should a business plan include risks

How to Highlight Risks in Your Business Plan

Tallat Mahmood

5 min. read

Updated October 25, 2023

One of the areas constantly dismissed by business owners in their business plan is an articulation of the risks in the business.

This either suggests you don’t believe there to be any risks in your business (not true), or are intentionally avoiding disclosing them.

Either way, it is not the best start to have with a potential funding partner. In fact, by dismissing the risks in your business, you actually make the job of a lender or investor that much more difficult.

Why a funder needs to understand your business’s risks:

Funding businesses is all about risk and reward.

Whether it’s a lender or an investor, their key concern will be trying to balance the risks inherent in your business, versus the likelihood of a reward, typically increasing business value. An imbalance occurs when entrepreneurs talk extensively about the opportunities inherent in their business, but ignore the risks.

The fact is, all funders understand that risks exist in every business. This is just a fact of running a business. There are risks that exist with your products, customers, suppliers, and your team. From a funder’s perspective, it is important to understand the nature and size of risks that exist.

• There are two main reasons why funders want to understand business risks:

Firstly, they want to understand whether or not the key risks in your business are so fundamental to the investment proposition that it would prevent them from funding you.

Some businesses are not at  the right stage to receive external funding  and placate funder concerns. These businesses are best off dealing with key risk factors prior to seeking funding.

The second reason why lenders and investors want to understand the risk in your business is so that they can structure a funding package that works best overall, despite the risk.

In my experience, this is an opportunity that many business owners are wasting, as they are not giving funders an opportunity to structure deals suitable for them.

Here’s an example:

Assume your business is  seeking equity funding,  but has a key management role that needs to be filled. This could be a key business risk for a funder.

Highlighting this risk shows that you are aware of the appointment need, and are putting plans in place to help with this key recruit. An investor may reasonably decide to proceed with funding, but the funding will be released in stages. Some will be released immediately and the remainder will be after the key position has been filled.

The benefit of highlighting your risks is that it demonstrates to investors that you understand the danger the risks pose to your company, and are aware that it needs to be dealt with. This allows for a frank discussion to take place, which is more difficult to do if you don’t acknowledge this as a problem in the first place.

Ultimately, the starting point for most funders is that they  want  to invest in you, and  want  to validate their initial interest in you.

Highlighting your business risks will allow the funder to get to the nub of the problem, and give them a better idea of how they may structure their investment in order to make it work for both parties. If they are unsure of the risks or cannot get clear explanations from the team, it is unlikely they will be forthcoming when it comes to finding ways to make a potential deal work.

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• The right way to address business risks:

The main reason many business owners don’t talk about business risks with potential funders is because they don’t want to highlight the weaknesses in their business.

This is a fair concern to have. However, there is a right way to address business risk with funders, without turning lenders and investors off.

The solution is to focus on how you  mitigate the risks.  

In other words, what are the steps you are taking in your business as a direct reaction to the risks that you have identified? This is very powerful in easing funder fears, and in positioning you as someone who has a handle on their business.

For example, if a business risk you had identified was a high level of customer concentration, then a suitable mitigation plan would be to market your products or services targeting new clients, as opposed to focusing all efforts on one client.

Having net profit margins that are lower than average for your market would raise eyebrows and be considered a risk. In this instance, you could demonstrate to funders the steps you are putting in place over a period of time to help increase those margins to at least market norms for your niche.

The process of highlighting risks—and, more importantly, outlining key mitigating actions—not only demonstrates honesty, but also a leadership quality in solving the problems in your business. Lenders and investors want to see both traits.

• The impact on your credibility:

Any lender or investor  backs the leadership team  of a business first, and the business itself second.

This is because they realize that it is you, the management team, who will ultimately deliver value and grow the business for the benefit for all. As such, it is imperative that they have the right impression about you.

The consequence of highlighting business risks in your business plan with mitigations is that it provides funders a real insight into you as a business leader. It demonstrates that not only do you have an understanding of their need to understand risk in your business, but you also appreciate that minimizing that risk is your job.

This will have a massive impact on your credibility as a business owner and management team. This impact is more acute when compared to the hundreds of businesses they will meet that omit discussing the risks in their business.

The fact is, funders have seen enough businesses and business plans in all sectors to instinctively know what risks to expect. It’s just more telling if they hear it from you first.

• What does this mean for you going forward?

Funders rely on you to deliver on your inherent promise to add value to your business for all stakeholders. The weight of this promise becomes much stronger if they can believe in the character of the team, and that comes from your credibility.

A business plan that discusses business risks and mitigations is a much more complete plan, and will increase your chances of securing funding.

Not only that, but highlighting the risks your business faces also has a long-term impact on your character and credibility as a business leader.

Tallat Mahmood is founder of The Smart Business Plan Academy, his flagship online course on building powerful business plans for small and medium-sized businesses to help them grow and raise capital. Tallat has worked for over 10 years as a small and medium-sized business advisor and investor, and in this period has helped dozens of businesses raise hundreds of millions of dollars for growth. He has also worked as an investor and sat on boards of companies.

Table of Contents

• Why a funder needs to understand your business’s risks:

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Business Plan Risk Analysis - What You Need to Know

The business plan risk analysis is a crucial and often overlooked part of a robust business plan. In the ever-changing world of business knowing potential pitfalls and how to mitigate them could be the difference between success and failure.  A well-crafted business plan acts as a guiding star for every venture, be it a startup finding its footing or a multinational corporation planning an expansion. However, amidst financial forecasts, marketing strategies, and operational logistics, the element of risk analysis frequently gets relegated to the back burner. In this blog, we will dissect the anatomy of the risk analysis section, show you exactly why it is important and provide you with guidelines and tips. We will also delve into real-life case studies to bring to life your learning your learning.

Table of Contents

• Risk Analysis - What is it?
• Types of Risks
• Components of Risk Analysis
• Real-Life Case Studies
• Tips & Best Practices
• Final Thoughts

Business Plan Risk Analysis - What Exactly Is It?

Risk analysis is like the radar system of a ship, scanning the unseen waters ahead for potential obstacles. It can forecast possible challenges that may occur in the business landscape and plan for their eventuality. Ignoring this can be equivalent to sailing blind into a storm. The business plan risk analysis section is a strategic tool used in business planning to identify and assess potential threats that could negatively impact the organisation's operations or assets. Taking the time to properly think about the risks your business faces or may face in the future will enable you to identify strategies to mitigate these issues.

Types of Business Risks

There are various types of risks that a business may face, which can be categorised into some broader groups:

• Operational Risks: These risks involve loss due to inadequate or failed internal processes, people, or systems. Examples could include equipment failure, theft, or employee misconduct.
• Financial Risks: These risks are associated with the financial structure of the company, transactions the company makes, and the company's ability to meet its financial obligations. For instance, currency fluctuations, increase in costs, or a decline in cash flow.
• Market Risks: These risks are external to the company and involve changes in the market. For example, new competitors entering the market changes in customer preferences, or regulatory changes.
• Strategic Risks: These risks relate to the strategic decisions made by the management team. Examples include the entry into a new market, the launch of a new product, or mergers and acquisitions.
• Compliance Risks: These risks occur when a company must comply with laws and regulations to stay in operation. They could involve changes in laws and regulations or non-compliance with existing ones.

The business risk analysis section is not a crystal ball predicting the future with absolute certainty, but it provides a foresighted approach that enables businesses to navigate a world full of uncertainties with informed confidence. In the next section, we will dissect the integral components of risk analysis in a business plan.

Components of a Risk Analysis Section

Risk analysis, while a critical component of a business plan, is not a one-size-fits-all approach. Each business has unique risks tied to its operations, industry, market, and even geographical location. A thorough risk analysis process, however, typically involves four main steps:

• Identification of Potential Risks: The first step in risk analysis is to identify potential risks that your business may face. This process should be exhaustive, including risks from various categories mentioned in the section above. You might use brainstorming sessions, expert consultations, industry research, or tools like a SWOT analysis to help identify these risks.
• Risk Assessment: Once you've identified potential risks, the next step is to assess them. This involves evaluating the likelihood of each risk occurring and the potential impact it could have on your business. Some risks might be unlikely but would have a significant impact if they did occur, while others might be likely but with a minor impact. Tools like a risk matrix can be helpful here to visualise and prioritise your risks.
• Risk Mitigation Strategies: After assessing the risks, you need to develop strategies to manage them. This could involve preventing the risk, reducing the impact or likelihood of the risk, transferring the risk, or accepting the risk and developing a contingency plan. Your strategies will be highly dependent on the nature of the risk and your business's ability to absorb or mitigate it.
• Monitoring and Review: Risk analysis is not a one-time task, but an ongoing process. The business landscape is dynamic, and new risks can emerge while old ones can change or even disappear. Regular monitoring and review of your risks and the effectiveness of your mitigation strategies is crucial. This should be an integral part of your business planning process.

Through these four steps, you can create a risk analysis section in your business plan that not only identifies and assesses potential threats but also outlines clear strategies to manage and mitigate these risks. This will demonstrate to stakeholders that your business is prepared and resilient, able to handle whatever challenges come its way.

Business Plan Risk Analysis - Real-Life Examples

To fully grasp the importance of risk analysis, it can be beneficial to examine some real-life scenarios. The following are two contrasting case studies - one demonstrating a successful risk analysis and another highlighting the repercussions when risk analysis fails.

Case Study 1: Google's Strategic Risk Mitigation

Consider Google's entry into the mobile operating system market with Android. Google identified a strategic risk : the growth of mobile internet use might outpace traditional desktop use, and if they didn't have a presence in the mobile market, they risked losing out on search traffic. They also recognised the risk of being too dependent on another company's (Apple's) platform for mobile traffic. Google mitigated this risk by developing and distributing its mobile operating system, Android. They offered it as an open-source platform, which encouraged adoption by various smartphone manufacturers and quickly expanded their mobile presence. This risk mitigation strategy helped Google maintain its dominance in the search market as internet usage shifted towards mobile.

Case Study 2: The Fallout of Lehman Brothers

On the flip side, Lehman Brothers, a global financial services firm, failed to adequately analyse and manage its risks, leading to its downfall during the 2008 financial crisis. The company had significant exposure to subprime mortgages and had failed to recognise the potential risk these risky loans posed. When the housing market collapsed, the value of these subprime mortgages plummeted, leading to significant financial losses. The company's failure to conduct a robust risk analysis and develop appropriate risk mitigation strategies eventually led to its bankruptcy. The takeaway from these case studies is clear - effective risk analysis can serve as an essential tool to navigate through uncertainty and secure a competitive advantage, while failure to analyse and mitigate potential risks can have dire consequences. As we move forward, we'll share some valuable tips and best practices to ensure your risk analysis is comprehensive and effective.

Business Plan Risk Analysis Tips and Best Practices

While the concept of risk analysis can seem overwhelming, following these tips and best practices can streamline the process and ensure that your risk management plan is both comprehensive and effective.

• Be Thorough: When identifying potential risks, aim to be as thorough as possible. It’s crucial not to ignore risk because it seems minor or unlikely; even small risks can have significant impacts if not managed properly.
• Involve the Right People: Diverse perspectives can help identify potential risks that might otherwise be overlooked. Include people from different departments or areas of expertise in your risk identification and assessment process. They will bring different perspectives and insights, leading to a more comprehensive risk analysis.
• Keep it Dynamic: The business environment is continually changing, and so are the risks. Hence, risk analysis should be an ongoing process, not a one-time event. Regularly review and update your risk analysis to account for new risks and changes in previously identified risks.
• Be Proactive, Not Reactive: Use your risk analysis to develop mitigation strategies in advance, rather than reacting to crises as they occur. Proactive risk management can help prevent crises, reduce their impact, and ensure that you're prepared when they do occur.
• Quantify When Possible: Wherever possible, use statistical analysis and financial projections to evaluate the potential impact of a risk. While not all risks can be quantified, putting numbers to the potential costs can provide a clearer picture of the risk and help prioritise your mitigation efforts.

Implementing these tips and best practices will strengthen your risk analysis, providing a more accurate picture of the potential risks and more effective strategies to manage them. Remember, the goal of risk analysis isn't to eliminate all risks—that's impossible—but to understand them better so you can manage them effectively and build a more resilient business.

In the ever-changing landscape of business, where uncertainty is a constant companion, the risk analysis section of a business plan serves as a guiding compass, illuminating potential threats and charting a course toward success. Throughout this blog, we have explored the critical role of risk analysis and the key components involved in its implementation. We learned that risk analysis is not just about identifying risks but also about assessing their potential impact and likelihood. It involves developing proactive strategies to manage and mitigate those risks, thereby safeguarding the business against potential pitfalls. In conclusion, a well-crafted business plan risk analysis section is not just a formality but a strategic asset that empowers your business to thrive in an unpredictable world. As you finalise your business plan, keep in mind that risk analysis is not a one-time task but an ongoing practice. Revisit and update your risk analysis regularly to stay ahead of changing business conditions. By embracing risk with a thoughtful and proactive approach, you will position your business for growth, resilience, and success in an increasingly dynamic and competitive landscape. Want more help with your business plan? Check out our Learning Zone for more in-depth guides on each specific section of your plan.

How to Write a Business Plan

An effective business plan should outline financial projections and a strategy to achieve future goals.

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Business plans can vary in format and structure, but experts say all should include some key elements.

When you're contemplating starting your own company , crafting a detailed financial document that outlines your strategy and long-term goals may not be at the top of your priority list, but it should be. Without a sound written plan that outlines your concept, structure and financial projections, it can be difficult to secure essential funding.

But unless you've been to business school, you may have never learned how to write a business plan. With that in mind, here are the basic steps for writing a business plan, along with key resources, detailed instructions and tips for getting your startup off the ground.

Why Do I Need a Business Plan?

If you need to secure a loan or attract key investors to get your business started , a detailed business plan is crucial. A written plan provides an overview of your business concept, structure and potential opportunities or risks for investors. The more well-laid-out your business plan is, the better your odds of attracting a lender or investor. Even if you don't intend to borrow money or pitch investors, crafting a business plan can help you fully understand the challenges ahead.

