Risk Management & Decision-Making

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Businesses face decisions about risk nearly every day. From equipment purchases to new hires to acquisitions and closures, each business decision carries an element of risk. The key aspect of making the right business decisions comes from determining the balance between risk and reward. Companies that expose themselves to high risks with minimal rewards can gamble themselves right out of business. At the other extreme, firms that play it too safe can miss out on growth opportunities they need to survive and thrive in a competitive marketplace.

Identifying Risks

  • Before a business can make a decision about risks, the company must identify those risks. The sources of these risks can be from the outside, such as weather events or market fluctuations, or they can be internal, such as capital acquisitions and training expenses. Companies must identify where those risks can occur, the conditions that can bring those risks into reality and the potential damage to the business for ignoring those risks.

Prioritizing Risks

  • When identifying risks, businesses should also determine the probability that those risks will occur. Businesses that face risks that carry heavy consequences and a high probability of occurring must protect themselves against those risks first. A company based in a desert is less likely to deal with blizzard conditions as a business risk than one in a location that sees snowfall every winter, so the firm would not focus its decision-making efforts on handling such a risk.

Developing Strategies

  • Another aspect of the decision-making process lies in the development of a strategic plan. This plan can give businesses the tools they need to prevent the risks that they can avoid and reduce the damage of those they cannot stop. A strategic plan also prevents the business owners from being caught by surprise by the consequences of foreseeable risks. This preparation eases much of the decision-making process and gives business owners the tools they need to make the right calls.

Measuring Progress

  • When potential risks become unwelcome facts, businesses must also measure and assess their decision-making processes. Business owners must measure the effectiveness of their methods, learn where mistakes were made and adapt their tactics as needed. As market conditions, legal regulations, technological innovations and customer tastes change, new risks will inevitably arise. These changes require the business to identify and prioritize these new risks, develop new strategies and reassess the strengths and weaknesses of these new processes.

References

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