5 Steps To Build a Risk Management Process for Your Business

Risk management is a fundamental strategy for most small-and-midsize-businesses (SMBs), who have limited resources and face multiple risks during everyday operations. A systematic approach to risk management can help businesses identify, assess, and mitigate risks to safeguard their operations and ensure long-term sustainability.

Effective risk management helps SMB leaders devise strategies to help their businesses stay ahead of the competition. All steps of the risk management process are crucial to building a safety net that can save your company in adverse market conditions.

What is risk management?

Risk management is the process in which businesses identify, assess, and control threats to their capital and earnings. These threats, or risks, can stem from various sources, including financial uncertainties, legal liabilities, strategic management errors, accidents, and even natural disasters.

Why is risk management important?

Risk management is a critical oversight aspect of a business that’s directly tied to a company’s success. Effective risk management means comprehensively understanding potential risks, how they can impact operations, and what steps you can take to mitigate them. For SMBs, where the margin for error is often smaller, risk management isn’t just a protective measure—it’s a strategic function that’s central to the decision-making process.

In a recent Gartner study [1]:

• 61% of enterprise risk management (ERM) leaders stated it’s important to improve their ability to correctly identify the emergent risks that could be most damaging over the coming 12 months.

• 47% of senior ERM leaders say being better prepared for these emerging risks over the next 12 months is crucial.

While the primary goal of these leaders is to prevent losses, ERM leaders know that good risk management also involves recognizing the opportunities that can help turn risks into profits. In essence, it’s about ensuring a business can capitalize on potential upsides just as effectively as it can protect itself from losses. This dual focus helps generate balanced, forward-thinking strategies for sustainable growth.

How to identify the risks to your business

The most critical step in the risk management process is risk identification, which involves a thorough examination of business operations and needs. Businesses need to consistently monitor and audit their requirements to avoid potential issues.

Identifying business risks begins with recognizing where these risks may originate:

• Internally: Assess internal processes, from human resources to finance, to ensure there aren’t any weak links in your operations. You should also check for vulnerabilities in your IT infrastructure, potential gaps in employee skills, and singular dependencies on key individuals.

• Externally: Consider economic shifts, competitive dynamics, regulatory changes, technological advancements, and natural events to understand where the risk is originating. External risks are often beyond the business's direct control and require careful monitoring and management strategies to mitigate their impact.

Evaluate market dynamics

As an SMB, it is crucial to assess how your business stacks up against others in your industry. You can analyze customer trends and responses to discern your market position and dynamics.

Evaluating market dynamics can include:

• Analyzing customer trends

• Supply chain reliability

• Industry-specific risks

As market dynamics are changing consistently, it is crucial to discern which factors can sway consumers towards or away from certain products, services, or entire industries.

Leverage risk management tools

Risk management tools can range from basic checklists to sophisticated software programs that analyze and predict risk factors using data analytics and business intelligence. With effective risk assessment tools and methodologies, you can identify and proactively assess threat potential.

Identify specific and emerging risks

New competitors in your niche or regulatory changes within your industry can affect your ability to cater to your customers. However, identifying risks requires the right tools and approach.

Some of the best ways to identify risks include:

Reviewing documentation

Documents stating project plans can hold a wealth of project-specific information that can prove helpful when identifying risks. Review all project documentation to ensure all plans are accurate, complete, and consistent. If you find any inaccuracies, missing information, or other discrepancies, these errors could point to risk.

Creating a risk register

Just like a bookkeeper enters every transaction into a ledger, a project manager can maintain a risk register, with details including the kind of risk, root cause, and potential solution. This record can be updated throughout the lifecycle of each project.

Analyzing root causation

Analyzing root causes helps you systematically define the primary cause of a problem and come up with a method of addressing it. The main steps of root cause analysis are:

1. Stating the problem.

2. Collecting relevant data.

3. Determining the factors that led to the problem.

4. Separating the root causes from factors that are merely symptoms.

5. Defining actions that can rectify the issue.

6. Determine solutions that can avoid that problem in the future.

7. Follow through with those solutions.

When used on an ongoing basis, analyzing root causation helps a business continuously improve.

Identifying emerging risks, however, requires more insight into all aspects of your business, your industry, and the greater market overall. While market influences like a pandemic are impossible to predict, other insights can be gleaned through:

• Brainstorm sessions: Gather project teams together for casual discussions on a topic of your choice, and invite all team members to freely share their ideas and perspectives.