"You're writing (a business plan) for lenders and investors to show that they can trust you with their funds," says Rob Stephens, founder of CFO Perspective, a business consultancy in Spokane Valley, Washington.

But even if you don't plan on finding lenders, you should still write a business plan, Stephens says. "The first investor you need to convince is yourself," Stephens says. "I had many doubts about leaving a good job to start my company. I looked at my business plan financial projection 20 times in the six months before starting my company to assure myself to take the big leap."

What Does a Traditional Business Plan Include?

While business plans can differ in format and structure, experts agree there are some key elements to include.

Here's what to include and how to write a business plan, step by step:

• Executive summary.
• Company description.
• Objective statement or business goals.
• A market analysis.
• Management and operational strategy.
• A financial analysis.
• Financial projections.

1. Executive Summary

This section sums up everything about your business. Mostly, it should explain how the business will make money. You can also include information such as a mission statement, an overview of your industry – and how your business fits into it – and a description of your service or product.

2. Company Description

While the executive summary gives the big picture on why your company is needed, this is where you can describe your business and drill down further into specifics on your company's core products or services. If you've registered it as an LLC or S Corp, you'll want to include that information as well as the registered name of the business, along with where you'll be located and your overarching mission for the company.

3. Objective Statement or Business Goals

In this section, you should address your business strategy . You may want to include an industry analysis, explaining who your competition will be and how you will market your product or service. You'll also want to explain how your company will spend any investment it receives, explaining how the revenue will help the business develop, grow and reach its goals.

4. A Market Analysis

This is where you define your target demographic and how your business will attract it. If you have hired a market research firm to conduct a market analysis for your business, you can include that information. You'll also want to show lenders and investors that you really understand who your business is servicing.

5. Management and Operational Strategy

Think of this as an outline of the nuts and bolts of how your business will run. The more information you put down, the more you'll demonstrate to key stakeholders that you've really thought how your business will operate. You'll want to consider key questions like: Will you have inventory? If so, you'll also want to take into account how much you will likely carry, whether or not you will manufacture a product and what the structure of manufacturing a product will look like.

6. A Financial Analysis

You'll want to highlight pricing and profit margins and explain how your company will make money. In this section, consider including any details that will be helpful to point out the financial strength of your company, like a balance sheet with your company's assets and liabilities.

7. Financial Projections

Estimate how much your company is likely to earn in its first year or two and provide that information to potential lenders and investors. If you have an estimate for the rate of return for investors, you'll definitely want to highlight this here. This is also an ideal section to indicate any risk factors you haven't spelled out.

8. Appendix

You can consider this section as optional, but if you have something like a resume that you'd like to include or paperwork, like permits you've already applied for, you could include that here.

How Can I Enhance My Business Plan?

Bruce Hogan, the New York City-based founder of SoftwarePundit, a technology research firm, says that you really want to study the different components of your business plan and why they are important. "You need to understand your product, target customers, sales and marketing strategy, financials, competitive landscape and the team you'll need to build. If you don't understand one of these areas, invest additional time mastering it," Hogan advises.

But at the same time, Hogan advises, don't get too caught up in trying to create the perfect business plan, he says. "At a certain point, your time is better spent building your business rather than perfecting your plan," he says.

How Should I Use My Business Plan and When Should I Submit It to Investors?

"I recommend sharing your business plan with trusted friends and advisors early on in the process," says Bobby Reed, CEO of Capitol Tech Solutions, an internet marketing service in Sacramento, California. "By getting feedback, you can strengthen the plan."

You also should consider reaching out to business experts for assistance in developing your plan, suggests Lin Grensing-Pophal, who is based out of Chippewa Falls, Wisconsin, and is the co-author of the book, "Writing a Convincing Business Plan." She is also the author of many other business books, including, "The Complete Idiot's Guide to Strategic Planning."

"Local universities and technical colleges often offer this type of assistance through instructors or student groups," she says. "In addition, most communities have organizations like SCORE that can provide small businesses with access to retired business experts with expertise in finance and other areas."

The U.S. Small Business Administration is also a great resource. The website SBA.gov offers information about writing a business plan. What's more, there are 68 district office around the U.S., and the SBA works with over 300 SCORE chapters, 980 Small Business Development Centers, over 100 Women's Business Centers and 20 Veterans Business Outreach Centers across the country, according to Andrea Roebker, regional communications director of the Great Lakes region for the U.S. Small Business Administration.

What Should I Do if I Don't Know How Much Money My Business Will Make?

"Your actual financial results won't match your business plan. Investors understand that," Stephens says. Investors are mostly concerned that "you have the right people leading a company with a good business model to earn significant income," Stephens says. "Clearly point out these items and back them up with a believable financial projection."

Grensing-Pophal echoes similar sentiments. "Don't think that your plan needs to be right. There's no such thing," she says. "Instead, your plan should be an educated, and fact-based, description of what you believe you can accomplish based on the best information available to you at the time the plan is created."

What Are Common Business Plan Mistakes?

Overhyping the financial projections is probably the biggest mistake. If your numbers are unrealistic, investors will lose confidence in you. But another significant mistake is having grammatical errors and spelling mistakes riddled throughout the business plan , many experts say. It suggests a lack of attention to detail. You also want to be clear and concise and avoid lending confusion to the reader.

What Should I Do With My Business Plan Once I Start My Business?

Ideally, you'll continue to update your business plan regularly. "Don't be afraid to change, modify or entirely toss out your plan," Grensing-Pophal says. "Things change. Markets change. Competitors change. Assumptions change. When these things happen, your plan should change, too."

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Should Business Plans Include a Risk Plan?

Tally Kaplan Porat

• policy administration

In the past I have held senior positions in marketing, business development, and investor relations and it always surprised me how corporations and even investors focus on what they are used to seeing: a regular business plan. The focus is on marketing, sales, revenue generation, market growth, go-to-market strategy, and other buzzwords we all recognize. Never have I been asked about a risk plan.

Come to think of it the only side of the business that has an actual integrated risk plan is the cyber team, as well as the cloud infrastructure that has what they call a disaster recovery plan. Business plans, however, generally focus on marketing, sales and R&D rather than risk.

When businesses conduct their SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis, it’s usually with reference to the market. I believe a broader perspective is called for.

As in your corporate SWOT analysis, have you identified the specific risks related to your business? What are your key business activities? What services or products do you provide? Now consider what can dramatically affect these, including illness, pandemics, power outages, wildfires, floods, natural disasters, strikes, etc. Can you continue to operate under such circumstances?  If so, how? Has your business allocated a budget for risk management and recovery?

Let’s drill down further. Consider a “what if” approach. What if your supplier went out of business? What if your overseas manufacturing facilities shut down? What if the internet goes down? Can we live without the things we take for granted? If so, how?

If the last two years taught us anything, it should be: prepare for the unexpected no less than the expected. Now that you have determined the risks involved in your business, have you formulated a procedure and strategy for each scenario? Is management part of your plan?

Having a risk plan confers so many benefits that it baffles me how many businesses neglect it. If anything, a risk management plan makes a company more resilient. A resilient company is more financially stable, making it more desirable for investors.

Efficiency is another added value of a risk management plan that directly affects businesses’ bottom line. Once you start digging into how your business operates today versus how it can operate with a risk management plan, chances are you’ll discover a lot of savings along the way.

The Role of Insurers and Reinsurers in Business Risk Plans

Once you have mapped your risks, insurance and reinsurance companies can measure and rate them. This process has two main objectives:

• Manage the business’ or organization’s exposure to potentially volatile capital and earnings.
• Maximize the value for the organization’s stakeholders. [1]

It is important to note that having a business risk plan that enables insurers and reinsurers to tailor a solution that fits your organization’s needs does not eliminate risks. It does however increase certainty and provide clarity as to how to conduct business in times of exposure.

Some key elements that are usually covered in business risk insurance and reinsurance policies are credit, market, underwriting, operational and strategic aspects [2] , property damage and personnel. Rating these categories is based on in-depth analysis of the organization’s balance sheets, SWOT analysis, decision-making processes, financial management, and more.

Business Risk Plan Vs. An Evacuation Plan

Every office building has an evacuation plan in the event of catastrophe. We all need to know what to do in case of a fire. Remember school fire drills? Even today, I believe fire drills are among the ISO compliance requirements. Most HR departments have been briefed on the premise’s evacuation plans, and in some countries these also apply to wartime to inform people exactly where the nearest shelter is, how to get there safely or what to do in cases where shelter is not available. Such evacuation plans are intuitive, and I urge you to think of your business risk plan as your “business evacuation plan” in the sense that your business escapes a crisis to continue safely.

Your insurer and reinsurer are your partners in business safety. Having the relevant technology and insurance platform to implement an effective and efficient business risk plan is mandatory. Make sure you have chosen an insurer and reinsurer that have the right tools.

Sapiens PolicyMaster

Risk management is complex and needs to constantly adapt to an ever-changing landscape. One of the many features I appreciate in Sapiens PolicyMaster is their “what if” approach.  They have a complete quote, bind and service functionality, including scenario-building options. Sapiens Policy Master is designed to change and grow with your business, taking risks into consideration and creating sense and order in times of crisis.

Additional features include:

• Support for internal users as well as agents and direct-to-consumer channels
• Quick quote and full-application data-capture flows
• Support for role-based processing
• Configure straight-through processing
• Full policy life-cycle management, including new business issuance, changes, cancellations, reinstatements, renewals and comprehensive support for out-of-sequence transactions
• Complete historical view of information, with full audit capability
• Advanced rule capabilities
• Ability to handle complexity with a unique blend of flexibility, functionality and intelligence that empowers insurance to turn highly complex situations into opportunities for sustainable growth

Read more about Sapiens PolicyMaster.

[1] Risk Management and the Rating Process for Insurance Companies

[2] Risk Management and the Rating Process for Insurance Companies

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Tally Kaplan Porat Corporate Marketing and Marketing Communications at Sapiens. Over 20 years of strategic marketing and communications experience with proven track record in brand transformation, managing teams and global marketing programs from development to execution.

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Managing Risks: A New Framework

• Robert S. Kaplan
• Anette Mikes

Risk management is too often treated as a compliance issue that can be solved by drawing up lots of rules and making sure that all employees follow them. Many such rules, of course, are sensible and do reduce some risks that could severely damage a company. But rules-based risk management will not diminish either the likelihood or the impact of a disaster such as Deepwater Horizon, just as it did not prevent the failure of many financial institutions during the 2007–2008 credit crisis.

In this article, Robert S. Kaplan and Anette Mikes present a categorization of risk that allows executives to understand the qualitative distinctions between the types of risks that organizations face. Preventable risks, arising from within the organization, are controllable and ought to be eliminated or avoided. Examples are the risks from employees’ and managers’ unauthorized, unethical, or inappropriate actions and the risks from breakdowns in routine operational processes. Strategy risks are those a company voluntarily assumes in order to generate superior returns from its strategy. External risks arise from events outside the company and are beyond its influence or control. Sources of these risks include natural and political disasters and major macroeconomic shifts. Risk events from any category can be fatal to a company’s strategy and even to its survival.

Companies should tailor their risk management processes to these different risk categories. A rules-based approach is effective for managing preventable risks, whereas strategy risks require a fundamentally different approach based on open and explicit risk discussions. To anticipate and mitigate the impact of major external risks, companies can call on tools such as war-gaming and scenario analysis.

Smart companies match their approach to the nature of the threats they face.

Editors’ note: Since this issue of HBR went to press, JP Morgan, whose risk management practices are highlighted in this article, revealed significant trading losses at one of its units. The authors provide their commentary on this turn of events in their contribution to HBR’s Insight Center on Managing Risky Behavior.

• Robert S. Kaplan is a senior fellow and the Marvin Bower Professor of Leadership Development emeritus at Harvard Business School. He coauthored the McKinsey Award–winning HBR article “ Accounting for Climate Change ” (November–December 2021).
• Anette Mikes is a fellow at Hertford College, Oxford University, and an associate professor at Oxford’s Saïd Business School.

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Why Are Major Risks in the Business Plan?

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Purpose of Financial Analysis

Strategic analysis of a company, what is 'systems thinking' in business.

• The Purpose of Analytical Business Reports
• Fundamental Principles of Strategic & Business Planning Models

Risk factors are possible events that, should they happen, could cause a company’s revenues or profits to be lower than what the owner had forecast. They are a standard part of a thorough business plan, whether the plan is designed for internal use by the management team or will be presented to outside investors. Risk factors are also called threats, because they threaten the business’s success and in extreme circumstances even its survival.

Encourages Contingency Planning

The risk factors section of the business plan should go beyond simply listing what might go wrong. Being aware of what could negatively impact the company is important, but the real value of including risk factors is the business owner’s thinking process to determine how she would mitigate the risks to minimize the financial damage to her company. The thinking process is referred to as contingency planning, also know as “what if” analysis. The business owner will make changes to her marketing strategies, operations and financial management in response to these risks becoming a reality.

Focus on the Business Environment

A company should have a system in place to gather information about emerging or potential risks. Monitoring competitors on an ongoing basis is one aspect of this system. The decisions a company’s competitors make pose threats, because they are designed to give the competitors a stronger market position by taking potential business away from the company. Risk factors are not just considered at the time the company is preparing its annual business plan -- they are year-round considerations, because new threats emerge throughout the year.

Alert Potential Investors

A venture capital firm or angel investor that is contemplating putting money into a business enterprise must assess the risk that the company’s financial results will be lower than forecast. The value of the company grows as the revenues and profits of the business grow. The risk factors alert the investor to the fact there is always a possibility of losing part or all of the money he puts into the company. If the investor believes the risks could severely hurt the company should they occur, he may decline to make the investment. As a practical matter, sophisticated investors do their own risk analysis prior to putting money in a company, but the fact the management team is aware of, and has strategies for dealing with, the risks can make the investors more confident about the management team’s abilities.

