“If you fail to plan, you are planning to fail,” said Benjamin Franklin, the Founding Father Of America. The saying goes quite well with business owners who know that things won’t remain the same always. There will be ups and downs and one must prepare for them in advance. Having said that, reversing the effects of different types of risks is possible through a business risk management plan. It helps business owners prepare for the unexpected. Though details of such risk management plans differ from business to business, however, a common element across all the successful risk management process is the identification and mitigation of risk with potential threats.
However, before that, we need to understand what is a business risk. It is the possibility of adverse situations that any organisation might face leading to disruptions in their daily operations and affecting the overall health and profit of the business. In simple terms, business risk can be called any unexpected events or uncertainties which are beyond the control. As the factors causing risks cannot be controlled, they affect the competitive position of the business and its ability to expand and grow.
What Are Uncertainties?
Uncertainty means being unsure about what can happen in the future. Some common examples of uncertainties are changes in technology, government policies, demand, etc. The degree of risk depends on the type and scale of the business. For example- a business dealing with fashion items is more prone to risk as compared to a business involved in standardized goods.
Large-scale business bears more risk than small-scale business. It is important to know that risk forms a vital part of business. No business can completely avoid risk but it is possible to reduce it.
What is Business Risk Management?
Business risk management involves a structured approach and plans to identify and mitigate potential threats to the business. It aims to develop strategies to reduce the impact of any potential threat or risk if they occur. These threats range from internal and external, financial and strategic to physical and technological risks.
An effective business risk management system can not only define the difference between success and failure but also let owners focus on other important aspects of their business. According to PwC survey in 2022, organisations that embrace business risk management strategies are five times more likely to succeed and achieve their overall business goals. The survey also states that companies with risk management are even “very confident” in delivering desired results.
Types of Risks That An E-commerce Company Might Face
- Technology and compliance risk
- Strategy risk
- Financial risk
- Operational risk
- Reputation risk
1. Technology and compliance risk
As e-commerce companies depend largely on technology, any potential threat related to it can lead to huge risks. E-commerce not only operates on a website but also depends on payment processing for their business. Any technical glitches or server failures can halt sales. Similarly, failure to protect payment information and other details of customers or data breaches may expose the company to penalties under consumer laws. This can also harm the finances and reputation of the company. Businesses should also be aware of laws and regulations related to their industry, such as rules related to pollution or handling of hazardous materials.
2. Strategy risk
Strategic risk means any risk related to market positioning and the objective of the company. Companies in the e-commerce space might face strategic risks like changes in demand and trends, loss of market share to a newcomer, price wars started by competitors or new offerings or technologies that can affect the appeal of your product.
3. Financial risk
Successful business operations require efficient finance management. E-commerce businesses might find it difficult to forecast their finances in case of volatility in inventory or sales. Even delays in payment from customers can impact operational efficiency and cash flow. Similarly, financial market fluctuations like currency exchange rates can hamper businesses operating overseas, affecting their profit and revenue margins.
4. Operational risk
Operational risk refers to day-to-day challenges that companies might face in business operations. They also include external and physical risks. For example, theft or fire at a fulfillment center or a natural disaster. An error made by an employee in the product description or pricing that affects the bottom line. Mishandled package cause a loss of inventory and dissatisfied customers comes under operational risk. Malicious insider threats like employee unlawfully accessing the private information of customers is also a potential risk.
5. Reputation risk
Every company has a brand image that is crucial to maintain and develop. Reputational risk is related to brand image. It includes any such risk that can impact the perception of customers towards the company. This could range from unresponsive customer service, recalled products, and delayed shipment to an association with an influencer who later developed a negative public image.
4 Tips For Better Risk Management
- Identify potential threats and risks
- Assess risk likelihood and possible impact
- Execute mitigation strategies
- Monitor, educate, and reassess
Businesses can identify and mitigate risk through various approaches. These four tips will help you start the process.
1. Identify potential threats risks
Risk identification refers to zeroing in on possible risks and threats that have the potential to impact your business operations. Identifying risks helps in developing strategies to reduce them if they occur. These potential risks can be negative reviews, website downtime, data breach or supply chain disruptions. All of these can hamper your business and hurt your reputation.
2. Assess risk likelihood and possible impact
After risk identification, business needs to evaluate how likely they are to occur and their potential impact. For example, supply chain disruptions pose a huge threat, though they may not happen frequently. Negative reviews from users are common in the e-commerce space, even if they occur rarely they don’t pose an existential threat. Meanwhile, cybersecurity threats are both probable and of high risk, so businesses must invest more resources in this sphere.
3. Execute mitigation strategies
Now, the third step is to develop strategies to mitigate risk. For risks related to cybersecurity, businesses should focus on getting technology like data encryption and enhanced firewalls. Regular vulnerability testing and employee education can also help in mitigating the risks. To tackle website downtime, business needs to work towards website backups, duplicate server infrastructure and recovery plans. Negative reviews can be dealt with by developing responsive and strong customer service. Similarly, supply chain risks can be mitigated by supplier audits and a list of alternative sourcing options.
4. Monitor, educate and reassess
Risk management can never be completed. It is an ongoing effort and process. Businesses should build a culture of risk management by involving employees as well. For this, training sessions can be conducted along with a clear reporting structure, thus making it easier for employees to contribute. Businesses can also detect and respond to risk with the help of technologies for website and security. Reputation monitoring also forms an important part of assessing uncertainties. Staying up to date with regulatory changes, historical data and stakeholder feedback can help which evaluating risk and restructure risk management plans.
Advantages of a Dedicated Risk Management Team or Officer
Businesses can better focus on risk management if they have a dedicated team or staffer who manages it. An experienced risk manager is an asset as the individual has an in-depth understanding of potential risks and can skillfully identify those. In the leadership of a risk manager, a company can strengthen its risk culture and better its crisis response.
Role of Insurance in Business Risk Management
Insurance plays a critical role in business risk management. It transfers certain risks to the insurance company for a fixed price. Owners can protect their businesses with the help of professional liability insurance, data breach insurance and many others. Insurance helps recover losses and facilitates the smooth functioning of operations during unexpected events.
