Managing Business Risks

Managing Business Risks

Eran Shay, Managing Director,
Benefit Business Solutions Ltd.

We don’t know whether it’s true that we’re living in more uncertain times than we have in the past, but it certainly feels like it. The latest big uncertainty to be thrown into our lives is the spread of the Coronavirus (COVID19) and how it is going to impact businesses, the economy and our daily life in general. It comes at a time when uncertainty is already high due to matters such as Brexit and how it will affect our lives in Gibraltar; U.S presidential elections later this year, extreme weather conditions across the globe, and numerous other concerns.

A consistent finding in psychology is that people don’t like uncertainty or risk. It’s called Risk Aversion, and we all have it to some degree.   People don’t like risk in part because of the uncertainty. We want to make a good decision but worry about how terrible the consequences will be if we make a bad one. Entrepreneurs and business professionals are no stranger to risk and uncertainty. Whether it’s reaching out to a new client, or releasing a new product, risk and uncertainty influence every business decision. But what are the differences between the two concepts?

The Difference Between Risk and Uncertainty

Risk is defined as the possibility or probability of an unpleasant or undesirable event. In business, risk might suggest the potential loss of money, time, or information. Most importantly, risk can be calculated or measured. Entrepreneurs can use market data to calculate whether a new product may be worth introducing. Accountants can use balance sheets to measure the profitability of certain stores. Calculated risk can be beneficial, as risk takers can also generate significant returns.

On the other side, there’s uncertainty. In contrast, uncertainty involves situations with unknown variables, information, and outcomes. Uncertainty cannot be measured or calculated. Since uncertain events are unique and difficult to plan for, they come with even greater downsides for unprepared businesses.

The main takeaway from these two concepts: risk can be measured and predicted, while uncertainty cannot.

How to Plan for High-Risk Events?

One of the unhealthy ways that people cope with uncertainty is to throw up their hands and give up. They decide that if the world is uncertain, then everything is uncertain and there is nothing they can do about it. Risk and uncertainty surround every business. Weighing options and outcomes, and deciding the final action as a team is just one way a business can remain vigilant. With enough practice in risk analysis and assessment, and the right guidance from professional advisors, uncertainty turns from an obstacle into a challenge. Risk and uncertainty forces companies to innovate faster through competition, and rewards entrepreneurs with greater experience of the market and industry. Risk can’t be avoided, but when businesses learn to prepare, risk can open up new business opportunities.

When coping with uncertainty, here are some of the things you should remember:

You must be able to deal with risk. Uncertainty and ambiguity are part of life and business, and it’s not going to get more comfortable moving forward.

You have to control the “controllable”. You can’t control politics or the economy or what your friend posts on Facebook. You can control how you react to them.

You need to recognise that human nature will not change.  People are people, no matter what, so understanding people’s psychology and emotional state is critical. These concepts of behavioural economics are vital to your business because it helps you understand human behaviour at a deeper level.

You should make your team’s world as certain as possible as a leader. Your employees want certainty, particularly about their job security. Share your decision-making process so your employees know what to expect and how you will evaluate their performance.

You cannot value the outcome over the decision-making process. We can’t guarantee results because we can’t control everything. However, we can make people feel more comfortable when we are transparent about the process.

While uncertainty cannot be controlled, risks can be managed to effectively mitigate against the potential negative eventualities. At the core of our risk management approach, we have applied the following principles when assisting our clients to implement a risk management strategy:

  1. Identify risk – Spot the risk early through research and historical analyses.
  2. Assess the probability – Evaluate all the factors involved, including the likelihood of positive and negative outcomes
  3. Make a cost-benefit analysis of alternatives – Measure the pros and cons of each decision you could take.
  4. Choose a response
  5. Evaluate results – How did the chosen action impact the business?
  6. Ongoing monitoring – Risk events should be constantly checked for changing circumstances. In some cases, risk aversion may be the best option.

Uncertainty is a fundamental part of making decisions in business now and it will be in the future. The question is are you prepared to deal with it?