• Interviews: Invite stakeholders, project teams, and industry experts to interview with you. Though similar to a brainstorming session, interviews are typically a one-on-one discussion in which you ask project-related questions using a structured or unstructured method. The former necessitates proper preparation, and the latter involves on-the-spot conversations.

• SWOT analysis: In a , you review the strengths, weaknesses, opportunities, and threats presented to or by a specific project. 

Knowing what makes a project viable and where vulnerabilities may exist helps you uncover possible risks, plan appropriately, and pivot when necessary.

Assess the likelihood of risks

Industries such as financial products, insurance coverage, and healthcare have stiff regulatory and compliance requirements. Consequently, it is important to assess the likelihood of risks so you can remain compliant with regulatory standards at all times.

Plan, prioritize, and apply risk mitigation strategies

Through the approaches listed here, every team member learns more about individual and project-specific expectations. Understanding what’s expected and what internal and external risks exist can help mitigate the chances of harm, keeping your team prepared for uncertainties. Analyzing potential risks and assigning a risk-potential score will help you understand which risks are most probable and could be the most damaging.

Collaborate with team and stakeholders

Involving multiple departments, team members, and stakeholders in your risk management process will give you insights from professionals with varying degrees of seniority and experience. Ensuring smooth communication and collaboration between these employees can ensure proper execution of the risk management process.

What are the five steps of the risk management process?

Here’s a five-step process for effective risk management that can help mitigate threats in your business operations.

Step 1: Identify potential risks

The first step is to identify potential risks that could affect your business. These should include internal risks within your company and external risks arising from the overall business environment. Legal compliance, environmental factors, market fluctuations, and regulatory obligations should be considered for proper risk identification. You can streamline this process by employing risk management software to increase risk visibility across all relevant stakeholders.

Step 2: Analyze the risks

Next, you should analyze the identified risks to determine how they may impact your business. This analysis should consider how the risks can affect various business functions and how they might disrupt operations. Risk management tools can help map these risks to your business processes, provide a clear view of the potential implications, and help you develop mitigation strategies.

Step 3: Evaluate the risks’ severity

It is crucial to evaluate, score, or rate different potential risks based on their severity. You can use qualitative and quantitative assessments to categorize risks, allowing you to prioritize them effectively. For instance, financial risks can often be quantified and should be assessed using data-driven approaches, while other risks might require a more qualitative analysis.

Step 4: Manage the risk

Once you’ve prioritized risks based on priority and severity, you can act to mitigate them. This involves developing strategies to prevent, transfer, accept, or avoid the risk. Collaboration is key here, and risk management solutions can facilitate communication among stakeholders, ensuring all voices are heard and everyone is aligned on the chosen risk treatment plans.

Step 5: Monitor and review the risk

Running any business involves taking multiple risks every day. Some of these risks are inherent in your business’s path to success. While some are expected risks, they should still be monitored continuously. 

Using digital risk management systems automates this monitoring process, providing real-time updates and allowing for quicker responses to dynamic risk conditions. This ongoing vigilance is crucial to maintain an effective risk management strategy.

What are the benefits of risk management?

Effective risk management can offer numerous advantages to a business, such as:

• Enhances decision-making: Understanding the risks can help you make more informed decisions. With effective risk management strategies, you can weigh potential risks against expected benefits.

• Ensures resource optimization: Identifying and prioritizing risks helps companies allocate resources more efficiently, focus on areas that require the most attention, and safeguard against significant losses.

• Improves planning: Risk management allows for better strategic planning and enhances the ability to identify potential obstacles and opportunities during the goal-setting process.

• Builds resilience: Managing risks helps build resilience against external shocks, ensuring that the business can continue operations even when faced with adverse events.

• Helps remain compliant: Staying on top of potential legal and regulatory risks helps a business maintain compliance and improves its reputation among its customers, partners, and stakeholders.

• Fosters proactive culture: Acknowledging that risks exist and not hiding from them fosters a proactive organizational culture where employees are encouraged to identify and communicate potential problems.

• Gives competitive advantage: A robust risk management framework can help a business remain competitive. Implementing risk management terms signals to investors, customers, and competitors that your business is prepared and well-equipped to handle the unknown.