Moving Forward Confidently

Analyzing risk factors allows the management team to be confident it is ready for whatever business environment the company may face in the upcoming year and beyond. The team has strategies in place that can be quickly implemented to minimize the damage caused by threats from competitors or changes in the overall economy. The management team assesses which risks are most likely to become actual threats and which have a very low likelihood of occurring. Owners of companies will always have external threats to worry about, but the risk analysis process helps reduce the number of worries to those that have the potential to negatively impact their revenues or profits.

• Inc.: Managing Risk in a New Venture

Brian Hill is the author of four popular business and finance books: "The Making of a Bestseller," "Inside Secrets to Venture Capital," "Attracting Capital from Angels" and his latest book, published in 2013, "The Pocket Small Business Owner's Guide to Business Plans."

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• 1 How Do Changes in the Business Environment Affect the Cost and Profit Analysis?
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Risk Analysis - A Key Section of Your Business Plan

A professional business plan should include a discussion of business risks and challenges. Although every possible risk will not be identified and addressed, the business plan should discuss the most important ones and indicate how management will mitigate their potential impact on business operations. Identification and discussion of business risks and challenges, and having strategies in place to deal with them strengthens the plan, enhances management’s credibility and increases the confidence potential investors will have in the business plan and its financial projections. Being upfront and discussing potential business risks, rather than glossing over them, builds confidence in the company’s management.

Risk analysis is particularly important for start-ups and small businesses, whose objective in writing a business plan is often to secure capital to start the business, to secure additional working capital for operations or to raise money for expansion. Since they often have more limited operating histories, entrepreneurs and small business managers have not yet demonstrated their ability to cope with business risks. Potential equity investors and lenders expect their business plans to provide assurance that management recognizes these challenges and is prepared to deal with them.

Identification of Risks

The first step in the enterprise risk analysis process is to identify the internal and external threats that may stand the way of achieving planned results. For convenience, these threats can be classified into three broad categories. These are “general business risks” that are faced by all companies, “industry-specific risks” that are faced by companies within the industry and “company-specific risks” faced by the company itself. Within this framework, specific potential risks within each category can be identified and addressed. The major challenges are those that may adversely affect the company’s financial condition, forecast financial results and liquidity.

General Enterprise Business Risks

General enterprise business risks are shared by most businesses but their significance varies by company. In the case of start-ups or early stage companies, management must gain experience in managing operational, marketing and other problems that will arise. Potential threats include unexpected problems that may develop in quality control, distribution, marketing and promotion and other areas. Start-ups and early stage companies must also build relationships with customers and attract customers from competitors. Small but established companies have already gained experience dealing with these problems, reducing this business risk. The risk analysis section should mention these dangers and uncertainties , and the business plan sections relating to each risk category should have strategies to deal with them.

Although all companies face uncertainties associated with the general economic environment, some enterprises are less business cycle sensitive than others. The economic cycle risk of a food company, for example, may be less of a concern than is the case of a construction company. Banks are exposed to interest rate risks but many have in place strategies to mitigate those uncertainties. Some businesses are exposed to challenges posed by higher gasoline prices, while realtors are exposed to risks relating to lower home sales. The important thing is to identify which of these general business challenges could impact the business and have strategies to deal with them. Companies should have strategies to stabilize their business and continue to succeed despite unexpected changes in the economic environment.

The business faces dangers associated with natural disasters. These relate to changes of the weather and their consequences, such as time lost in production and distribution and resultant economic downturns that depress sales.

In the case of companies that offer proprietary products, there are uncertainties associated with ownership of intellectual property. It is important to have trademarked brand name and patent protection to prevent replication of company products or services, which could have an adverse effect on the company and affect the outcome of intellectual property rights disputes.

Industry Specific Risks

The risks and challenges section of the business- or project plan should discuss industry-specific risks. One of those challenges is industry competition. Although it is expected that competition will be mentioned as one of the risks, enterprise strategies for competing effectively should be outlined in the competition and marketing plan sections of the business plan. In the competition section, major competitors and their strengths and weaknesses are discussed, as well as the company’s strategic positioning. In the marketing plan, the company’s action plans for overcoming the competition are outlined.

Some types of businesses are more subject to litigation risks than others. Uncertainties are especially high for companies selling internally consumed products such as food, beverages and pharmaceuticals. Any business that involves customers physically visiting its place of business is vulnerable to “slip and fall” or other types of litigation. Even professionals who have no on-site business can be sued for alleged “errors and omissions” in their advice. The litigation risk is discussed and measures to reduce it, including safety precautions and insurance coverage, can be described to indicate that the risk is known and has been addressed. The company should include the cost of liability insurance in the financial forecasts.

Company Specific Risks

In the case of start-ups, there are uncertainties associated with raising start-up capital and maintaining sufficient funding. In many cases, operations cannot commence until sufficient funds are raised to fund the acquisition of property, plant and equipment and initial working capital requirements.

The risks associated with fixed cost structure of the business are company-specific because they vary from high to low, depending on the nature of the business. In some businesses such as manufacturing, there are high fixed costs because of the large investments in equipment and facilities. Companies with high fixed costs achieve profitability only after the volume of business builds to a point that the fixed costs are covered. Thus, any problems in achieving and maintaining sales levels beyond the breakeven revenue level would have an adverse impact on operating results. The risks and challenges section of the project plan should refer to the marketing section, where strategies to achieve required volumes are discussed. In a service business, this challenge is not as significant, as more costs are variable and can be more easily managed as business volume changes.

All companies have uncertainties associated with recruiting, retaining and managing human resources. In the management and human resources section of the business plan, the company should discuss plans to recruit additional key employees and senior management that are critical to achieving its forecast and operational goals. The risk management section should mention that the company may or may not be successful in obtaining experienced professionals in web site development, operations and other areas but reference sections of the business plan where strategies are outlined to address this issue.

In the case of start-up companies, success of the enterprise will be dependent on the continuing services of only one or two key managers who provide executive leadership. If for any reason these managers were not to fulfill their current leadership roles, the ability of the Company to achieve its forecast results would be adversely affected.

It is important that the business and financial risks be identified and discussed in the enterprise business plan. The informed reader, especially one who may be asked to provide capital for the business, wants to be comfortable that the management has considered potential risks and developed strategies to deal with them. In the process of developing the business plan, identification of potential risks will not only result in a better plan but also better prepare management to successfully manage the enterprise. Readers will have a less favorable view of a written project plan that does not include a risk analysis section than one that demonstrates that management is aware of uncertainties and is prepared to take actions to address any threat.

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What is business risk?

You know about death and taxes. What about risk? Yes, risk is just as much a part of life as the other two inevitabilities. This became all the more apparent during COVID-19, as each of us had to assess and reassess our personal risk calculations as each new wave of the pandemic— and pandemic-related disruptions —washed over us. It’s the same in business: executives and organizations have different comfort levels with risk and ways to prepare against it.

Where does business risk come from? To start with, external factors can wreak havoc on an organization’s best-laid plans. These can include things like inflation , supply chain  disruptions, geopolitical upheavals , unpredictable force majeure events like a global pandemic or climate disaster, competitors, reputational  issues, or even cyberattacks .

But sometimes, the call is coming from inside the house. Companies can be imperiled by their own executives’ decisions or by leaks of privileged information, but most damaging of all, perhaps, is the risk of missed opportunities. We’ve seen it often: when companies choose not to adopt disruptive innovation, they risk losing out to more nimble competitors.

The modern era is rife with increasingly frequent sociopolitical, economic, and climate-related shocks. In 2019 alone, for example, 40 weather disasters caused damages exceeding $1 billion each . To stay competitive, organizations should develop dynamic approaches to risk and resilience. That means predicting new threats, perceiving changes in existing threats, and developing comprehensive response plans. There’s no magic formula that can guarantee safe passage through a crisis. But in situations of threat, sometimes only a robust risk-management plan can protect an organization from interruptions to critical business processes. For more on how to assess and prepare for the inevitability of risk, read on.

Learn more about McKinsey’s Risk and Resilience  Practice.

What is risk control?

Risk controls are measures taken to identify, manage, and eliminate threats. Companies can create these controls through a range of risk management strategies and exercises. Once a risk is identified and analyzed, risk controls can be designed to reduce the potential consequences. Eliminating a risk—always the preferable solution—is one method of risk control. Loss prevention and reduction are other risk controls that accept the risk but seek to minimize the potential loss (insurance is one method of loss prevention). A final method of risk control is duplication (also called redundancy). Backup servers or generators are a common example of duplication, ensuring that if a power outage occurs no data or productivity is lost.

But in order to develop appropriate risk controls, an organization should first understand the potential threats.

What are the three components to a robust risk management strategy?

A dynamic risk management plan can be broken down into three components : detecting potential new risks and weaknesses in existing risk controls, determining the organization’s appetite for risk taking, and deciding on the appropriate risk management approach. Here’s more information about each step and how to undertake them.

1. Detecting risks and controlling weaknesses

A static approach to risk is not an option, since an organization can be caught unprepared when an unlikely event, like a pandemic, strikes. So it pays to always be proactive. To keep pace with changing environments, companies should answer the following three questions for each of the risks that are relevant to their business.

• How will a risk play out over time? Risks can be slow moving or fast moving. They can be cyclical or permanent. Companies should analyze how known risks are likely to play out and reevaluate them on a regular basis.
• Are we prepared to respond to systemic risks? Increasingly, risks have longer-term reputational or regulatory consequences, with broad implications for an industry, the economy, or society at large. A risk management strategy should incorporate all risks, including systemic ones.
• What new risks lurk in the future? Organizations should develop new methods of identifying future risks. Traditional approaches that rely on reviews and assessments of historical realities are no longer sufficient.

2. Assessing risk appetite

How can companies develop a systematic way of deciding which risks to accept and which to avoid? Companies should set appetites for risk that align with their own values, strategies, capabilities, and competitive environments—as well as those of society as a whole. To that end, here are three questions companies should consider.

• How much risk should we take on? Companies should reevaluate their risk profiles frequently according to shifting customer behaviors, digital capabilities, competitive landscapes, and global trends.
• Are there any risks we should avoid entirely? Some risks are clear: companies should not tolerate criminal activity or sexual harassment. Others are murkier. How companies respond to risks like economic turmoil and climate change depend on their particular business, industry, and levels of risk tolerance.
• Does our risk appetite adequately reflect the effectiveness of our controls? Companies are typically more comfortable taking risks for which they have strong controls in place. But the increased threat of severe risks challenges traditional assumptions about risk control effectiveness. For instance, many businesses have relied on automation to increase speed and reduce manual error. But increased data breaches and privacy concerns can increase the risk of large-scale failures. Organizations, therefore, should evolve their risk profiles accordingly.

3. Deciding on a risk management approach

Finally, organizations should decide how they will respond when a new risk is identified. This decision-making  process should be flexible and fast, actively engaging leaders from across the organization and honestly assessing what has and hasn’t worked in past scenarios. Here are three questions organizations should be able to answer.

• How should we mitigate the risks we are taking? Ultimately, people need to make these decisions and assess how their controls are working. But automated control systems should buttress human efforts. Controls guided, for example, by advanced analytics can help guard against quantifiable risks and minimize false positives.
• How would we respond if a risk event or control breakdown happens? If (or more likely, when) a threat occurs, companies should be able to switch to crisis management mode quickly, guided by an established playbook. Companies with well-rehearsed crisis management capabilities weather shocks better, as we saw with the COVID-19 pandemic.
• How can we build true resilience? Resilient companies not only better withstand threats—they emerge stronger. The most resilient firms can turn fallout from crises into a competitive advantage. True resilience stems from a diversity of skills and experience, innovation, creative problem solving, and the basic psychological safety that enables peak performance.

Change is constant. Just because a risk control plan made sense last year doesn’t mean it will next year. In addition to the above points, a good risk management strategy involves not only developing plans based on potential risk scenarios but also evaluating those plans on a regular basis.

Learn more about McKinsey’s  Risk and Resilience  Practice.

What are five actions organizations can take to build dynamic risk management?

In the past, some organizations have viewed risk management as a dull, dreary topic, uninteresting for the executive looking to create competitive advantage. But when the risk is particularly severe or sudden, a good risk strategy is about more than competitiveness—it can mean survival. Here are five actions leaders can take to establish risk management capabilities .

• Reset the aspiration for risk management.  This requires clear objectives and clarity on risk levels and appetite. Risk managers should establish dialogues with business leaders to understand how people across the business think about risk, and share possible strategies to nurture informed risk-versus-return decision making—as well as the capabilities available for implementation.
• Establish agile  risk management practices.  As the risk environment becomes more unpredictable, the need for agile risk management grows. In practice, that means putting in place cross-functional teams empowered to make quick decisions about innovating and managing risk.
• Harness the power of data and analytics.  The tools of the digital revolution  can help companies improve risk management. Data streams from traditional and nontraditional sources can broaden and deepen companies’ understandings of risk, and algorithms can boost error detection and drive more accurate predictions.
• Develop risk talent for the future.  Risk managers who are equipped to meet the challenges of the future will need new capabilities and expanded domain knowledge in model risk management , data, analytics, and technology. This will help support a true understanding of the changing risk landscape , which risk leaders can use to effectively counsel their organizations.
• Fortify risk culture.  Risk culture includes the mindsets and behavioral norms that determine an organization’s relationship with risk. A good risk culture allows an organization to respond quickly when threats emerge.

How do scenarios help business leaders understand uncertainty?

Done properly, scenario planning prompts business leaders to convert abstract hypotheses about uncertainties into narratives about realistic visions of the future. Good scenario planning can help decision makers experience new realities  in ways that are intellectual and sensory, as well as rational and emotional. Scenarios have four main features  that can help organizations navigate uncertain times.

