you're a complete newbie to risk management, you might be wondering what types of risk we're talking about. After all, as a business owner, you're constantly taking risks in order to grow your business. When it comes to a risk management plan, we're talking about four specific areas of risk that you can manage and prepare for:


Financial and Reporting


Some examples of financial and reporting risks that could lead to a business to lose earnings are ROI lower than expected, legal action, fluctuating foreign exchange rates or market demand.


Strategic


Having a good strategy in place is the key to any successful business. But with strategy, comes risks – some examples include large shift in input costs, disruptive technology entering the market or inadequate resources.


Compliance and Regulatory Risks


For all trading businesses, there are certain compliance procedures and regulations that should be abided by. Some scenarios that might risk this include insufficient policies, regulatory changes or not having the right board members in place.


Operational Risks


All organisations strive for a well organised operation, but operational risks that need to be considered include managerial inefficiency, deficient metric performance or sales not materialising.

As well as the main 4 risks there are additional risks such as:

  • Environmental Risk such as Natural Disasters

  • Political and Economic Instability

  • Health and Safety Risks

  • Workforce Risks like consistent staffing levels and skill retention

  • Commercial Risks from key suppliers and customers

Most common business risks
As a business owner, you are constantly taking risk.

The most common business risks


Every organisation is unique and will come with its own set of challenges, from our experience the most common types of risk in business include:

  • Bad debt: late payments and poor credit management can cause cash flow problems

  • Cash flow: irregular cash flow can wreak havoc on regular outgoings such as rent, bills and wages.

  • Market changes: fluctuations exchange rates and price changes out of your control.

  • Compliance: changes to regulations and health and safety can affect your organisation.

Why is a risk management plan important?


Risk management is more important than ever, with new risks emerging constantly. Just take the COVID-19 pandemic as an example of a risk which effected not only the health and safety of organisations, but the supply chain and ability to do business with customers.


“Having a proper risk management plan in place can reduce cash flow problems, and help make those unexpected circumstances a little less unexpected in future.” - Anita Tweats, CEO of The Finance People.

Benefits of a risk management plan


Still not convinced on the importance of risk management? Not only will risk management help you to effectively allocate resources, improve mandatory and voluntary reporting and increase stakeholder confidence, but it can benefit your business in multiple other ways too. For example it can help with:

  • Preparation for the future: By identifying potential risks, an organisation has the opportunity to try and prevent these through appropriate procedures. Risk awareness allows the business to be prepared.

  • Health and Safety: Training your staff on your risk management procedures can help with efficient and safe practices in the work place.

  • Reduced costs: Managing your risk can have financial benefit to organisations, by preventing avoidable costs. It also allows businesses the opportunity to make smarter financial decisions to avoid unnecessary risks.

4 strategies for managing risk


If you've decided you need a risk management plan, it can be tricky to know where to begin, especially as there are so many potential strategies for managing risk and they're not very clear cut. Here we break down our four key strategies for managing risk to help you better start your risk management journey.


Risk Acceptance - when a business ascertains that the potential loss from a risk does not warrant the time or finances required to avoid it.


Risk Transference - when a business outsource operations such as customer service or payroll. Usually the primary focus of outsourcing is not for risk avoidance but it’s a secondary benefit.


Risk Avoidance - when a business eliminates exposure to the risk.


Risk Reduction - when a business reduces the likelihood and severity of possibly loss from a risk. In the natural disaster example this would be implementing emergency plans, being prepared with emergency supplies, exits and meeting points, and planning for the future with data back-ups.


How The Finance People can help


With good financial planning, proactive responses, and an experts on hand to help, a risk-free future is on the horizon.

If you need help with a risk management plan, get in touch. Our in-house finance directors can help you identify potential risks to your business - both internally and externally. Our finance experts can ensure you are not exposed to risks such as foreign currency exchanging or banks revoking loans.