This is a guest article by Laura O’Donnell, TGO Consulting.
There is an element of risk in every business, no matter how high the demand it serves. In virtually all cases, the risk will be monetary, or come down to the loss of money, whether directly or through the expenditure of money to avert disaster or through the loss of investments. But while risk is a constant danger, it’s a danger that can be mitigated, if not entirely eliminated if risk management is made a priority, particularly in terms of your budgeting procedures.
What comprises a risk for your company may not be a risk for another, but risk management is generally the same from business to business. It may take a little time and a little money that could be put into other areas of the budget, but it will help ensure your business is at least a little prepared for any sudden shifts in the market or an unforeseen incident that would otherwise mean a significant downturn or even a failure of your organization.
If you look at it from a certain angle, budgeting itself is a form of risk management. You have to plan ahead to make sure you always have enough money to keep your organization not only functioning, but hopefully growing. It takes an honest assessment of the strengths and weaknesses you have and looks to bolster the assets while diminishing those things that might be detrimental to progress. A well-prepared budget is a vital key to success.
A proper risk management strategy goes a step further, and requires a deeper look into the life of the organization from day to day, month to month, and year to year. Now that you have a handle on what your business does and what it needs to do it, it’s time to identify the things that threaten those goals and needs. If you can’t identify the risks, after all, you anticipate and plan for them.
Think about the things you absolutely need – then think about the adverse things that could happen to them. What would you do if your most reliable employee suddenly quit? What if your internet provider went out of business? What if one of your suppliers has a fire or some other disaster? What if your facility had a disaster and you lost important documentation? What if new regulations come down that require massive changes or re-scaling? That’s a lot of what ifs, but these are the basis of risk management. All of them will require you to spend some of that rainy day money to allocate them into either new resources or mending the damaged resources – as well as the means to go on in the meantime if it takes some time to get back to normal.
It’s likely everything in your budget is there because you felt it was important. Nonetheless, part of risk management is knowing what you can and can’t spare. When you create your budget, keep in mind the items you could scale back, or even cut entirely, if you absolutely had to do so. These are usually worst-case scenarios, but if you plan for the worst, the smaller problems that are sure to arise will be that much easier.
While considering what to cut back, consider what to do if your risk management succeeds and things return to normal, or even better than normal. A risk management strategy should be flexible enough to deal with the many, many setbacks (and occasional windfall) that may occur.
A lot of what goes into budgeting, especially with today’s analytical sciences and software, is forecasting, i.e. financial projections. Identifying possible risks and developing contingencies to deal with them are both important factors, but there’s more to consider when it comes to blunting events that have yet to happen. For instance, there may be something too risky to even put your money against. Cutting something out of the budget altogether means you’ll never have to deal with any risk it might incur.
When possible, you might consider transferring risk, as well. If you’ve got a partner or investors, they can certainly take on a part of the burden, if you include them in the budgeting process. Of course, one of the classic ways to do this is to simply see that everything insurable has a decent insurance policy on it. Or you can simply make sure you have a fallback alternative in case you lose something important – alternate internet providers, employees trained in multiple aspects of your work, or alternate methods of work in case a vital piece of equipment is out for repair. If you can pull this off, it has minimal impact on your budget, because the resources you need are already available to be tapped at a moment’s notice.
Perhaps most importantly, your risk management strategy needs to subject to change, as least as often as your budget, because risks can change. Anyone who runs an organization of any kind these days knows just how swiftly the economy can turn and part of preparing your budget means being ready for it, so you’ll be insulated as well as you can be from the vagaries of the market.
About Laura O’Donnell: Laura writes smart content on behalf of the business systems specialists at TGO Consulting. As an avid writer and learner, she loves to use her skills for engaging others in important topics in creative and effective ways. When she is not working, she loves meeting new people, traveling, and bringing her Pinterest dreams to life. Find her on LinkedIn.
Celoxis is a comprehensive project management tool that helps companies streamline management of projects, timesheets, expenses and business processes, specific to their organization. Over the last decade, Celoxis has specialized in delivering improved collaboration and increased efficiency for teams of all sizes, both in SMB and Enterprise segments. To know more visit www.celoxis.com