• Scenarios expand your thinking.  By developing a range of possible outcomes, each backed with a sequence of events that could lead to them, it’s possible to broaden our thinking. This helps us become ready for the range of possibilities the future might hold—and accept the possibility that change might come more quickly than we expect.
• Scenarios uncover inevitable or likely futures.  A broad scenario-building effort can also point to powerful drivers of change, which can help to predict potential outcomes. In other words, by illuminating critical events from the past, scenario building can point to outcomes that are very likely to happen in the future.
• Scenarios protect against groupthink.  In some large corporations, employees can feel unsafe offering contrarian points of view for fear that they’ll be penalized by management. Scenarios can help companies break out of this trap by providing a “safe haven” for opinions that differ from those of senior leadership and that may run counter to established strategy.
• Scenarios allow people to challenge conventional wisdom.  In large corporations in particular, there’s frequently a strong bias toward the status quo. Scenarios are a nonthreatening way to lay out alternative futures in which assumptions underpinning today’s strategy can be challenged.

Learn more about McKinsey’s Strategy & Corporate Finance  Practice.

What’s the latest thinking on risk for financial institutions?

In late 2021, McKinsey conducted survey-based research with more than 30 chief risk officers (CROs), asking about the current banking environment, risk management practices, and priorities for the future.

According to CROs, banks in the current environment are especially exposed to accelerating market dynamics, climate change, and cybercrime . Sixty-seven percent of CROs surveyed cited the pandemic as having significant impact on employees and in the area of nonfinancial risk. Most believed that these effects would diminish in three years’ time.

Introducing McKinsey Explainers : Direct answers to complex questions

Climate change, on the other hand, is expected to become a larger issue over time. Nearly all respondents cited climate regulation as one of the five most important forces in the financial industry in the coming three years. And 75 percent were concerned about climate-related transition risk: financial and other risks arising from the transformation away from carbon-based energy systems.

And finally, cybercrime was assessed as one of the top risks by most executives, both now and in the future.

Learn more about the risk priorities of banking CROs here .

What is cyber risk?

Cyber risk is a form of business risk. More specifically, it’s the potential for business losses of all kinds  in the digital domain—financial, reputational, operational, productivity related, and regulatory related. While cyber risk originates from threats in the digital realm, it can also cause losses in the physical world, such as damage to operational equipment.

Cyber risk is not the same as a cyberthreat. Cyberthreats are the particular dangers that create the potential for cyber risk. These include privilege escalation (the exploitation of a flaw in a system for the purpose of gaining unauthorized access to resources), vulnerability exploitation (an attack that uses detected vulnerabilities to exploit the host system), or phishing. The risk impact of cyberthreats includes loss of confidentiality, integrity, and availability of digital assets, as well as fraud, financial crime, data loss, or loss of system availability.

In the past, organizations have relied on maturity-based cybersecurity approaches to manage cyber risk. These approaches focus on achieving a particular level of cybersecurity maturity by building capabilities, like establishing a security operations center or implementing multifactor authentication across the organization. A maturity-based approach can still be helpful in some situations, such as for brand-new organizations. But for most institutions, a maturity-based approach can turn into an unmanageably large project, demanding that all aspects of an organization be monitored and analyzed. The reality is that, since some applications are more vulnerable than others, organizations would do better to measure and manage only their most critical vulnerabilities.

What is a risk-based cybersecurity approach?

A risk-based approach is a distinct evolution from a maturity-based approach. For one thing, a risk-based approach identifies risk reduction as the primary goal. This means an organization prioritizes investment based on a cybersecurity program’s effectiveness in reducing risk. Also, a risk-based approach breaks down risk-reduction targets into precise implementation programs with clear alignment all the way up and down an organization. Rather than building controls everywhere, a company can focus on building controls for the worst vulnerabilities.

Here are eight actions that comprise a best practice for developing  a risk-based cybersecurity approach:

• fully embed cybersecurity in the enterprise-risk-management framework
• define the sources of enterprise value across teams, processes, and technologies
• understand the organization’s enterprise-wide vulnerabilities—among people, processes, and technology—internally and for third parties
• understand the relevant “threat actors,” their capabilities, and their intent
• link the controls in “run” activities and “change” programs to the vulnerabilities that they address and determine what new efforts are needed
• map the enterprise risks from the enterprise-risk-management framework, accounting for the threat actors and their capabilities, the enterprise vulnerabilities they seek to exploit, and the security controls of the organization’s cybersecurity run activities and change program
• plot risks against the enterprise-risk appetite; report on how cyber efforts have reduced enterprise risk
• monitor risks and cyber efforts against risk appetite, key cyber risk indicators, and key performance indicators

How can leaders make the right investments in risk management?

Ignoring high-consequence, low-likelihood risks can be catastrophic to an organization—but preparing for everything is too costly. In the case of the COVID-19 crisis, the danger of a global pandemic on this scale was foreseeable, if unexpected. Nevertheless, the vast majority of companies were unprepared: among billion-dollar companies in the United States, more than 50 filed for bankruptcy in 2020.

McKinsey has described the decisions to act on these high-consequence, low-likelihood risks as “ big bets .” The number of these risks is far too large for decision makers to make big bets on all of them. To narrow the list down, the first thing a company can do is to determine which risks could hurt the business versus the risks that could destroy the company. Decision makers should prioritize the potential threats that would cause an existential crisis  for their organization.

To identify these risks, McKinsey recommends using a two-by-two risk grid, situating the potential impact of an event on the whole company against the level of certainty about the impact. This way, risks can be measured against each other, rather than on an absolute scale.

Organizations sometimes survive existential crises. But it can’t be ignored that crises—and missed opportunities—can cause organizations to fail. By measuring the impact of high-impact, low-likelihood risks on core business, leaders can identify and mitigate risks that could imperil the company. What’s more, investing in protecting their value propositions can improve an organization’s overall resilience.

Articles referenced:

• “ Seizing the momentum to build resilience for a future of sustainable inclusive growth ,” February 23, 2023, Børge Brende and Bob Sternfels
• “ Data and analytics innovations to address emerging challenges in credit portfolio management ,” December 23, 2022, Abhishek Anand , Arvind Govindarajan , Luis Nario  and Kirtiman Pathak
• “ Risk and resilience priorities, as told by chief risk officers ,” December 8, 2022, Marc Chiapolino , Filippo Mazzetto, Thomas Poppensieker , Cécile Prinsen, and Dan Williams
• “ What matters most? Six priorities for CEOs in turbulent times ,” November 17, 2022, Homayoun Hatami  and Liz Hilton Segel
• “ Model risk management 2.0 evolves to address continued uncertainty of risk-related events ,” March 9, 2022, Pankaj Kumar, Marie-Paule Laurent, Christophe Rougeaux, and Maribel Tejada
• “ The disaster you could have stopped: Preparing for extraordinary risks ,” December 15, 2020, Fritz Nauck , Ophelia Usher, and Leigh Weiss
• “ Meeting the future: Dynamic risk management for uncertain times ,” November 17, 2020, Ritesh Jain, Fritz Nauck , Thomas Poppensieker , and Olivia White
• “ Risk, resilience, and rebalancing in global value chains ,” August 6, 2020, Susan Lund, James Manyika , Jonathan Woetzel , Edward Barriball , Mekala Krishnan , Knut Alicke , Michael Birshan , Katy George , Sven Smit , Daniel Swan , and Kyle Hutzler
• “ The risk-based approach to cybersecurity ,” October 8, 2019, Jim Boehm , Nick Curcio, Peter Merrath, Lucy Shenton, and Tobias Stähle
• “ Value and resilience through better risk management ,” October 1, 2018, Daniela Gius, Jean-Christophe Mieszala , Ernestos Panayiotou, and Thomas Poppensieker

Want to know more about business risk?

Related articles.

What matters most? Six priorities for CEOs in turbulent times

Creating a technology risk and cyber risk appetite framework

Risk and resilience priorities, as told by chief risk officers

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What Is Risk Management & Why Is It Important?

• 24 Oct 2023

Businesses can’t operate without risk. Economic, technological, environmental, and competitive factors introduce obstacles that companies must not only manage but overcome.

According to PwC’s Global Risk Survey , organizations that embrace strategic risk management are five times more likely to deliver stakeholder confidence and better business outcomes and two times more likely to expect faster revenue growth.

If you want to enhance your job performance and identify and mitigate risk more effectively, here’s a breakdown of what risk management is and why it’s important.

Access your free e-book today.

What Is Risk Management?

Risk management is the systematic process of identifying, assessing, and mitigating threats or uncertainties that can affect your organization. It involves analyzing risks’ likelihood and impact, developing strategies to minimize harm, and monitoring measures’ effectiveness.

“Competing successfully in any industry involves some level of risk,” says Harvard Business School Professor Robert Simons, who teaches the online course Strategy Execution . “But high-performing businesses with high-pressure cultures are especially vulnerable. As a manager, you need to know how and why these risks arise and how to avoid them.”

According to Strategy Execution , strategic risk has three main causes:

• Pressures due to growth: This is often caused by an accelerated rate of expansion that makes staffing or industry knowledge gaps more harmful to your business.
• Pressures due to culture: While entrepreneurial risk-taking can come with rewards, executive resistance and internal competition can cause problems.
• Pressures due to information management: Since information is key to effective leadership , gaps in performance measures can result in decentralized decision-making.

These pressures can lead to several types of risk that you must manage or mitigate to avoid reputational, financial, or strategic failures. However, risks aren’t always obvious.

“I think one of the challenges firms face is the ability to properly identify their risks,” says HBS Professor Eugene Soltes in Strategy Execution .

Therefore, it’s crucial to pinpoint unexpected events or conditions that could significantly impede your organization’s business strategy .

Related: Business Strategy vs. Strategy Execution: Which Course Is Right for Me?

According to Strategy Execution , strategic risk comprises:

• Operations risk: This occurs when internal operational errors interrupt your products or services’ flow. For example, shipping tainted products can negatively affect food distribution companies.
• Asset impairment risk: When your company’s assets lose a significant portion of their current value because of a decreased likelihood of receiving future cash flows . For instance, losing property assets, like a manufacturing plant, due to a natural disaster.
• Competitive risk: Changes in the competitive environment can interrupt your organization’s ability to create value and differentiate its offerings—eventually leading to a significant loss in revenue.
• Franchise risk: When your organization’s value erodes because stakeholders lose confidence in its objectives. This primarily results from failing to control any of the strategic risk sources listed above.

Understanding these risks is essential to ensuring your organization’s long-term success. Here’s a deeper dive into why risk management is important.

4 Reasons Why Risk Management Is Important

1. protects organization’s reputation.

In many cases, effective risk management proactively protects your organization from incidents that can affect its reputation.

“Franchise risk is a concern for all businesses,“ Simons says in Strategy Execution . “However, it's especially pressing for businesses whose reputations depend on the trust of key constituents.”

For example, airlines are particularly susceptible to franchise risk because of unforeseen events, such as flight delays and cancellations caused by weather or mechanical failure. While such incidents are considered operational risks, they can be incredibly damaging.

In 2016, Delta Airlines experienced a national computer outage, resulting in over 2,000 flight cancellations. Delta not only lost an estimated $150 million but took a hit to its reputation as a reliable airline that prided itself on “canceling cancellations.”

While Delta bounced back, the incident illustrates how mitigating operational errors can make or break your organization.

2. Minimizes Losses

Most businesses create risk management teams to avoid major financial losses. Yet, various risks can still impact their bottom lines.

A Vault Platform study found that dealing with workplace misconduct cost U.S. businesses over $20 billion in 2021. In addition, Soltes says in Strategy Execution that corporate fines for misconduct have risen 40-fold in the U.S. over the last 20 years.

One way to mitigate financial losses related to employee misconduct is by implementing internal controls. According to Strategy Execution , internal controls are the policies and procedures designed to ensure reliable accounting information and safeguard company assets.

“Managers use internal controls to limit the opportunities employees have to expose the business to risk,” Simons says in the course.

One company that could have benefited from implementing internal controls is Volkswagen (VW). In 2015, VW whistle-blowers revealed that the company’s engineers deliberately manipulated diesel vehicles’ emissions data to make them appear more environmentally friendly.

This led to severe consequences, including regulatory penalties, expensive vehicle recalls, and legal settlements—all of which resulted in significant financial losses. By 2018, U.S. authorities had extracted $25 billion in fines, penalties, civil damages, and restitution from the company.

Had VW maintained more rigorous internal controls to ensure transparency, compliance, and proper oversight of its engineering practices, perhaps it could have detected—or even averted—the situation.

Related: What Are Business Ethics & Why Are They Important?

3. Encourages Innovation and Growth

Risk management isn’t just about avoiding negative outcomes. It can also be the catalyst that drives your organization’s innovation and growth.

“Risks may not be pleasant to think about, but they’re inevitable if you want to push your business to innovate and remain competitive,” Simons says in Strategy Execution .

According to PwC , 83 percent of companies’ business strategies focus on growth, despite risks and mixed economic signals. In Strategy Execution , Simons notes that competitive risk is a challenge you must constantly monitor and address.

“Any firm operating in a competitive market must focus its attention on changes in the external environment that could impair its ability to create value for its customers,” Simons says.

This requires incorporating boundary systems —explicit statements that define and communicate risks to avoid—to ensure internal controls don’t extinguish innovation.

“Boundary systems are essential levers in businesses to give people freedom,” Simons says. “In such circumstances, you don’t want to stifle innovation or entrepreneurial behavior by telling people how to do their jobs. And if you want to remain competitive, you’ll need to innovate and adapt.”

Netflix is an example of how risk management can inspire innovation. In the early 2000s, the company was primarily known for its DVD-by-mail rental service. With growing competition from video rental stores, Netflix went against the grain and introduced its streaming service. This changed the market, resulting in a booming industry nearly a decade later.

Netflix’s innovation didn’t stop there. Once the steaming services market became highly competitive, the company shifted once again to gain a competitive edge. It ventured into producing original content, which ultimately helped differentiate its platform and attract additional subscribers.

By offering more freedom within internal controls, you can encourage innovation and constant growth.

4. Enhances Decision-Making

Risk management also provides a structured framework for decision-making. This can be beneficial if your business is inclined toward risks that are difficult to manage.

By pulling data from existing control systems to develop hypothetical scenarios, you can discuss and debate strategies’ efficacy before executing them.

