Risk management

CORE BUSINESS ESSENTIALS

Is your business ready for surprises? In the world of start-ups and growing businesses, risks are always there.

This may seem scary, but risks are a natural part of growth and change. If you’re not taking risks, you’re not taking opportunities.

Yes, it’s true. 50% of small businesses fail within five years. If you want to be one of the ones that last, you need to manage your risk proactively.

In this lesson, you’ll learn how to spot problems early and lessen their effects. We’ll also cover how risks are a natural part of growth.

Chapter 1 - What are risks?

Types of risk

Risks are possible events or situations that can cause harm to your business. These come from lots of different places and affect your business in many ways.

Here are some of the types you need to be aware of:

Being aware of risks like these can help you prepare. So, how do you spot them? Look at all parts of your business and think about what could go wrong.

It’s normal this may seem a little negative. Remember, preparing can help you, but ignoring risks can’t.

Let's start with some ways to prepare:

Introduction - Risk management

Chapter 2 - Methods for spotting risks

What are your options?

There’s a few different ways to start creating a list of potential risks. We’re going to cover two for you in this chapter - SWOT Analysis and The Delphi Method.

The Delphi Method

The Delphi Method is a way to get expert opinions on a topic. This includes topics like risks. It uses a group of experts who answer questions in rounds. This can be helpful as it makes sure you have looked from different perspectives.

Here’s how it works:

Select a group of people who know a lot about the topic. These can be from inside or outside your business.
Ask the experts to answer questions about risks. They do this on their own, without talking to each other.
Collect all the answers and summarise them. Look for common points and differences.
Share the summary with the experts. Ask them to review the answers. Provide more thoughts or changes based on what others said.
Do more rounds of questions and summaries. Do this until the experts agree on the main risks and how to manage them.
Create a final report with the experts' opinions and ideas.

SWOT Analysis

A SWOT analysis is a simple tool to help you understand your business better. It stands for Strengths, Weaknesses, Opportunities and Threats.

All of these link to risk. Strengths can lead you to a false sense of security. Weaknesses can cause risks. Opportunities can come with risk.

Threats are particularly associated with risk management. This is because they tend to focus on future potential issues – so are synonymous with risk.

So, let’s spend the last part of this chapter covering some potential areas of threat. This will help you when writing your list and starting to prioritise.

Start by thinking about:

Chapter 1 - What is a growth plan?

Chapter 3 - Prioritising risks

Risk matrices

Once you have your risks, you need to manage them. You can do this on something called a risk matrix. A risk matrix is a simple yet powerful tool used to assess and prioritise risks in your business. It helps you map out risks based on their likelihood and impact. This means you can focus on the ones that matter most first.

You’re going to take each of your risks and score them on two things. First, their likelihood. How likely is it that your risk will occur? If something seems a far off possibility, you might mark it a low. But you might mark something high if it seems likely.

Here’s a scale you could use:


1	2	3	4	5
Highly unlikely	Unlikely	Possible	Likely	Almost certain

The second thing you’ll score for is impact. If your risk did happen, how much harm would it create for your business.

Again, here’s a potential scale for you:


1	2	3	4	5
Insignificant	Minor	Moderate	Major	Catastrophic

Take time to score all your identified risks using these two scales. At this point, a risk matrix will allow you to plot your risks onto a chart. It’s up to you if this is helpful. We've included one in the Digital Workbook. You can download a copy, if you haven't already.

Another way could be to add together the risk and likelihood scores and order from high to low.

Let’s take low cashflow as an example. If you have good cashflow, you might rate this 1 for likelihood. Low cashflow can lead to business failure though, so you might rate it 5 for impact.

Compare this with the risk of a road closure outside your shop. if it’s happening now and having a major impact on your business then it might well score 9. This is because it would be 5 for likelihood plus 4 for impact.

In this scenario, you would plan to focus on the roadwork issue before even considering your cashflow, as it has a higher score of 9.

Using your risk matrix

Once you’ve mapped your risks, the job isn’t over.

You need to do three main things:

Make plans – Start with high priority risks. Put plans in place to lower the impact or likelihood
Track and review – Update the risk matrix as new risks emerge or risks change. This might change your priorities
Share – Make sure your team is aware and actively using the matrix

If we take our road closure, for example. It’s unlikely you can change the likelihood anytime soon as it’s already happening. So, you might do things to lower the impact, like improve your online shop to reduce the need for your physical shop.

This might well become an opportunity to grow online. Once the road closure ends and the likelihood lowers, you’d change the risk and reassess your plans.

