5 risk management process tips and tricks for businesses

Protect your business with these risk management tips and tricks

We’ve all seen Risky Business. Great, funny movie, Tom Cruise dancing, and teen angst. What could be better? But, while risk and reward looks great on screen, the reality is that, while it isn’t the worst thing in the world, risk does increase the likelihood that your business will struggle. Left unchecked and unmanaged, it can break the back of any unsuspecting business.

You may not think that your particular small to medium sized business (SMB) runs into many risks. What could be so dangerous about my online homemade scrunchie business, you ask? In fact, all businesses face risks. Anything that could potentially harm your business’s bottom line is a risk.

Some risks, like larger macroeconomic factors, aren’t under the average SMB owner’s control. Things like changing political parties, international tariffs, or climate change can’t be controlled. However, most risks can be mitigated with the proper risk management techniques and proper planning.

What is a risk management process?

While not all risks can be eliminated, they can be controlled with a management process.

The first step in an effective risk management strategy is to discover and record all potential risks, whether they are likely to happen or not. Everything from employee theft to natural disasters should be included. Then, assess the likelihood of each risk taking place.

Actuarial tables, produced by insurance companies, can provide a reliable estimate for the likelihood of a particular risk actually occurring. While they are usually used to calculate life insurance, they also work for property, liability, and other types of insurance.

However, it’s important to take your unique circumstances into account. Is your business located in an active earthquake zone? Is your warehouse an older building, and therefore more susceptible to fire? Is your ecommerce business reliant upon workers in unstable political climates?

Nobody likes to imagine the worst case scenario. However, not having risk management policies in place increases your exposure to those risks. While it isn’t fun to think about everything that could go wrong, a well prepared risk management strategy is invaluable if something does.

When former soldier Robert Baden-Powell penned the Boy Scout’s official motto of ‘Be Prepared’, he was asked the obvious follow up question: “for what?”

“Why, for any old thing”.

Wise words that are just as relevant to bushcraft as they are in business.

Risk management techniques

Not all risks are created equal. Some are unlikely but constant, some are unlikely to ever occur, and some are almost guaranteed.

For example, some risks are unavoidable. Employee turnover is a risk faced by all businesses – even entrepreneurs and sole proprietors face the risk that they will no longer be able to focus on their company. In this example, a good risk management technique is to continually invest in recruitment and hiring, so that your business has a deep pool of experienced talent to draw on during staff changes.

Unfortunately, some risks can’t be planned around. Natural disasters, fire, property damage, extreme sickness, and other emergencies are serious risks faced by your business. Even online and ecommerce businesses are vulnerable to hardware malfunctions, hacking, denial of service (DDoS) attacks, viruses, and more. While these types of risks can’t be avoided, there are plenty of risk management techniques to mitigate your exposure.

Natural and physical risks are often addressed via insurance. Disaster, fire, or property insurance will protect your business in case of an emergency, reducing your exposure to that risk. Specific assets like software, inventory, and machinery can be insured as well, effectively eliminating the risk posed by a failure of a key business system. If a key piece of equipment were to malfunction, you’ll be covered against any losses incurred. This is known as risk hedging, or hedging your risk, and it’s an essential part of the risk management process.

The many types of risk

Some risks are self evident and nearly universal. Some aren’t so obvious. Here are some risk management ideas for lesser-known, potentially disastrous risks.

Brand fatigue

You know your company is the best around. But when it comes to advertising, there can be too much of a good thing. Brand fatigue is what happens when formerly engaged customers become bored, annoyed, or disinterested in a brand. This is usually caused by irrelevant ads or too many ‘spam’ emails.

To mitigate this risk, business owners need to be thoughtful of their marketing and communications efforts. Every little update, new product, or event probably isn’t worth a ‘send-to-all’ email blast. Instead, try to segment your customers based on their interests, and only contact them when you have something of value to offer, such as a coupon, sale, or information about a new product. When it comes to brand communications, less is always more.

Reduce your risk of brand fatigue with purposeful and targeted advertising, and avoid getting marked with the dreaded ‘spam’ label.