“Interactive control systems are the formal information systems managers use to personally involve themselves in the decision activities of subordinates,” Simons says in Strategy Execution . “Decision activities that relate to and impact strategic uncertainties.”

JPMorgan Chase, one of the most prominent financial institutions in the world, is particularly susceptible to cyber risks because it compiles vast amounts of sensitive customer data . According to PwC , cybersecurity is the number one business risk on managers’ minds, with 78 percent worried about more frequent or broader cyber attacks.

Using data science techniques like machine learning algorithms enables JPMorgan Chase’s leadership not only to detect and prevent cyber attacks but address and mitigate risk.

Start Managing Your Organization's Risk

Risk management is essential to business. While some risk is inevitable, your ability to identify and mitigate it can benefit your organization.

But you can’t plan for everything. According to the Harvard Business Review , some risks are so remote that no one could have imagined them. Some result from a perfect storm of incidents, while others materialize rapidly and on enormous scales.

By taking an online strategy course , you can build the knowledge and skills to identify strategic risks and ensure they don’t undermine your business. For example, through an interactive learning experience, Strategy Execution enables you to draw insights from real-world business examples and better understand how to approach risk management.

Do you want to mitigate your organization’s risks? Explore Strategy Execution —one of our online strategy courses —and download our free strategy e-book to gain the insights to build a successful strategy.

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What Is Business Risk?

Understanding business risk, reducing business risk, the bottom line, what is business risk definition, factors, and examples.

Business risk is the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail. Anything that threatens a company's ability to achieve its financial goals is considered a business risk . There are many factors that can converge to create business risk. Sometimes it is a company's top leadership or management that creates situations where a business may be exposed to a greater degree of risk.

However, sometimes the cause of risk is external to a company. Because of this, it is impossible for a company to completely shelter itself from risk. However, there are ways to mitigate the overall risks associated with operating a business ; most companies accomplish this by adopting a risk management strategy.

Key Takeaways

• Business risk is any exposure a company or organization has to factor(s) that may lower its profits or cause it to go bankrupt.
• The sources of business risk are varied but include changes in consumer taste and demand, the state of the overall economy, and government rules and regulations.
• Risk can be created by external factors that the business doesn't control, as well as by decisions made within the company's management or executive team.
• While companies may not be able to completely avoid business risk, they can take steps to mitigate its impact, including the development of a strategic risk plan.

Investopedia / Xiaojie Liu

When a company experiences a high degree of business risk, it may impair its ability to provide investors and stakeholders with adequate returns. For example, the CEO of a company may make certain decisions that affect its profits, or the CEO may not accurately anticipate certain events in the future, causing the business to incur losses or fail.

Business risk is influenced by a number of different factors including:

• Consumer preferences, demand, and sales volumes
• Per-unit price and input costs
• Competition
• The overall economic climate
• Government regulations

A company with a higher amount of business risk may decide to adopt a capital structure with a lower debt ratio to ensure that it can meet its financial obligations at all times. With a low debt ratio, when revenues drop the company may not be able to service its debt (and this may lead to bankruptcy). On the other hand, when revenues increase, a company with a low debt ratio experiences larger profits and is able to keep up with its obligations.

To calculate risk, analysts use four ratios: contribution margin, operation leverage effect, financial leverage effect, and total leverage effect. For more complex calculations, analysts can incorporate statistical methods.

Business risk usually occurs in one of four ways: strategic risk, compliance risk, operational risk, and reputational risk .

Types of Business Risk

Strategic risk.

Strategic risk arises when a business does not operate according to its business model or plan. When a company does not operate according to its business model, its strategy becomes less effective over time, and the company may struggle to reach its defined goals.

For example, imagine ABC Store is a big box store that strategically positions itself as a low-cost provider for working-class shoppers. Its main competitor is XYZ Store, which is seen as a destination for more middle-class consumers. However, if XYZ decides to undercut ABC's prices, this becomes a strategic risk for ABC.

Compliance Risk

The second form of business risk is compliance risk, sometimes known as regulatory risk. Compliance risk primarily arises in industries and sectors that are highly regulated. For example, in the wine industry, there is a three-tier system of distribution that requires wholesalers in the U.S. to sell wine to a retailer, who then sells it to consumers. This system prohibits wineries from selling their products directly to retail stores in some states.

However, there are many U.S. states that do not have this type of distribution system; compliance risk arises when a brand fails to understand the individual requirements of the state in which it is operating. In this situation, a brand risks becoming non-compliant with state-specific distribution laws and may face fines or other legal action.

Operational Risk

The third type of business risk is operational risk . This risk arises from within the corporation, especially when the day-to-day operations of a company fail to perform. For example, in 2012, the multinational bank HSBC faced a high degree of operational risk and as a result, incurred a large fine from the U.S. Department of Justice when its internal anti-money laundering operations team was unable to adequately stop money laundering in Mexico.

Reputational Risk

Any time a company's reputation is ruined, either by an event that was the result of a previous business risk or by a different occurrence, it runs the risk of losing customers and its brand loyalty suffering. The reputation of HSBC faltered in the aftermath of the fine it was levied for poor anti-money laundering practices.

Business risk cannot be entirely avoided because it is unpredictable. However, there are many strategies that businesses employ to cut back the impact of all types of business risk, including strategic, compliance, operational, and reputational risk.

The first step that brands typically take is to identify all sources of risk in their business plan . These aren't just external risks—they may also come from within the business itself. Taking action to cut back the risks as soon as they present themselves is key. Management should come up with a plan in order to deal with any identifiable risks before they become too great.

Finally, most companies adopt a risk management strategy . This can be done either before the business begins operations or after it experiences a setback. Ideally, a risk management strategy will help the company be better prepared to deal with risks as they present themselves. The plan should have tested ideas and procedures in place in the event that risk presents itself.

Once the management of a company has come up with a plan to deal with the risk, it's important that they take the extra step of documenting everything in case the same situation arises again. After all, business risk isn't static—it tends to repeat itself during the business cycle. By recording what led to risk the first time, as well as the processes used to mitigate it, the business can implement those strategies a second time with greater ease. This reduces the timeframe in which unaddressed risk can impact the business, as well as lowering the cost of risk management.

What Are the 4 Main Types of Business Risk?

The four main types of risk that businesses encounter are strategic, compliance (regulatory), operational, and reputational risk. These risks can be caused by factors that are both external and internal to the company.

Why Is Risk Management Important In Business?

Businesses face a great deal of uncertainty in their operations, much of it outside their control. This uncertainty creates risk that can jeopardize not both a company's short-term profits and long-term existence. Because risk is unavoidable, risk management is an important part of running a business. When a business has a thorough and carefully created risk management plan in place, and when they are able to iterate on that plan to deal with new an unexpected risks, the business is more likely to survive the impact of both internal and external risk.

What Are Internal Risks That Can Impact a Business?

Internal risks that can impact a business often come from decisions made by the management or executive team in pursuit of growth. These decisions can create physical or tangible risks. For example, on-site risks such as fires, equipment malfunctions, or hazardous materials can jeopardize production, endanger employees, and lead to legal or financial penalties. Policies that guarantee a safe working environment would, in this instance, be an effective strategy for managing internal risks.

In business, risks are factors that an organization encounters that may lower its profits or cause it to go fail. Sources of risk can be external, such as changes in what consumers want, changes in competitor behavior, external economic factors, and government rules or regulations. They can also be internal such as decisions made by management or the executive team.

No company can completely avoid risks, especially because many risk factors are external. However, businesses can put risk management strategies into place. These strategies can be used both to reduce risk and to mitigate the impact of risks when they arise. By documenting the sources of risk and creating a strategic plan that can be repeated, businesses can reduce the overall impact of risk and deal with it more efficiently and effectively in the future.

United State Department of Justice. " HSBC Holdings Plc. and HSBC Bank USA N.A. Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement ."

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How to Perform Business Risk Mitigation: Strategies, Types, and Best Practices

By Kate Eby | March 23, 2023

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Successful companies are always identifying, lessening, and eliminating business risks. We’ve gathered tips from industry experts on how they do this. We also provide risk assessment templates and step-by-step guidance on business risk mitigation.

Included on this page, you’ll find the main ways companies should respond to risks , best practices for business risk mitigation , a step-by-step process for performing good risk mitigation, and templates that can help guide you in assessing and dealing with business risks.

What Is Risk Mitigation?

Risks can pose a threat to a project or a business. Risk mitigation is the process of eliminating or lessening the impact of those risks. Teams can use risk mitigation in several ways to help protect a business.

Project leaders might use project risk management and mitigation to ensure the success of a specific project. Business leaders might use business risk mitigation — sometimes as part of overall enterprise risk management or enterprise risk assessment — to protect the long-term health of a company.

Why Is Risk Mitigation Important?

Risk mitigation is important because risks sometimes turn into realities. If your project team or business leaders haven’t figured out ways to deal with and lessen those risks, they can have a hugely negative impact on a project or business.

“Business risk mitigation is important because it helps organizations to identify and address potential risks that could impact their operations, reputation, or bottom line,” says Andrew Lokenauth, a former finance executive with Goldman Sachs and JP Morgan, an adjunct professor at the University of San Francisco School of Management, and the founder of Fluent in Finance . “By proactively managing risks, organizations can minimize disruptions and protect their assets, stakeholders, and long-term viability.”

Here are some of the top reasons that business risk mitigation is important:

• Maintain the Existence and Profitability of a Business: Some risks can torpedo the very existence of a business — especially if they happen when the business hasn’t prepared for them. Business leaders must identify and assess risks and figure out ways to lessen or eliminate high-priority risks.
• Maintain a Business Reputation for Stability: Some risks, when they happen, can  damage a company’s customer relationships. Business leaders want customers to be able to trust the stability of a business. Preparing for risks helps ensure that stability. 
• Keep Internal and External Stakeholders Happy: Both employees and external stakeholders want a business to succeed and be prepared for negative risks. Making sure your team performs good risk management — including risk mitigation — will give internal and external stakeholders confidence that the business is ready for any negative events.

• Keep Your Staff and Others Safe: The mitigation measures you need for weather events will also protect the safety of your staff and others. Mitigation measures against problems such as fire damage can also protect staff and customers. 
• Avoid Negative Societal and Economic Impacts: In some cases, risks to your organization can have large societal and economic impacts. Examples include risks to the operations of utilities, government agencies, or internet companies. Perform solid risk mitigation to prevent these negative risks or lessen their impact.
• Know That No One Else Will Do It for You: Many people believe that certain risks just won’t happen or that some government agency or other group is monitoring the situation and will assist if there is a problem. That is often not true. “This is typical of most Americans — not even just business heads or business leaders — that you don’t think it’s gonna happen to you,” says Andresen. “You think if it does happen, it's not going to be that bad, and that you're going to get help from somewhere else. And all of those things are patently false.”

What Are the Types of Risk Mitigation?

When people talk about the types of risk mitigation, what they’re often referring to are types of risk responses or risk response strategies. Risk mitigation is one possible risk response, but it is not the only one.

Another important thing to remember is that not all risks are negative. There are positive risks — or opportunities — that can happen for your business as well. Experts have outlined five primary ways to respond to negative risks and five primary ways to respond to positive risks, both of which are important to the long-term health of a company.

These are the five primary risk response strategies for dealing with negative risks:

• Mitigate: Risk mitigation involves taking steps to reduce the likelihood or impact of a risk. 
• Transfer: Leaders can choose to transfer a risk to another entity. Buying insurance is a good example of transferring risk. You still take steps to prevent fires at your property, but when you buy fire insurance, the insurance company assumes much of the financial risk if a fire happens.
• Accept: In some cases, it is simply not possible or economically feasible to avoid or mitigate risk. Leaders might choose to accept certain risks that are too costly to try to affect or that are unlikely to happen.“It may not be possible or practical to avoid or reduce a risk,” Lokenauth says. “In these cases, organizations may choose to accept the risk and manage it as it arises.”
• Escalate: In project risk management — though not often in business risk mitigation — leaders choose to escalate certain risks. This response involves providing information on the risk to top organizational leadership, so they can make a decision. This is usually the response to a significant risk that would require significant costs to mitigate.

These are the five primary risk response strategies for positive risks:

• Share:   If your company chooses to share a positive risk, that means it will work with another company or entity to take advantage of an opportunity. Sharing positive risk can increase the likelihood and impact of opportunities. However, they also require that the company split the resulting benefits. 
• Exploit: When a company chooses to exploit a positive risk, it devotes special attention and resources to making sure an event happens.
• Enhance:  Companies can enhance positive risks by improving the likelihood that it will happen. This is different from exploiting a risk, because the possibility still exists that the opportunity will never arise. 
• Accept: If your company understands that a positive risk might happen, it might prepare to act on it without investing resources to try to increase the chances that it will happen.
• Escalate: As with escalating negative risks, your team can escalate positive risks to company leadership to make decisions about which strategy to implement. This is common when teams identify opportunities that could have enormous benefit to the company but might take a large investment to enhance or exploit.

You can learn much more about risk assessments, and the primary ways that project managers and organizations can respond to both negative and positive risks, in this essential guide to project risk assessments .

Risk Mitigation Strategies

Businesses use a number of strategies to help them respond to business risks. These can include overall risk and contingency planning, as well as tactical moves, such as hiring a risk manager or outside risk management consultant.

Here are some overall risk response strategies teams can use:

• Risk Management Planning: Teams will very often produce a risk management plan for individual projects, but they can also create a risk management plan for an entire enterprise. This plan should describe how your team plans to identify, assess, respond to, and mitigate risks to the organization. You can learn much more about risk management plans and planning and can download risk management plan templates .
• Contingency Planning: Contingency planning is usually a part of project risk management, but teams can create contingency plans for their entire organization. Contingency plans include specific actions your team will take if a risk actually happens. The contingency plan might include extra funds or extra staff to respond to a risk.
• Business Continuity Planning: Business continuity planning is the most common risk response strategy that organizations use to deal with risks to the entire enterprise. For specific projects, organizations will more often use strategies such as contingency planning and project risk management planning. The goals of business continuity planning are to identify important risks to the organization and make plans for what the organization will do to lessen or eliminate those risks.