Chapter 2 - Methods for spotting risks

Chapter 4 - Reducing risks

Lowering impact and likelihood

In the last chapter, we talked about likelihood and impact being the main measures of risk. Focusing on these can also help you to reduce your risks over time. To reduce the likelihood, you need to put in place actions that will prevent or lower the chance of the risk happening. With impact it’s about actions that can lower the harm if it does.

Ways to reduce likelihood


Improving processes	Make your processes as efficient as possible. Review and update them often to avoid mistakes.
Maintenance	Keep your equipment and tools in good condition. Regular maintenance can prevent them from breaking and expensive repairs.
Training and education	Train your employees well. Regular training updates can keep skills sharp.
Quality control	Put in place strict quality control measures. Check your products or services to make sure they meet standards.
Health and safety	Follow health and safety regulations. This will reduce accidents and health issues.
Supplier management	Select reliable suppliers. Review their performance often. Have backup suppliers.
Using technology wisely	Use technology to improve efficiency. Technology can also help reduce mistakes. Regularly update software and equipment.
Clear communication	Communicate clearly with your team. Misunderstandings lead to mistakes and increased risk. Encourage your team to ask questions.
Risk awareness	Keep your team aware of possible risks. They should report any concerns or issues they spot.
Proactivity	Identify problems early and take steps to stop them. This could include regular inspections and audits.

Ways to reduce impact


Emergency plans	Create clear emergency plans for different scenarios. Make sure everyone knows what to do if something goes wrong.
Insurance	Get insurance to cover losses. This can help you recover financially from unexpected events.
Multiple suppliers	Don’t rely on just one supplier. Having many suppliers can make sure you still get what you need if one fails.
Build reserves	Keep some money aside for emergencies. This can help you cover costs if your income drops suddenly.
Strong relationships	Build good relationships with customers and suppliers. Loyal customers and suppliers can help you bounce back more quickly.
Flexible operations	Make your operations flexible. This can help you adapt to changes or problems.
Data backup	Back up your data often. This makes sure you don’t lose important information if there’s a technical failure.
Crisis training	Train your employees on how to handle crises. This makes sure they can act quickly and effectively when needed.
Reduce single points of failure	Put back-ups and safety nets in place where you find points of potential failure in your business.

Reducing risk in a crisis

Even with the best plans, things can still go wrong. Have a crisis management plan in place to handle unexpected problems.

Here’s 8 steps to help you create and execute one:

By having a crisis management plan, you can respond quickly and effectively. This helps reduce losses, protect your business, and recover faster. A well-prepared business is able to handle crises and come out stronger on the other side.

Chapter 3 - Prioritising risks

Chapter 5 - The benefits of risk

Focusing on the positives

Through the lesson we have touched on the impact of risk and have spoken of risk and the problems they can cause.

While risks can pose challenges, they are needed for growth. Embracing risk can create new opportunities. In this chapter, you’ll learn how seeing risks positively can help drive your business forward.

Risk as a part of change

Change is always happening in business. With change comes risk. Every time your business grows or tries something new, you face unknowns. These risks are natural and part of the journey.

If you never take risks, your business may stop growing. Sticking to the same ways and products might seem safe, but it limits your ability to improve. Taking risks means you are ready to move out of your comfort zone, try new things, and adapt to changes.

Knowing that risk is part of change helps you prepare. Instead of avoiding risks, learn to manage them well. This lets you use the good side of risk, while reducing the bad effects.

What are the benefits?

Taking risks can bring many rewards to your business. One of the biggest benefits is growth. When you try new things, you can find new markets, customers and ideas. This can lead to more sales and higher profits.

Others include:

Risk management in a nutshell

This lesson should have given you the tools and know-how to manage risks. You’ve learned how to spot, prioritise and reduce different types of risks. Plus, you learned how to use methods to do this.

So remember, risks are a natural part of growth. Proactive risk management is the key.

Chapter 4 - Reducing risks

How did we do?

We'd love your in the moment feedback on the lesson.

Please let us know how you rate it by selecting from the options provided.

Very helpful

Helpful

Okay

Unhelpful

Very Unhelpful

Lloyds Bank Academy is committed to providing information in a way that is accessible and useful for our users. This information, however, is not in any way intended to amount to authority or advice on which reliance should be placed. You should seek professional advice as appropriate and required. Any sites, products or services named in this module are just examples of what's available. Lloyds Bank does not endorse the services they provide. The information in this module was last updated on 21^st August 2024.

Back to top Click to jump to top of page