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How important is risk to your business strategy?

Accountancy News |  26/01/2017
How important is risk to your business strategy?Businesses need to be constantly aware of the risks they face. It plays a huge part in developing the appropriate business strategy, as well as contingency plans, which may have to be implemented when something goes wrong.

It often falls to the finance department to establish the risks faced by a business as they are responsible for the budget. It means that they must have the right people in the right roles.

Understanding and identifying risk

Companies face different risks, depending on their activity and sector. For example, companies operating in the fishing industry will face drastically different risks than those in the digital marketing sector.

However, firms that serve both - and other - sectors have to be aware of all of those risks. This means that accountancy and financial services practices must be kept updated on everything that could potentially adversely affect their clients.

It is not just economic issues that could have this sort of impact. Political uncertainty and unrest can affect businesses, often causing them to operate a great deal more cautiously. In addition, climate change is something that is impacting a huge number of companies.

For businesses to establish where risks lie, they must take a long-term view of the whole market they operate in. If customers are likely to spend less, they need to be aware of this so they can revert back to their contingency plans.

There are other aspects that must be considered when identifying risks, such as fire or theft. These can be mitigated by having the right sort of insurance and making sure that every single term and condition is understood and adhered to.

Importance of the right person

When it is time to identify risk, you have to ensure that you have the right person at the helm of the operation. If your business doesn’t have this individual in place already, it means that you will need to recruit them.

This is a necessity because the company has to be protected from threats. The person with the appropriate skills and experience can be the reason the company remains successful during a problematic period.

On the other hand, if there is no one installed or if you leave the job of identifying risk to the wrong person, then your business could end up susceptible to the potential threats it will face in a dynamic marketplace, as all firms inevitably do.

Incorporating risk into your strategy

Companies need to be aware of the potential for ‘black swan’ events - when something highly unlikely but with severe consequences occurs. Although they are difficult to predict with accuracy, events like these should be accounted for in business strategies.

Those responsible for identifying risk should ensure that they are incorporating quantitative risk management into their assessments. This allows them to make recommendations on decisions based on probability.

They should possess the right analytical skills, which will allow them to calculate the likelihood of a situation and how much weight should be given to that specific scenario over another. They should also have excellent communication skills, since they will be discussing their findings with chief executives and managing directors.

Businesses should also be willing to adapt to the potential problems that the risk assessment highlights. It might require that a certain amount of budget is ring-fenced as a result. However, the fact it will go towards keeping companies afloat when disaster - whether natural or constructed - strikes should make this more palatable.

Incorporating risk into business strategy is about thinking about the long term, rather than the short term.

By Jon Aspinell

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