You can learn much more about business continuity plans . You can also download business continuity plan templates .

• Setting Aside Contingency Reserves: These are funds an organization sets aside to help it deal with and mitigate important risks if they happen.
• Employing a Risk Manager: Many organizations choose to employ a full-time risk manager to oversee the organization’s entire risk management program. This role may involve helping with project risk management, or overseeing the more general management of risk and compliance across an organization.
• Contracting with Outside Consultancies: Many organizations contract with outside risk experts to help with risk assessments and business continuity planning.
• Employee Training: Forward-thinking organizations also conduct employee training and drills to bolster their contingency and risk mitigation plans. The training helps employees understand what they should be doing if a risk happens. You can learn more about such training and drills as part of contingency plans. 
• Product Testing: For software and technology companies especially, it’s important to do product testing throughout the development of a product. That testing will lower the risk that your organization will have to spend extra money to fix problems or to repeat development work.
• Following Information Security Best Practices: Information security issues are a huge risk for many organizations. Most organizations understand the importance of good information security practices, such as implementing strict password policies and two-factor authentication requirements.

Risk Mitigation Best Practices

Experts recommend following certain best practices for business risk mitigation. Some best practices include being proactive in identifying and assessing risks and making management policies clear to all stakeholders.

Here are some important best practices for business risk mitigation:

• Create a Strong Culture of Risk Management: It’s important that your organization and its leaders understand the importance of investing in solid risk management. Avoid the temptation to believe that risk management is not important or necessary. “Humans want to avoid risks, so we want to even avoid the discussion of risks,” Contreras says. “Good risk management forces you to have those discussions. You have to face them and look them in the eye, then make some decisions on how you're going to handle them. Don't let it fall by the wayside.”
• Involve Stakeholders: Make sure you communicate with and involve stakeholders in your risk management work. That means asking for their input as you identify and assess risks.
• Create a Clear and Transparent Risk Management Framework and Policy: Your organization should outline the basics of its risk management program in a risk management policy. Everyone in your organization should have access to and understand that policy. “A risk management policy should outline the organization's approach to risk management, including the roles and responsibilities of different stakeholders; the processes for identifying, analyzing, and responding to risks; and the methods for monitoring and reviewing the effectiveness of risk management efforts,” Lokenauth says.
• Be Proactive: It is vital for any organization to be proactive and aggressive in identifying and planning for risks. Lokenauth recalls a time when he worked for a large company in New York that wasn’t prepared for all risks. When Hurricane Sandy hit in October 2012, the firm had no place for its employees to work. “We were home for a week or two getting paid, and we weren't doing any work,” he says. “Things weren't getting done. It took them about a week or two to send us laptops. And then it took another week to try to figure out where to put us, to rent some space in Jersey City. If they had a plan in place for a thing like that, it would have been better. “It's important to be proactive about identifying and addressing potential risks rather than waiting for them to occur,” he says. Contreras adds that a business leader’s perspectives on risks can affect how an entire company approaches risk — either to the company’s benefit or to their detriment. “Small and medium-sized businesses are usually led by one big leader,” he says. “That leader’s perspective can really sway the business — and maybe not in a good way. The leader might be super optimistic, always thinking, ‘Yeah, we can do this.’ But the leadership team really needs to look at things and ask, ‘What if it doesn’t go?’ What would be the downside here? What are the things that can go wrong?’ So you want to get people in a room and start thinking negatively. ‘What are the things that can go wrong? And what can we do about them? What can we do to mitigate them?’”
• Be Comprehensive: It’s important that your organization thinks about risks in all areas. Avoid focusing only on what leaders think might be the most obvious areas for risk. “It's important to develop a comprehensive risk management plan rather than focusing on individual risks in isolation,” Lokenauth says.
• Conduct Employee Training or Drills: Risk mitigation isn’t finished once a company writes a contingency plan. Leaders must also train employees to perform the actions outlined in the plan. They must also determine whether that contingency plan is going to be effective by performing drills. You can learn more about training and drills in contingency planning.
• Continuously Monitor Possible Risks: Too many organizations perform one risk assessment, then believe they are finished — sometimes for a year or two or more, experts say. However, risks are constantly changing, and organizations need to continually identify and assess new risks to avoid costly oversights. That means requiring routine risk assessments and creating a culture that is always monitoring and addressing new risks. “You want to establish policies on how you identify and monitor risks, and you want to monitor them every month,” Lokenauth says. That can be as simple as making sure your risk department works through a monthly checklist of risks that you are tracking and what’s happening with them. It also means watching for new risks or for changing circumstances around current risks, experts say.
• Make Changes Where Needed: When your organization’s continual assessment shows that a new risk has arisen, or that an older risk is changing, it must make changes in its risk response plan. “If you grow as a company, you now have a different footprint in which you need to assess your risk,” Andresen says. “If you shrink — again, you have a different footprint. You might not need the same control measures or countermeasures, and you can put that money somewhere else.”
• Communicate Your Risk Management Plans: It’s vital that your organization communicates often and effectively with organization leaders, employees, and other stakeholders about the organization’s risk management work.

What Is the Risk Mitigation Process?

Experts sometimes use the term risk mitigation process to describe how organizations identify, assess, and prepare to lessen or mitigate risks. More often, experts use the term risk management to describe that work.

Here are the seven basic steps of the risk management process:

• Identify All Possible Risks: Gather a team or multiple teams to offer input on all possible risks to your organization. You might do this through formal meetings or gather input in other ways. “The first thing you would do is have every department do their risk analysis — but not in a silo,” Andresen says. “You do want them talking to each other. Because you’ll get some people being inspired by the others. You’ll get others validating the risk of others. And you get a whole operating picture of the entire company: ‘Where are we weak? Where are we strong?’” Lokenauth suggests using such options as “brainstorming sessions, risk assessments, or reviewing industry data” to identify risks. Ask everyone involved — internally and externally — to think broadly about all possible risks. Your team can use a questionnaire to assess potential risks to your organization and analyze its risk culture.
• Analyze Risk Probability and Impact: After your team identifies all risks, it will need to assess each risk’s probability and the potential impact on your business. “You have to figure out what exactly is the most vital piece of your ability to conduct your business, then figure out the risks to that,” Andresen says. “Then you have to look at internal and external risks. What are the internal risks that you can encounter? And what are your external risks that you could potentially encounter? How do you want to solve for them? ”Contreras notes that your team can also assess the top risks for various departments within your organization, along with various kinds of risks. “If, say, it's a supplier risk, what are the top three suppliers that we should be concerned about?” he says. “And what are the top three infrastructure risks? What are the top three HR staffing risks that we have?”
• Prioritize Risks: Once your team has studied and assessed the probability and potential impact of each risk, it must then prioritize which risks are most important to address. “As the likelihood becomes very high — let's say over 50 percent — then you decide, ‘OK, we need to do something to mitigate that,’” Contreras says. “Then the second determination would be: ‘What's the cost?’ If it’s high likelihood and high dollars, those are the ones you do want to focus on — the more likely it is to happen and the more obvious the cost impact.” For example, a risk that could cost your organization millions of dollars will take priority over a risk that would cost them thousands at most. Similarly, a risk that is almost certain to happen will take priority over a risk that has almost no chance of happening.
• Create Response Plans: Create plans to deal with or lessen the effects of the most important risks. Your organization likely won’t have the resources to mitigate every risk your company identifies. That’s why you prioritize the most important risks to face. “The next step is to develop responses to address the important risks,” Lokenauth says. “This may involve implementing controls or safeguards to prevent the risk from occurring, transferring the risk to a third party, or accepting the risk and managing it as it arises.” Lokenauth adds that your team should consider the costs to your organization of mitigating even the high-priority risks. If mitigating a high-priority risk will be prohibitively expensive, an organization might decide to simply accept that risk, while mitigating lower-priority risks.
• Track and Monitor Risks: Remember that business risk mitigation is an ongoing, evolving process. Continually track risks and potential changes in risk probability or impact. Contreras suggests that risk teams hold regular meetings to assess and monitor risks. “You probably should make it monthly — where you revisit the risks, and you're either changing the probability, or you're taking some out because they didn't happen, or some of them occurred,” he says. “Now, it becomes not a risk, but an issue — a problem that you have to begin to solve.”
• Monitor Mitigation Measures: Your organization should also monitor its mitigation measures. Monitor how and whether your teams are implementing risk mitigation measures. In addition, monitor how the mitigation measures are working and what risks have already occurred.
• Report to Organization Leaders: Regularly report to organizational leaders about ongoing risks and mitigation measures.

Example Risk Response Plan

Download a Sample Business Risk Response Plan for  Excel | Microsoft Word

Download this completed example business risk response plan that can help your team understand how to write a risk response plan for your organization. This plan includes sample data, with components such as include risk, risk severity, description of mitigation plans for that risk, and if and how those mitigation plans are working. Use this template as a starting point, and customize it to create your own business risk response plan.

Risk Mitigation by Departments and Broad Areas

Teams can assess business risks by department, such as operations or sales. They can also assess them by broad categories, such as technical risks or compliance risks. This will help organizations avoid costly oversights during risk mitigation.

Organizations might assess risk in various departments, such as the following:

• Human Resources

They might also assess risks in broader, thematic areas. Those areas might include:

• Compliance Risks: There can be risks in areas where laws or government rules require certain actions and issue penalties for noncompliance.
• Management Risks: There can be risks surrounding a company’s management, such as a key leader leaving the company.
• Operational Risks: Risks can arise based on the operational structure of your organization, such as how it sources materials or hires staff members.
• Overall Costs Risks: Some risks threaten to significantly increase your company’s costs to operate.
• Reputational Risks: Some risks relate to your company’s image and reputation among customers or clients.
• Resources Risks: There can be risks to the resources your company needs to operate.
• Strategic Risks: Some risks involve a company’s overall business strategy.
• Technical Risks: There can be risks related to technology your company is using or producing.

Your team might also consider doing what is called a PESTLE analysis . In this analysis, your team considers the overall business environment and potential risk in six areas: political, economic, social, technological, environmental, and legal. 

Tip: You might see this type of analysis written as a PESTEL analysis . Both acronyms indicate the same six areas but are written in a different order.

PESTLE Analysis Template

Download a PESTLE Analysis Template Excel | Microsoft Word

Download this template to help guide you through a PESTLE analysis. This analysis helps your team focus on and think about risks to the business in six broad areas. Use the empty columns to list potential risks to your organization in each category and summarize your risk mitigation plan.

Risk Mitigation Tools

A variety of tools are available to help your team assess and mitigate risks. These include risk management plans and assessments. Many companies also use risk assessment frameworks (RAFs), which specifically measure IT risks.

These are some tools that can help all companies with risk management and risk mitigation:

• Risk Assessment Matrix: A risk assessment matrix can help your team calibrate risks based on probability and likelihood.
• SWOT Analysis: A SWOT analysis can help your team analyze threats to your organization, along with strengths, weaknesses, and opportunities.
• Root Cause Analysis: A root cause analysis can help your team determine the root cause of an issue or problem affecting your company. 
• Business Impact Analysis: A business impact analysis is a process that teams work through to assess the possible effects of major interruptions to an organization’s operations. Most often, these potential interruptions are events such as natural disasters, major accidents, or other emergencies.

These are some common RAFs that IT experts use:

• Factor Analysis of Information Risk (FAIR)
• Committee of Sponsoring Organizations of the Treadway Commission (COSA) Risk Management Framework
• Control Objectives for Information Technologies (COBIT) from the Information Systems Audit and Control Association
• Operationally Critical Threat, Asset, and Vulnerability Evaluation (OCTAVE) Framework from Carnegie Mellon University
• Risk Management Framework from the National Institute of Standards and Technology (NIST)
• Threat Agent Risk Assessment (TARA), created by Intel

Risk Mitigation vs. Contingency

A risk mitigation plan might include a contingency reserve or contingency. While the risk mitigation plan includes many elements, the contingency is simply a reserve of funds, time, or other resources that can help mitigate certain risks.

Risk Mitigation vs. Risk Management

Risk mitigation is one part of the entire risk management process. When your organization performs risk management, it will perform risk assessments that might call for risk mitigation.

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How to Make a Risk Management Plan (Template Included)

You identify them, record them, monitor them and plan for them: risks are an inherent part of every project. Some project risks are bound to become problem areas—like executing a project over the holidays and having to plan the project timeline around them. But there are many risks within any given project that, without risk assessment and risk mitigation strategies, can come as unwelcome surprises to you and your project management team.

That’s where a risk management plan comes in—to help mitigate risks before they become problems. But first, what is project risk management ?

What Is Risk Management?

Risk management is an arm of project management that deals with managing potential project risks. Managing your risks is arguably one of the most important aspects of project management.

The risk management process has these main steps:

• Risk Identification: The first step to manage project risks is to identify them. You’ll need to use data sources such as information from past projects or subject matter experts’ opinions to estimate all the potential risks that can impact your project.
• Risk Assessment: Once you have identified your project risks, you’ll need to prioritize them by looking at their likelihood and level of impact.
• Risk Mitigation: Now it’s time to create a contingency plan with risk mitigation actions to manage your project risks. You also need to define which team members will be risk owners, responsible for monitoring and controlling risks.
• Risk Monitoring: Risks must be monitored throughout the project life cycle so that they can be controlled.

If one risk that’s passed your threshold has its conditions met, it can put your entire project plan in jeopardy. There isn’t usually just one risk per project, either; there are many risk categories that require assessment and discussion with your stakeholders.

That’s why risk management needs to be both a proactive and reactive process that is constant throughout the project life cycle. Now let’s define what a risk management plan is.

What Is a Risk Management Plan?

A risk management plan defines how your project’s risk management process will be executed. That includes the budget , tools and approaches that will be used to perform risk identification, assessment, mitigation and monitoring activities.

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Risk Management Plan Template

Use this free Risk Management Plan Template for Word to manage your projects better.

