Why You Need to Create a Risk Management Plan Right Now

Risk Management

23 Sept

2022 is proving to be a very turbulent year. With the country still recovering from the pandemic, the nation has been through a lot from the passing of Queen Elizabeth ll, rising inflation, a new Prime Minister and a cost of living crisis.

In July, consumer price inflation rose to 10.1% reaching record-breaking levels for the last 40 years. With theories that the situation will continue to develop and worsen before we see any improvement, there has never been a more critical time for SME’s to create a risk management plan to protect their business and prepare for the future.

What is a risk management plan?

A risk management plan is a detailed and complex process. A risk management plan is put in place by businesses to mitigate risks, but what is a risk?

A risk is any factor that causes uncertainty about whether a business is going to meet its goals and achieve objectives. Unexpected risks can not only disrupt a business but usually result in significant financial loss. To create a risk management plan, a business must first identify and analyse potential threats and then make suitable arrangements to lessen the impact of these risks.

Once all potential risks have been identified, a business can take steps to minimise these business risks, for instance, an SME may monitor their cash flow more closely or increase the amount of documentation they keep.

The final step in a risk management plan is to then adopt a variety of risk management strategies depending on how each risk needs to be handled. This can vary from accepting the risk and any associated cost to transferring the risk to a third party, such as taking out an insurance policy.

With the cost of living crisis and recession, the benefits of a risk management plan are even more paramount.

What types of risks might my SME face?

We have identified nine different types of business risk and have written in detail about these in our dedicated article. However, we know how overwhelming the current economic environment can be, so let’s quickly run through the three main types you are likely to face as an SME during the recession:

Financial

Financial risk can be poor debt management, taking out loans with unaffordable interest rates or any other risk raised by poor financial planning.

One example of a business that failed due to poor financial planning is Toys-R-Us. Toys-R-Us Ltd went into administration in 2018 due to 15 million pounds in unpaid taxes.

Strategic

A strategic risk can be any risk that prevents your business from achieving its strategic goals, such as increased supply costs or not keeping up with technological advances.

An example is when Apple almost went bankrupt in 1997 after the failure of their expansive line of products that were too similar to their competition, such as PalmPilot, ultimately costing them 1 billion dollars. Thankfully, a large investment from Microsoft and streamlining their products allowed Apple to make a recovery.

Compliance

A compliance risk is when compliance and regulations are not followed, such as privacy breaches or illegal practices.

Amdocs (UK) Limited is one example of a company who are facing unexpected costs due to hefty fines for failing to comply with reporting. In 2018, they were fined 45,000 pounds for not completing mandatory reporting under the Energy Savings Opportunity Scheme (ESOS).

How will a risk management plan help you overcome a crisis?

The benefits of a risk management plan are plentiful, so much so that we’ve written an article dedicated to the benefits of risk management.

With the current cost of living crisis and recession, the benefits of a thorough risk management plan are even more paramount.

Costs

The obvious benefit of a risk management plan in the current economic climate is reduced costs. With every risk you manage to avoid, you also dodge the financial loss that would have inevitably come with it. And without the unexpected costs, you will have a more reliable cash flow to help sustain your business.

Unexpected costs are not desirable in the best of times, let alone in the middle of a recession. By creating a risk management plan, you are ensuring your business is in the best possible position for the future.

Opportunities and threats

The earlier you can identify your business opportunities and threats, the more time you have to act on these. The main focus of a risk management plan is to assess the threats and to take steps to reduce their impact should they arise, but a fantastic secondary benefit is that you can also identify opportunities.

A risk management plan will help you identify opportunities irrelevant to a recession, which makes it even more crucial to stay on trend and adapt quickly in a recession. When you’re deep diving into your business, you may find a more cost-efficient way of working or stumble upon a new audience or product. All of which will help you recover and thrive following a recession.

Business objectives

A great risk management plan will allow your business to set realistic future objectives and, therefore, make them more achievable. During a recession, your business objectives might become unachievable, so understanding the risks to your business is going to be key to adapting quickly to change and aiming for current objectives.

You may even find that you need to re-evaluate your objectives given the current economic landscape, and after completing your risk management plan, you'll be fully equipped to set these new achievable objectives. When you increase the likelihood of achieving your goals, you are ensuring long-term success.

Budgeting

When you are going through your business with a magnifying glass, you will give yourself a better understanding of the entire business, especially the budgets. You’ll be able to take the guesswork out of budgeting and be able to allocate funds more effectively.

Your business’s budgets are going to change throughout a recession; you might take additional steps to cut costs or reduce budgets. The recession is likely going to be one of the biggest threats your company will face when outlining your risk management plan, so a thorough plan of action will be required to budget accordingly. If you haven't included recession within your risk management plan, now would be the time to consider this to help over the coming months and to support your business through any potential future recessions.

How we can help

Our passion is helping businesses succeed. Here at The Finance People, we offer a range of services to help businesses get access to the very best finance resources.

We offer flexible solutions depending on your business needs and budget. From outsourced support to a virtual finance director or an interim finance director, we have the support you require.

Carly Smith