How to create a risk management plan

The process to create a risk management plan can be different for every company. Despite being a part of the same industry, different businesses may have to face varying degrees of risks across multiple business areas. According to KPMG’s 2022 Project Management Survey, nearly 44% of organizations claim to have robust project risk management in place, and about 15% of companies don’t have a risk management plan in place. [2]

A risk management plan equips organizations with the means to identify, evaluate, and tackle potential risks before those risks transform into unmanageable issues. Follow these steps to create your company’s risk management plan.

Step 1: Prepare a comprehensive risk assessment

A thorough risk assessment involves evaluating your business and identifying potential risks to your business objectives. To be effective, examine both internal and external risk factors so you can identify risk opportunities you may otherwise overlook.

Assess each risk’s likelihood and establish criteria to assign impact scores. While you need regular monitoring to identify low-priority risks, you may need to act immediately in cases of high-probability, high-impact risks.

Some mitigation strategies can help you create a better risk management plan. These include:

• Initiating preventive measures: Examples include clarifying project requirements, ensuring adequate resources, creating quality assurance procedures, and overseeing feasibility studies.

• Contingency planning: Examples include putting money into a business savings account, securing backup equipment, and obtaining the proper business insurance coverage.

• Risk transfer: An example of risk transfer is obtaining a business insurance policy that provides absolute coverage if a loss occurs. The covered loss’s risk becomes the responsibility of the insurance company.

Risk management software is a valuable asset when conducting a risk assessment. These programs typically offer features such as risk identification, assessment matrices, and dashboard monitoring, helping to streamline your process and ensure a comprehensive risk assessment approach.

Step 2: Assign roles and responsibilities for proactive risk management

Key roles in risk management include:

• Risk manager, who oversees the risk management process. A risk manager may be responsible for continuous risk assessment and reporting.

• Project managers, who are responsible for implementing strategies in specific assigned projects. They might have to brainstorm mitigation strategies and ensure proper implementation within their projects.

• Risk management committee, which is responsible for general oversight and strategic direction. A collaborative risk management committee requires project management programs and team collaboration tools. These solutions help assign tasks, track progress, and facilitate communication among team members.

Step 3: Create a risk management response plan

Your plan should detail your organization's desired risk management response to various scenarios, ensuring proactive risk identification and a swift, effective response. The plan should include:

• Required actions defined according to the threat level.

• The designated staff members responsible for those actions.

• The appropriate communication methods and strategies according to the type of risk event.

A well-developed business continuity plan outlines how your organization will continue operations during and after a significant disruption. It is necessary to regularly review and update this plan to adapt to changing circumstances, both within your organization and in the industry overall.

All staff members should know their risk management roles, appropriate responses to detected threats, and your business continuity process. Risk management training and educational programs help train your employees. You can track their learning progress and ensure they can handle their roles during a company crisis.

Risk management best practices

Follow these best practices to enhance your risk management efforts.

Involve leadership

Leadership should actively participate in and support risk management initiatives. Their engagement helps businesses foster a culture that values risk awareness and management.

Ensure a comprehensive understanding

Ensure that the risk management process is well-understood across the organization. This includes clarity on procedures, methodologies, and the importance of risk management across all departments and teams working for the business.

Conduct regular reviews

Regular risk assessments and reviews help you keep up with an ever-changing business landscape. This dynamic approach ensures that new and emerging risks do not go unnoticed.

Use technology to your advantage

Risk management software can automate many aspects of the risk management process, from identifying and assessing risks to monitoring and reporting. Selecting the right tool can save you a lot of time and effort.

Encourage collaboration across departments

Different perspectives can lead to a more comprehensive risk profile and innovative mitigation strategies. For instance, frontline employees may see a different side of the business than the C-suite. Likewise, the legal teams can help the business comply with regulatory standards while devising the risk management strategy.

Treat risk management as a continual process

Potential risks are always evolving, and risk management procedures require ongoing monitoring for updates and opportunities to improve. Create an open communication channel via survey or feedback forms where employees can share lessons learned from previous risk management processes.

Foster a culture of positivity

Work towards creating a proactive risk management culture where identifying and managing risk is part of everyone’s role, and no one is reprimanded for pointing out discrepancies.

Look outside

Don’t hesitate to look outside your organization for insights and best practices. This can include industry groups, risk management associations, and professional consultants.

Prepare your business for risk management

Risk management is not just about avoiding risk—it's an approach to running your business that helps you make informed decisions and devise better plans for the future. By following these five steps, you can create a robust framework to protect your business and get a competitive edge in your market.