A risk management plan usually includes:

• Methodology: Define the tools and approaches that will be used to perform risk management activities such as risk assessment, risk analysis and risk mitigation strategies.
• Risk Register: A risk register is a chart where you can document all the risk identification information of your project.
• Risk Breakdown Structure: It’s a chart that allows you to identify risk categories and the hierarchical structure of project risks.
• Risk Assessment Matrix: A risk assessment matrix allows you to analyze the likelihood and the impact of project risks so you can prioritize them.
• Risk Response Plan: A risk response plan is a project management document that explains the risk mitigation strategies that will be employed to manage your project risks.
• Roles and responsibilities: The risk management team members have responsibilities as risk owners. They need to monitor project risks and supervise their risk response actions.
• Budget: Have a section where you identify the funds required to perform your risk management activities.
• Timing: Include a section to define the schedule for the risk management activities.

How to Make a Risk Management Plan

For every web design and development project, construction project or product design, there will be risks. That’s truly just the nature of project management. But that’s also why it’s always best to get ahead of them as much as possible by developing a risk management plan. The steps to make a risk management plan are outlined below.

1. Risk Identification

Risk identification occurs at the beginning of the project planning phase, as well as throughout the project life cycle. While many risks are considered “known risks,” others might require additional research to discover.

You can create a risk breakdown structure to identify all your project risks and classify them into risk categories. You can do this by interviewing all project stakeholders and industry experts. Many project risks can be divided up into risk categories, like technical or organizational, and listed out by specific sub-categories like technology, interfaces, performance, logistics, budget, etc. Additionally, create a risk register that you can share with everyone you interviewed for a centralized location of all known risks revealed during the identification phase.

You can conveniently create a risk register for your project using online project management software. For example, use the list view on ProjectManager to capture all project risks, add what level of priority they are and assign a team member to own identify and resolve them. Better than to-do list apps, you can attach files, tags and monitor progress. Track the percentage complete and even view your risks from the project menu. Keep risks from derailing your project by signing up for a free trial of ProjectManager.

2. Risk Assessment

In this next phase, you’ll review the qualitative and quantitative impact of the risk—like the likelihood of the risk occurring versus the impact it would have on your project—and map that out into a risk assessment matrix

First, you’ll do this by assigning the risk likelihood a score from low probability to high probability. Then, you’ll map out your risk impact from low to medium to high and assign each a score. This will give you an idea of how likely the risk is to impact the success of the project, as well as how urgent the response will need to be.

To make it efficient for all risk management team members and project stakeholders to understand the risk assessment matrix, assign an overall risk score by multiplying your impact level score with your risk probability score.

3. Create a Risk Response Plan

A risk response is the action plan that is taken to mitigate project risks when they occur. The risk response plan includes the risk mitigation strategies that you’ll execute to mitigate the impact of risks in your project. Doing this usually comes with a price—at the expense of your time, or your budget. So you’ll want to allocate resources, time and money for your risk management needs prior to creating your risk management plan.

4. Assign Risk Owners

Additionally, you’ll also want to assign a risk owner to each project risk. Those risk owners become accountable for monitoring the risks that are assigned to them and supervising the execution of the risk response if needed.

Related: Risk Tracking Template

When you create your risk register and risk assessment matrix, list out the risk owners, that way no one is confused as to who will need to implement the risk response strategies once the project risks occur, and each risk owner can take immediate action.

Be sure to record what the exact risk response is for each project risk with a risk register and have your risk response plan it approved by all stakeholders before implementation. That way you can have a record of the issue and the resolution to review once the entire project is finalized.

5. Understand Your Triggers

This can happen with or without a risk already having impacted your project—especially during project milestones as a means of reviewing project progress. If they have, consider reclassifying those existing risks.

Even if those triggers haven’t been met, it’s best to come up with a backup plan as the project progresses—maybe the conditions for a certain risk won’t exist after a certain point has been reached in the project.

6. Make a Backup Plan

Consider your risk register and risk assessment matrix a living document. Your project risks can change in classification at any point during your project, and because of that, it’s important you come up with a contingency plan as part of your process.

Contingency planning includes discovering new risks during project milestones and reevaluating existing risks to see if any conditions for those risks have been met. Any reclassification of a risk means adjusting your contingency plan just a little bit.

7. Measure Your Risk Threshold

Measuring your risk threshold is all about discovering which risk is too high and consulting with your project stakeholders to consider whether or not it’s worth it to continue the project—worth it whether in time, money or scope .

Here’s how the risk threshold is typically determined: consider your risks that have a score of “very high”, or more than a few “high” scores, and consult with your leadership team and project stakeholders to determine if the project itself may be at risk of failure. Project risks that require additional consultation are risks that have passed the risk threshold.

To keep a close eye on risk as they raise issues in your project, use project management software. ProjectManager has real-time dashboards that are embedded in our tool, unlike other software where you have to build them yourself. We automatically calculate the health of your project, checking if you’re on time or running behind. Get a high-level view of how much you’re spending, progress and more. The quicker you identify risk, the faster you can resolve it.

Free Risk Management Plan Template

This free risk management plan template will help you prepare your team for any risks inherent in your project. This Word document includes sections for your risk management methodology, risk register, risk breakdown structure and more. It’s so thorough, you’re sure to be ready for whatever comes your way. Download your template today.

Best Practices for Maintaining Your Risk Management Plan

Risk management plans only fail in a few ways: incrementally because of insufficient budget, via modeling errors or by ignoring your risks outright.

Your risk management plan is one that is constantly evolving throughout the course of the project life cycle, from beginning to end. So the best practices are to focus on the monitoring phase of the risk management plan. Continue to evaluate and reevaluate your risks and their scores, and address risks at every project milestone.

Project dashboards and other risk tracking features can be a lifesaver when it comes to maintaining your risk management plan. Watch the video below to see just how important project management dashboards, live data and project reports can be when it comes to keeping your projects on track and on budget.

In addition to your routine risk monitoring, at each milestone, conduct another round of interviews with the same checklist you used at the beginning of the project, and re-interview project stakeholders, risk management team members, customers (if applicable) and industry experts.

Record their answers, adjust your risk register and risk assessment matrix if necessary, and report all relevant updates of your risk management plan to key project stakeholders. This process and level of transparency will help you to identify any new risks to be assessed and will let you know if any previous risks have expired.

How ProjectManager Can Help With Your Risk Management Plan

A risk management plan is only as good as the risk management features you have to implement and track them. ProjectManager is online project management software that lets you view risks directly in the project menu. You can tag risks as open or closed and even make a risk matrix directly in the software. You get visibility into risks and can track them in real time, sharing and viewing the risk history.

Tracking & Monitor Risks in Real Time

Managing risk is only the start. You must also monitor risk and track it from the point that you first identified it. Real-time dashboards give you a high-level view of slippage, workload, cost and more. Customizable reports can be shared with stakeholders and filtered to show only what they need to see. Risk tracking has never been easier.

Risks are bound to happen no matter the project. But if you have the right tools to better navigate the risk management planning process, you can better mitigate errors. ProjectManager is online project management software that updates in real time, giving you all the latest information on your risks, issues and changes. Start a free 30-day trial and start managing your risks better.

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Business Plan Risks How to present your business risks without scaring away investors

By Stever Robbins Dec 11, 2004

Opinions expressed by Entrepreneur contributors are their own.

Q: I would like to include a risk analysis in my business plan. I don't know how to show risks without sending investors into an anxious frenzy.

A: Any start-up idea will have enough risk to fill a dozen business plans. No investor expects a risk-free plan. Angels and VCs know start-ups are incredibly risky. If they don't, don't take their money--they don't know what they're doing! Most projects fail for reasons that could have been (and sometimes were) predicted far in advance. Since entrepreneurs are optimistic folks by nature: They tend to brush off predictions of doom and charge ahead assuming they will find a way to overcome. You can often avoid the most dire scenarios with intelligent upfront risk planning.

The risk analysis in your plan is to show that you've thought through risks, that you know how to plan for probable risks, and that your plan can survive when things go wrong.

Your plan can address several kinds of risk. You don't need to address every kind of risk in the book, but pick the risk categories that are most relevant to your company and include a paragraph or two about each:

• Product risk is the risk that the product can't be created. Biotech firms often have a high degree of product risk. They never know for sure they can produce the drug they are hoping to produce.
• Market risk is the risk that the market will develop differently than expected. Sometimes markets take too long to develop, and cash runs out while a company is waiting for customers.
• People risk is big in companies that depend on having certain employees or certain kinds of employees. I was with a company that had hired one of the world experts in a certain type of 3-D modeling. It was possible that without this man on board and happy, the company wouldn't be able to create their product.
• Financial risk is the risk that a company will run out of money or mismanage their money in some way. Finance companies may have huge financial risk, since bad lending policies combined with poor investment policies can sink them.
• Competitive risk is the risk that a competing product or service will be able to win. Many Web-based businesses have high competitive risk since they can be started with little money and have no way of locking in customers.

What investors want is to know that you are prepared to respond to risks. To the extent possible, outline what your response is to the risk you anticipate. After all, assuming you get funding, those risks may really come to pass. And you will really have to do something about it. By showing investors some of the alternatives you've thought through, you raise their confidence that you'll be able to deal if things don't go according to plan.

For example, consider the risk to a restaurant that people won't come back. What are the reasons you believe that would happen? What can you do to keep that from happening in the first place? It amazes me how many restaurants have a lousy menu selection or bad food and go under without ever asking customers, "Did you enjoy your meal? What could we do to make it better?" An at-the-table survey may be how you propose to avoid having the wrong menu. If things go wrong, you may decide to proactively invite critics to the restaurant for specific feedback on how to make the experience better.

The key is acknowledging that things can go wrong and demonstrating some creativity in finding a solution. You certainly needn't respond to every risk imaginable. Your goal is to provide enough to help your investors feel secure that you have anticipated and dealt with major risks, and they can count on you to handle things that come up once the business is under way.

Stever Robbins is a consultant specializing in mastering overwhelm, power and influence. The author of It Takes a Lot More Than Attitude...to Lead a Stellar Organization , he has been a team member or co-founder of nine startups, an advisor and angel investor, and co-developer of Harvard's MBA program. You can find his other articles and information at SteverRobbins.com .

This article originally appeared on Entrepreneur.com in 2002.

Stever Robbins is a venture coach, helping entrepreneurs and early-stage companies develop the attitudes, skills and capabilities needed to succeed. He brings to bear skills as an entrepreneur, teacher and technologist in helping others create successful ventures.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

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Guide to executing a winning risk management plan

Risk is a fact of life for any organization. What’s more, risk isn’t always a potential threat. For successful businesses, taking risks is crucial to growth and sustaining profitability. Those risks can include new products and markets, investments, and acquisitions, among others. They’re risks because they might not succeed, or they might bring about unanticipated consequences. 

But whether the organization is a business, a nonprofit, or a government agency, risks are more likely to have negative impacts. If it doesn’t plan for those impacts, a risk event can disrupt its workflows, cost the organization millions of dollars, and perhaps even cause it to shut down. 

To protect itself from potential disaster, every organization should establish a risk management plan that sets the specific ways to handle any possible risk. To succeed, such a plan needs to be carefully and strategically designed while being flexible enough to accommodate any new hazards that might arise. 

Risk management is more than a way to help ensure an organization’s continuity. Many businesses must have risk management protocols in place to meet industry laws, regulations, or compliance requirements. That’s particularly true regarding cybersecurity and the need to protect sensitive information. 

All that said, a risk management plan doesn’t eliminate all risks. Instead, it determines the best course of action to strike a cost-benefit balance between risk reduction and the use of corporate resources. A risk management plan documents potential risks to an organization and the steps employees should take to keep those risks at acceptable levels. In addition, an organization may need different risk management plans to address additional risks.

Setting risk management goals

Risk management includes developing procedures for uncertain events. In crafting a risk management plan, an organization identifies potential risks, evaluates their likelihood and potential impact, and develops strategies for either avoiding them or mitigating their effects if avoidance is unfeasible. Risk assessment is a part of this process, focusing on detecting potential hazards and analyzing conceivable risks in an organization’s immediate workplace. Risk assessment also identifies risks related to fraud and (for many organizations) compliance. 

Risks are typically described as either operational or enterprise. Operational risks, which are associated with the execution of an organization’s operations, can originate from various sources, including human error, third parties, cybersecurity threats such as data breaches or ransomware attacks, external events such as natural disasters, and government regulations. Enterprise or strategic risks are those risks that could be beneficial to a business — big changes that could bring in new customers or lead to the development of new product lines, for instance. 

In crafting a plan, the organization must determine its risk management goals. What dangers does it wish to avoid? What opportunities might a risk offer? How might a risk derail an organization from its mission? Once it answers questions like these, it can develop a risk management plan that aligns with those goals. 

With all this in mind, let’s look at the chief steps any organization should follow to set up a risk management plan.

Risk assessment

This step focuses on identifying and analyzing potential hazards before they can cause disruption — or identifying disruptive events that could lead to beneficial results. Risk assessment helps organizations understand the nature and extent of any risks they might face and with informed decision making about risk management, including what level of risk organizations are willing and able to tolerate. It also helps them uncover events that might seem unlikely but could suddenly and disastrously occur. 

One of the most valuable tools in this process is a risk assessment matrix, used to visualize potential risk impacts. A risk assessment matrix measures the likelihood from low to high on one axis and the severity from low to high on the other. The organization can then prioritize risks with higher “scores” for risk prevention or reduction. 

Risk tolerance

Risk tolerance is the amount of risk an organization is willing to bear within a specific project, activity, or timeframe. Measuring risk tolerance helps determine the acceptable range of risk exposure for particular initiatives and align risk management efforts with its resources. A low-risk tolerance will most likely require additional funding to protect the organization from a disruptive event.

Determining risk tolerance also helps an organization balance potential risks and the costs of managing them. In some cases, the organization may decide that potential losses or risk events wouldn’t significantly hinder its operations. 

Desired outcomes

What an organization hopes to achieve goes back to its goals or mission. How might certain risks sidetrack those outcomes? What does the organization need to do to minimize negative impacts? 

