Part X – Risk Assessment and Management

Part X – Risk Assessment and Management

Part X – Risk Assessment and Management

Part X – Risk Assessment and Management

It is very rare to come across business plans which have an exhaustive assessment and mitigation plan of the potential business risks in any given business, that one intends to invest his or her resources into. This being a vital component of business plans, most businesses will describe and develop strategies on on how to go about various business risks, but will somewhat fail to highlight or mention them. As such, business assumptions are thought through and well articulated, key to success will be included in the business plan, but you will not see anything about potential business risks and how a business plans to mitigate them.

flexibility, risk assessment, business planningBusiness Risk and Business Planning

It is intriguing how budding entrepreneurs frequently gloss over the concept of business risk, especially as they rush to impress potential equity investors or lenders about what an amazingly fail-safe business they are launching or seeking to expand. To their detriment, they focus almost exclusively on their apparent strengths and theoretical opportunities, and often completely ignore what can be a make-or-break strength — the capacity to manage risk.

SWOT analysis is an all-inclusive management concept. It entails the global analysis of strengths, weaknesses, opportunities and threats that a business faces — not just analysis of the SOs (Strengths and Opportunities). By evading the important question of the risks and challenges that confront a business, the crafter of a Business Plan effectively weakens one’s case. The reason for this is simple: a demonstration of the knowledge of risk, as well as the capacity to manage this risk, establishes the business administrator’s credibility as a resilient business manager.

This credibility will go a long way towards convincing readers of the Business Plan that the document’s originator/ developer indeed has a good chance of steering the venture through thick and thin, and is the right person for the job. As such, risk assessment (i.e. the appraisal of the threats and challenges facing a business, as well as a detailing of the activities that might counteract these risk and challenges) is critical to the success of a Business Plan.

Describing the Nature and Types of Risk

A business is a microcosm of life itself. As with life, a business is a system within interrelated systems and sub-systems which mutually impact each other in incalculable ways. Notwithstanding the business you are in or considering getting into, count on there being a multitude of forces that both reinforce your objectives and threaten these objectives. Some of these forces are internal to the business, some are external, some are direct and others are quite indirect.

Evaluation of risk levelOf course, the exact nature of the risks your business faces is specific to that business. The risks internal and direct to a business include legal risks (e.g. facing a damaging suit as a result of contractual breaches); natural catastrophes (e.g. natural disasters may destroy a crop and deny you of raw materials, which means you have no product to sell); or internally emerging competition, say from an employee who quits and develops more market-friendly models of what you are already doing. Also always looming is the departure of members of staff who seek greener pastures. Indirect risks to a business include devaluation of currencies, say as a result of political instability; and technological disruption. Especially in today’s increasingly automated technological economies, it is a good idea to realize that, regardless of the business you are in, chances are that someone somewhere is busy working out ways of putting you out of business (or, as is commonly stated in James Bond movies, someone somewhere has a bullet with your name on it.)

In your description of risk, focus on risks that are relevant to your business. Dwell not on anything and everything that can go wrong, but on a few key risks and challenges that are almost certain to strike within the first few years of operation. For example today, a popular route for entrepreneurs is the online option for new business. If this is the case for you, you will undoubtedly want to discuss the next possible technological innovation and the risks it potentially poses.

Describing the Impact of Risk

Political risk, for example a sweeping change in the laws and policies that regulate a given business or industry, can have wide-ranging impact on an industry or business. Many times, regulatory changes have seen the closure of entire businesses. Not long ago, for example, Turkey and Russia were in good business terms. They exchanged diplomatic missions and allowed trading across their borders. Then Turkey downed a Russian warplane, and the political relations between both nations suddenly became frosty, with grave consequences for business from either country that operated in the other country.

Even where risk does not result in the closure or winding up of business, it can change the trajectory or model of a business. Often, what is hampered is the bottom-line (a business must contend with increasingly lowered profit margins or a less competitive market position). Think of the carbon paper and what the photocopier did to it. Many years after the photocopier became a common feature in offices, the personal computer slowly took over, and the reading culture steadily changed, with people increasingly reading onscreen, rather than on paper. Now the photocopy business is dying away.

An understanding of the potential risks and challenges that threaten your business, as well as the impact such risk poses to your business, is key to persuading lenders or investors that you are indeed the right person (or team) to run the business that is proposed in the Business Plan.

Description of the Risk Management Plan

After describing the nature of risks that threaten your business, and thereafter discussing the impact of these risks to the venture, the next natural course of action is to lay down a practical risk-management plan. Let us, for example, assume that you developed the idea for Google’s self-driving car (which has neither a steering wheel nor operation pedals, and which still awaits regulatory approval in many US states).

In your risk management plan, you have discussed the nature and types of risks this self-driving car faces. For instance, you can be certain that the first accident this car causes will be blown out of proportion by the mass media, amplifying pre-existing social phobias about driverless cars, and possibly stirring a major political revolution against this innovation. Next, you describe the impact of this risk. For instance, a five-year moratorium may be imposed on you invention — pending thorough forensic audit of the safety record of this driverless car. If this happens, you can kiss goodbye your dreams of owning the automobile industry.

Sailing through Business Risks
Sailing through Business Risks

Remember, your main goal is to sail through all the potential business risks. You can not allow anything to come between you and your dream, your passion. With your impact assessment done, you move on to the next section: a description of your risk-management plan. What would you do to counter what might be a public relations nightmare for your business? You might lobby the government to give your invention greater chance. You might invest more resources to public education on the comparative safety of the driverless car. You could also proceed to court to seek injunctions against any anti-competitive moves to block the release of your innovation.

In your description of the risk-management plan, be sure to demonstrate knowledge of both the practical realities of your operating environment and your skilfulness in managing a complex situation. Such a demonstration of management skill will go a long way towards swaying the readers of your Business Plan that you, your team, and your venture are entities worth financing. Even if you are writing the Business Plan simply as a personal guide rather than as a funding proposal, the capacity to order your thoughts and force yourself to weigh up many competing business variables will concentrate your mind and prepare you for the complex world of management.

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