Benjamin Franklin once famously said, “If you fail to plan, you are planning to fail.” Business owners know well that not everything goes smoothly. But it’s still possible to prepare for the unexpected by implementing a business risk management plan. The specific details of such a plan vary by business—but a successful risk management process involves identifying and mitigating risks that could affect and even harm your operations, as well as cost you money.
Here’s a rundown on risk management and how you can implement it in your business.
Table of Contents
What is business risk management?
Risk management is a structured approach to identifying and mitigating a variety of potential threats to your business: internal and external, physical and technological, financial and strategic. The ultimate goal is to proactively address any potential risks to your company and develop strategies to minimize their impact if they do occur.
Developing an effective business risk management system can be the difference between success and failure—and give leaders peace of mind. A 2022 PwC survey found when companies embrace risk management, they’re five times more likely to say they’re “very confident” in delivering results including overall business objectives.
What types of risks might an ecommerce company face?
Risk analysis varies by company, but several risk categories apply to many businesses—including ecommerce companies.
1. Strategy risk
Strategic risks involve the company’s objectives and market positioning. For an ecommerce company, this might include price wars initiated by competitors, loss of market share to a newcomer, changes in consumer trends and demand, or new technologies or offerings that could make your products less appealing.
2. Operational risk
This category includes potential challenges related to day-to-day business operations and processes. Some of these are physical risks and external risks. For example, a natural disaster could damage inventory in a warehouse, or theft or fire might occur at a fulfillment center. An employee might make an error in a product description or pricing that hurts the bottom line, or an illness might run through the customer service department, overloading the remaining team members and slowing response times. Mishandling packages can result in loss of inventory and unhappy customers. Malicious insider threats are also a potential risk, such as an employee who improperly accesses private customer information.
3. Technology and compliance risk
Technology poses a large risk because ecommerce companies depend on websites and payment processing to do business. Server failures or other technical issues could hurt sales while a data breach or failure to protect customers’ payment information may leave the company exposed to penalties under consumer-protection laws, while also harming the brand’s finances and reputation. Companies should also be aware of industry-specific regulation, such as laws about pollution or handling hazardous materials.
4. Financial risk
Successfully managing finances is a crucial part of business operations. Volatility in sales or inventory may make it difficult for an ecommerce company to forecast their finances. Delays in payments from customers can hurt cash flow and reduce operational efficiency. Fluctuations in financial markets, including currency exchange rates when doing business overseas, can affect revenue and profit margins.
5. Reputation risk
A company is nothing without its image, and reputational risks comprise anything that could hurt customer perceptions. This could be a recalled product, unresponsive customer service, delayed or mishandled shipments to customers—even association with an influencer who is later involved in a scandal.
4 tips for managing risk
- Identify potential risks
- Assess risk likelihood and potential impact
- Implement mitigation strategies
- Monitor, educate, and reassess over time
Businesses can take a number of measures to identify and mitigate risk. These four tips can help you with this process:
1. Identify potential risks
Risk identification entails pinpointing potential risks such as supply chain disruptions, website downtime, or a data breach that exposes customers’ personal data. It can even include negative user reviews that hurt your sales and reputation.
2. Assess risk likelihood and potential impact
After the business has identified risks, the team needs to assess how likely they are and what their potential impact to the business is. For example, supply chain disruptions may not happen often, but they pose an enormous risk. Negative ecommerce reviews from customers are a regular fact of life for businesses, though if they are infrequent they don’t pose an existential threat. A cybersecurity event, by contrast, is both probable and of high impact—so a business can justify focusing more resources here.
3. Implement mitigation strategies
Next, it’s time to invest in risk mitigation strategies. For cybersecurity risk, mitigation could include technology such as data encryption and enhanced firewalls as well as employee education and periodic vulnerability testing. Mitigating website downtime could call for duplicate server infrastructure, website backups, and recovery plans. Strong customer service including speedy response to complaints could address negative reviews. Supplier audits and a list of alternative sourcing options could help minimize supply chain risks.
4. Monitor, educate, and reassess over time
Risk management isn’t one-and-done—it’s an ongoing effort. Technologies for security, website, and reputation monitoring can help your business detect and respond to threats. Building a culture of risk management, including training sessions and a clear reporting structure, can make it easier for employees to do their part. Finally, staying abreast of regulatory changes, stakeholder feedback, and historical data can be instructive when evaluating risk and revamping the risk management plan periodically.
Business risk management FAQ
What are the 5 main types of risk?
The risks a given company may face can vary, but the five main categories apply to many businesses: strategic risk, operational risk, technology and compliance risk, financial risk, and reputational risk.
What are the benefits of having a dedicated risk management committee or officer?
Hiring a staffer or team dedicated to managing risk can help ensure a focus on risk management. An experienced risk manager comes to the job with a deep understanding of risk and the skill to identify those that could affect your business. A risk manager’s leadership can help strengthen a company’s risk culture, and they can help lead a company’s crisis response if needed.
How can businesses monitor and review their risk management strategies?
The potential risk landscape is ever-changing. Regular monitoring and assessments can identify new risks, reassess existing ones, and verify whether your current mitigation strategies are effective. These reviews can include analysis of relevant data and metrics, soliciting feedback from suppliers and customers, and comparing your risk management practices with those of industry peers. Stress testing your plans with a mock scenario can help assess your mitigation approach.
What role does insurance play in business risk management?
Insurance can play a key role in business risk management, effectively transferring certain risks to an insurance company—for a price. Policies like data breach insurance, professional liability insurance, and other types of business insurance may help protect your business, limiting your losses and allowing operations to continue during unexpected events.