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Use risk management to monitor business performance
A business risk management plan involves identifying, assessing and developing strategies to manage risks. It is an essential part of any business plan and will help you prepare for, and deal with, risk factors associated with an economic downturn.
During an economic downturn, business risk management involves closely monitoring your business's performance, identifying any issues affecting it and putting in place strategies to reduce or address these issues. In most cases the best way to monitor performance is to use your financial statements.
If you discover, for example, that your sales have dropped, you should analyse the factors affecting sales performance so you know how to address the issue and manage associated risks.
The process of identifying and managing risks during an economic downturn involves 5 steps.
1. Identify risks that could impact your business performance
Take a close look at your financials and each of your business operations and ask yourself:
- What could cause an impact?
- How serious would that impact be?
- What is the likelihood of this occurring?
- Can it be reduced or eliminated?
The risks associated with an economic downturn may be external (e.g. changes in interest rates, lower consumer confidence) and internal (e.g. cash flow shortages, customers defaulting on payments or depreciation of assets).
2. Analyse risks to assess their impacts
Work out which risks have a greater consequence or impact on your business's performance than others. Separate minor acceptable risks (e.g. a single customer defaulting on a payment) from major risks that require immediate action (e.g. major supply chain disruption).
Analysing risks involves deciding on the relationship between the likelihood and impacts of the risks you have identified.
3. Evaluate risks to prioritise their management
Compare the likelihood and impact of each risk on your business's performance to evaluate and prioritise the resources you are prepared to invest to treat these risks. The outcome of this step is a prioritised list of risks that require further action.
4. Treat risks to minimise their impact
You will need to work out which risks you consider acceptable to be left untreated and which risks need to be treated.
Once you've identified the risks you consider unacceptable, you need to consider strategies for improving your business performance.
5. Develop and review your risk management plan
A business risk management plan shows your chosen strategy for treating risks you have identified. It details information about:
- risks identified
- level of risks
- planned strategy
- time frame for implementing the strategy
- resources required
- staff responsible for ensuring the strategy is implemented.
The final documentation should include appropriate objectives, a budget and milestones on the way to achieving those objectives.
Find out about the PPRR model for risk management, a tool used by Australian emergency management agencies.