Whether we like it or not, risks are part of our everyday lives. When it comes to business, there are also major risks and as an entrepreneur, it’s extremely important to anticipate and mitigate them. This is why today we will focus on risk mitigation strategies and show you how to implement them.
Risk Mitigation Definition
Risk mitigation, also called risk reduction, refers to a systematic process of reducing the exposure to a risk or the likelihood of the event to happen. Naturally, there are various strategies and methods people employ to achieve this goal.
13 Risk Mitigation Strategies and Their Implementation
1. Choose an Adequate Business Structure
One important risk mitigation strategy is to change your business structure. It’s not recommended to have a sole proprietorship where you will be personally liable for the business operations. Instead, go for a corporation or a limited liability company.
2. Minimize Loans
For this, you will need to minimize the outstanding loans and financing needs. It’s important to control your growth so as the company can finance itself internally. If your business can’t pay some of the loans, you should consider replacing the short-term with fixed-rate, long-term ones.
3. Transfer the Risk to Insurance Companies
Insurance companies can be a lifesaver in certain conditions. One of the most important risk mitigation strategies is to transfer the risk to them. Get insured against the main risks you could be facing, such as product liability, your facilities, injuries to suppliers or customers or death/incapacity of the company principals.
4. Manage Your Accounts
Yet another way to minimize the risks is to minimize the outstanding balances and to identify the poor credit risks. You need to implement some standards for credits and payments, making a list of acceptable credit scores and payment records. Finally, evaluate the customer payments. You can even ask for advance payment if there are customers who can’t meet the standards you imposed.
5. Perform a Risk Analysis
This is essential for any entrepreneur that wants to stay on top of the business risks. You can have a risk analysis if you evaluate the consequences of your risky activities, for example. Furthermore, include the likelihood of these consequences to happen, as well as the benefits of the activities. If you notice there are some activities that might have severe consequences that are likely to happen and don’t bring many benefits either, it’s better to quit them altogether.
6. Keep Accurate Records
It’s useful to set in place a system that limits the people who can authorize any specific actions. Moreover, you can also place limits on how much they can spend. If you want key information about the performance obtained in the company, it’s useful to use a reporting system. Evaluate it, together with the controls, by comparing the practice and the performance to the information that was reported, as well as the control procedures.
7. Transfer the Risks to Other Parties
As we mentioned earlier, there might be some activities with severe and highly likely consequences that bring high benefits. A solution for this issue would be to transfer their risks to other parties. You can create a new and independent company that can carry out the activities. Alternatively, assign them to other partners or suppliers.
8. Implement a Quality Assurance Program
Start with the customer service and implement a system of reporting from there to identify any potential problems. This program should document both the production tasks and the product testing. You should be able to draw a connection between the problems that are reported by the customer service and the failures in production or the testing procedures. Next, you should correct the mistakes.
9. Increase Responsiveness
Another excellent risk mitigation strategy is to increase the responsiveness. Offering faster delivery to your customers means mitigating various risks: costs, safety, schedule, etc.
10. Have Accurate Cost Estimates
This is extremely important as it can account for preventing plenty of other further issues. Try to estimate the costs correctly right from the start to eliminate any unwanted spending. Creating a preliminary schedule, as well as a system that works well, are essential for improving the accuracy of the cost estimates. The earlier you identify budget issues in the process, the better.
11. Forecast, Forecast, Forecast
You can never say you forecasted too much, can you? In this case, forecasts can prove to be a saver for your business. Try to have as few surprises as possible. If you end up having no money (and you will, at some point), it’s better to have a backup plan. Constantly analyze your business dynamics and monitor the evolution. When you hit a new low, use your savings account or the solution you previously prepared.
12. Risk Avoidance
It may not sound too well, but risk avoidance is definitely a good solution for risk mitigation. If you notice that a project isn’t heading in the right direction, change its parameters. Adjust the conditions accordingly until you minimize or eliminate the risks. Pay attention, since there may be risks with different natures: technical, political, engineering, financial, etc. However, make sure that by avoiding one risk you’re not triggering others.
13. Assuming a Risk
Sometimes, the best strategy to mitigate a risk is to assume it. As surprising as it may seem, it can be the most efficient way of dealing with it. If the risk isn’t that big, you can accept it and prepare for the consequences. It’s not viable to try all the time to avoid losing, so you can take a break and prepare for a potential loss. Who knows, you may even have a surprise and see the project was a success, despite the risks.
To sum up, there are plenty of risk mitigation strategies that you learn to implement. Naturally, not all of them may work for your specific niche or business, but they’re a good start. Using the ones we suggested above is a first step to eliminating risks and leading your business to new milestones.
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