Cash flow

Many small businesses struggle to maintain a healthy cash flow. Cash flow at risk (CFaR) is a concept that defines the vulnerability of a company’s future payables and receivables in relation to potential variations in the market.

In simple terms, CFaR is the likelihood that your business’s cash flow will be negatively affected by an external factor, such as shifting foreign exchange rates, changes in consumer preferences, political instability, or other macroeconomic trends.

Cash flow risk can be mitigated with proactive management and forecasting. Anticipate accounts payable (money out) and receivable (money in), then determine if your cash flow will be adequate. Don’t fret about negative cash flow; it isn’t the business kiss of death it’s made out to be. It is, however, a risk you must manage.

A business loan is an excellent source of working capital for small businesses. Veem Capital has partnered with Behalf to make the loan application process simpler for SMBs. Pay Later provides small businesses with up to $50,000 USD to manage their cash flow and reduce the risk of CFaR.

Occupational fraud

Occupational fraud, or fraud committed against an organization by its own employees, is the largest and most prevalent threat according to the Association of Certified Fraud Examiners (ACFE).

In 2018, ACFE found that small businesses are particularly susceptible to loss by fraud: the median loss for companies with less than 100 employees was $200,000 USD (companies with over 100 employees had a median loss of $104,000 USD). Nearly half (42%) of these frauds were caused by a lack of internal controls. Since SMBs typically have fewer anti-fraud controls than large organizations, they are more vulnerable to fraud.

The most common type of fraud is asset misappropriation, which can include everything from the basic pocketing of cash to more sophisticated schemes like check and payment tampering, expense reimbursements, skimming, and financial statement fraud.

While these are some frightening stats for the average SMB owner, there are numerous simple policies and best practices that can dramatically reduce your risk of fraud.
Managing the risk of fraud:

Multi party approval

Relying on a single person to enter payment data and reconcile financials invites human error and can expose your business to fraudulent activities. Incorporating the approval of different individuals (for example, an accountant who prepares the payments and a controller who approves them) can reduce this risk.

Account validation

Are you really sure you know who you are sending your money to? Wire transfers are a common method of misappropriating funds. A single changed digit and your payment is suddenly redirected to the other side of the world. When you choose a relationship-based payment network like Veem, both parties are independently verified before any funds are moved. If banking information is changed, account managers must approve those changes before the payment is released, further protecting your business against the risk of fraud.

Anti-fraud training, company culture, and whistleblowing

Anti-fraud training is one of the most effective methods for reducing your company’s exposure to fraud risk. Employees who are made aware of what constitutes fraud, the costs of fraud, where to seek advice on potentially unethical decisions, and any anti-fraud policies in place are the number one way to reduce your business’s risk of fraud. Make it crystal clear to employees how and why they should anonymously report suspicious activity. By fostering a culture of openness, integrity, and support, you can nip any potentially fraudulent activity in the bud.

Foreign exchange risk

Business has become global. Unfortunately for SMBs, that can mean navigating the confusing world of foreign exchange markets. Volatile exchange rates can unexpectedly increase the cost of global payments, leaving SMBs strapped for cash. This is known as exchange rate risk.

Veem’s Locked Exchange Rates protect SMBs against fluctuating exchange rates. This feature allows businesses to schedule or receive a payment in advance with a predetermined (or ‘locked’) currency exchange rate. Knowing exactly what future payments will be in their final currency allows SMBs to plan, budget, and forecast with confidence. By purchasing a locked exchange rate, businesses avoid costly surprises and eliminate exchange rate volatility and risk.

Locked Rates

See how Locked Exchange Rates can stabilize your cashflow. Learn more

* This blog provides general information and discussion about global business payments and related subjects. The content provided in this blog ("Content”), should not be construed as and is not intended to constitute financial, legal or tax advice. You should seek the advice of professionals prior to acting upon any information contained in the Content. All Content is provided strictly “as is” and we make no warranty or representation of any kind regarding the Content.