Risk management strategies

A risk management plan includes the strategies an organization needs to take to prevent a risk event — a risk that fulfills its potential and causes disruption. The plan should also include what the organization needs to do if a risk event occurs. 

In developing a risk management strategy, an organization needs to identify vulnerabilities and potential threats, how likely they are to occur, how damaging they could be to the organization, and what forms of mitigation would be needed should they happen. 

For many businesses, a major source of risk is their supply chain. This risk became all too clear during the pandemic when lumber, steel, and semiconductors became difficult — and costly — to obtain. This situation proved to many businesses that they needed to have contingency plans should their supply chains become snarled again in the future. 

There are some dangerous risks, of course, that an organization will want to prevent from happening. Whether the organization is a business, a nonprofit, or a government agency, it will want to stop fraudulent activity before it happens and seek to establish actions and strategies to prevent it. For businesses, that activity could originate from vendors, customers, and subcontractors, not to mention cybercriminals. 

For nonprofits and government agencies, fraudsters may include people seeking to get public benefits under false pretenses. The organization can implement processes and protocols to reduce the chances of an unwanted risk event, such as heightened cybersecurity to protect sensitive data. Where feasible, the organization may be able to buy insurance to cover the costs of a potential risk event — this is called risk transfer or risk outsourcing. 

Whatever the organization, it should consider the following strategies as part of its risk management plan. 

Using key risk indicators 

A key risk indicator (KRI) is a metric that measures not only how likely a particular risk event could be but also how seriously it could impact the organization’s operations. KRIs typically fall under the categories of people, processes, and technologies. 

In the people category, examples of KRIs include measurements of the effect that the loss of key employees could have on operations. They can also measure similar effects for fraudulent activity by outside parties such as vendors and clients. Process KRIs can measure operational objectives such as production and sales levels — and the factors that might disrupt them, such as supply chain snarls. KRIs for technology can focus on cybersecurity objectives and other data protection measures, identifying when these protective measures fall below safe optimums. 

Assembling a list of KRIs can also overlap with developing a risk assessment matrix. Both are valuable tools for identifying and evaluating risks. 

Mitigation planning

Most organizations can’t avoid all risks; some are simply unpredictable. For instance, a reliable vendor or customer can suddenly stop delivering services or paying bills. An innovative fraudster might find a way around a seemingly impregnable cybersecurity system. 

Unpredictable risk is where mitigation comes in — this is the set of responses intended to reduce the harm of a risk event should it occur. The organization should have a response plan before a risk event occurs. This plan could include business backup plans — in the case of a hurricane or other disaster — media crisis management, and other forms of risk response that will vary depending on the organization’s business or mission. 

The organization will also want to determine whether some risks simply aren’t worth preventing, which goes back to the idea of risk tolerance. In some cases, the potential harm of risk is so low that the costs of avoiding it would be too high. In those situations, the damage the event might cause would be less damaging to the organization and its finances. 

Ongoing monitoring

Ongoing monitoring is the process of keeping tabs on potential risks. It also involves determining whether prevention and mitigation processes are working the way they’re intended. An organization needs to continually monitor its risk management plan since the sources of risk are ever changing. That’s certainly true in the realms of technology and regulation, but talent pools and processes also change and evolve. Organizations need to prepare themselves for disruptions to their business models and hiring practices, as well as data breaches and natural disasters.

Many organizations also need to monitor media coverage. This is required in order to manage crises and anticipate risk events and — for certain types of businesses — to prevent fraud. For instance, a financial institution will want to avoid doing business with customers or vendors sanctioned by regulators or law enforcement. Advance media screening can help identify these bad actors and thus protect the institution from massive fines and reputation damage. 

Risk management policies

An effective policy framework for managing risk includes policies, processes, and procedures designed to reduce or eliminate potentially damaging risks. The content of this framework should be clearly and specifically written, with the duties and responsibilities of those in the organization involved with risk management spelled out. The plan should include regular reports to senior executives — and the board of directors if the organization has one — about how various risks are being managed. 

If possible, an organization should establish a dedicated risk response team that oversees all aspects of risk management. An organization can maximize its risk management program’s effectiveness by promoting it throughout all the departments with potential vulnerability to risk. For businesses, this typically includes sales and marketing, finance, IT, and product development; the departments involved should collaborate on risk management strategies. A risk management plan won’t be fully successful unless there is buy-in throughout the organization. Departments must collaborate and share information since risk is rarely “siloed.” 

To further strengthen the risk management plan’s effectiveness, the organization should consider engaging all its stakeholders to establish and maintain the plan. Those stakeholders will vary from organization to organization. They might include not only employees but also clients, business partners, and vendors, as well as investors and regulators. Getting stakeholders’ input can be particularly useful in identifying and assessing risk since they can reveal possible threats the organization itself hadn’t considered. They also can help establish effective mitigation strategies. 

It’s essential to keep a risk management program flexible. The organization should review its list regularly and establish contingency plans for new and unforeseen risks — once a year is a good rule of thumb, although larger organizations with more exposure to risk should conduct updates more often. 

It should also be clear that effective risk management requires time and money resources. Not every organization is in a position to devote these kinds of resources to a risk management plan, but it will need to weigh both costs and benefits. A risk event could cost the organization more than the upfront expense of establishing effective risk management policies. 

Compliance, risk, and governance

A growing source of risk for many enterprises involves the areas of governance and compliance.  Compliance risk became front and center for many enterprises thanks to the financial crisis of 2008 and 2009. As a result, a risk management plan for governance and compliance has become crucial as government regulations increase and evolve. If an organization isn’t meeting regulations involving its operations, it exposes itself to potentially massive monetary penalties and other sanctions. In addition, investors are demanding greater corporate transparency. The growth of third-party relationships can open an enterprise to new forms of risk. 

A compliance and governance risk management plan must track pending legislation, proposed rules, enforcement actions, and public comments from regulators to detect future risks and concerns. The organization then should prepare for what moves it might need to make in response to regulatory changes.

A successful risk management plan is integrative — that is, it crosses several aspects of the enterprise’s operations — which is notably true when it comes to corporate governance. It requires each department, particularly human resources, IT, and finance, to collaborate on information related to risk. It also requires clear and frequent communication with top executives, the board of directors, and investors regarding how risk is being managed. 

Utilizing risk management tools

We’ve explored vital techniques and strategies organizations can incorporate in their risk management plans. While human judgment and input remain paramount, the complexity of risk management means that digital technology can play a crucial role in an effective risk management strategy. Technology solutions could also reduce the costs of maintaining a risk management plan. 

Most corporate compliance and risk departments are already using software platforms to help them manage governance and regulatory risk. For organizations of all kinds, the digital tools of the future will be incorporating artificial technology (AI). AI’s ability to learn and improve will make it increasingly valuable for managing risks in numerous areas, including fraud, cybersecurity and data protection, governance, and finance, among many others. 

For instance, the growing frequency, complexity, and sophistication of cyberthreats make enhanced defense capabilities necessary. AI-powered tools can provide advanced threat detection, predictive analytics, and real-time monitoring. Banks and financial institutions can use AI to analyze large data sets and establish more effective controls to prevent or mitigate the risks that data reveals. 

An effective risk management plan is increasingly essential for organizations of all kinds — the organization needs to have a clear picture of all the possible risks it might face. A good plan also needs to anticipate events that might seem unlikely — but still could disrupt the organization, perhaps fatally. It’s an approach that requires the participation of everyone in the organization. As risk management becomes increasingly complex, the organization should explore new tools that can boost the plan’s chances for success. 

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Why A Risk Management Plan Is Important For Business

by Mike Vestil  

Risk management is an essential practice for any organization looking to minimize the impact of potential threats and uncertainties to their operations. A risk management plan is a strategic document that helps organizations identify, assess, prioritize and manage risks in a systematic and structured manner.

This plan enables businesses to develop contingency plans and resolutions that can help them respond effectively to potential crisis situations. In this article, we explore the importance of a risk management plan , and how organizations can develop one to safeguard their operations.

Introduction To Risk Management Plan

Purpose of risk management plan.

A Risk Management Plan is a crucial aspect of any project plan in any organization. It is a comprehensive document that outlines the strategies that a firm employs to identify, assess, and mitigate risks that may affect the project’s success.

The purpose of a Risk Management Plan is to allow companies to achieve their objectives by identifying risks and taking the necessary measures to prevent them from derailing their projects.

The plan helps organizations to put in place proactive measures, such as risk mitigation and risk avoidance, that minimize the impact of potential risks. Additionally, it provides a structured approach for decision-making to all stakeholders involved in the project, and enables them to work collaboratively.

The primary objective of a well-defined Risk Management Plan is to identify the risks that could negatively impact the project objectives. It also defines how the risks will be assessed, analyzed, prioritized, and controlled.

The document serves as a tool for effective communication between the project team, project manager, and stakeholders. The plan provides clear guidance on how to identify potential risks, assign ownership of risks, and explain how risks should be managed.

It is essential to consider the risk appetite of the organization when developing a Risk Management Plan. This is because the risk appetite of an organization will influence how risks are managed and what measures are taken to control them. Therefore, it is important to define the objectives and the scope of the project before developing a Risk Management Plan.

In conclusion, the Purpose of a Risk Management Plan is to identify risks that could negatively impact a project, prioritize them, and define how they will be controlled. The Risks Management Plan also provides a way for stakeholders to communicate effectively, assigns ownership of risks, and outlines how they will be managed.

It provides a structure that allows organizations to work collaboratively towards their objectives by proactively identifying, analyzing, and preventing potential risks. To that, it is crucial to develop a Risk Management Plan that consider the scope and objectives of a project so that it can account for the risk appetite of the organization.

Scope Of Risk Management Plan

The scope subsection of a Risk Management Plan outlines the boundaries of the project that will be subject to risk management procedures.

The scope defines the limits of the risk management plan, including the types of risks that will be addressed, the stakeholders to be involved, and the level of detail that is necessary to manage risks effectively.

The scope will also define the goals and objectives of the project. In this subsection, it is important to describe the project in detail and identify all stakeholders who will participate in the plan.

Stakeholders can include project sponsors, team members, vendors, and customers. It is also important to establish the timeframe for the project and the processes that will be used to manage risks.

The scope subsection should provide the reasoning behind the need for a risk management plan.

This includes identifying the potential impact that risk events could have on the project and how risk management strategies can help mitigate those risks. Additionally, an overview of the risk management plan’s relationship to other management plans should also be included.

The scope subsection should also include a description of the methodology that will be used to assess risks. This can include information on the tools and techniques that will be used, how risks will be identified and analyzed, and how they will be prioritized.

This helps stakeholders understand how risks will be identified and managed throughout the project, making it easier to mitigate risks when they arise.

Finally, the scope subsection should describe the deliverables that will be produced as part of the risk management plan.

This includes the documentation that will be used to manage risks, such as a risk register, and any reports or analysis that will be produced identifying the effectiveness of the risk management plan.

Having a clear understanding of the deliverables ensures that all stakeholders know what to expect and what they need to produce, which helps to ensure that the risk management plan is successful.

Objectives Of Risk Management Plan

Risk management is a vital component of any project, business, or entity. It involves identifying, assessing, and mitigating risks that could hinder the achievement of objectives. Objectives are significant goals a project or business endeavors to achieve.

Objectives establish the direction and scope of the work, and they are the foundation upon which the risk management plan is built. The purpose of the objectives subsection is to define the objectives and articulate how risk management will help achieve them.

The objectives should be specific, measurable, achievable, relevant, and time-bound. A well-formulated risk management plan ensures the objectives are achieved with minimal setbacks, and the organization remains resilient against unforeseen challenges.

Risk Management Process

Risk identification subsection.

The Risk Identification subsection is an essential phase of the risk management plan. This step entails identifying and documenting all potential risks that could affect the project’s objectives.

The risks identified in this phase can be categorized as internal (within the organization) or external (outside the organization). A project manager must have a robust understanding of the project activities, its scope, timeline, and resources to be able to identify potential risks accurately.

Risk identification is a continuous process that involves all project stakeholders, including team members, customers, and suppliers, and can be done through brainstorming sessions, root cause analysis, SWOT analysis, and other techniques.

The primary documentation produced in this phase is the risk register, which includes a detailed description of the risks, their likelihood, impact, and priority level.

The risk register serves as a reference for the risk assessment and mitigation phases , and the success of the entire risk management plan depends on the accuracy and comprehensiveness of the risk identification phase.

Risk Assessment Section

The Risk Assessment section of the Risk Management Plan involves evaluating the identified risks and determining their level of potential harm and probability of occurring. This process is crucial in creating a plan of action to mitigate the risk and prevent potential negative consequences.

The methodology for this section typically involves a systematic approach that includes identifying the risks, assessing their likelihood and impact, and prioritizing them based on their level of risk.

It is important to involve all parties who are responsible for managing the risk and ensure that they understand the risks and potential consequences.

The roles and responsibilities in this section should clearly define who is responsible for assessing the risks and implementing mitigation strategies. It may be necessary to enlist the help of outside experts to ensure the best possible risk assessment.

The final outcome of the Risk Assessment section is a list of prioritized risks and a detailed plan of action to address each one. This list should be regularly reviewed and updated to ensure that the organization is adequately prepared to manage its risks.

Risk Mitigation Process

Risk Mitigation is the process of managing risks that have been identified and assessed, in order to reduce the likelihood or impact of the risk event. This process involves developing and implementing strategies to prevent, or minimize, the occurrence of the identified risks.

Risk mitigation requires a thorough understanding of the risks involved, as well as the potential impact on the project or organization. This includes determining the likelihood and impact of each risk, and prioritizing them based on their importance.

The mitigation plan should be developed with input from all stakeholders, and should be regularly reviewed to ensure its effectiveness.

The methodology for risk mitigation involves several steps. The first step is to identify the risks that pose a threat to the project or organization. This involves brainstorming sessions, interviews with stakeholders, and reviewing historical data.

Once the risks have been identified, they must be assessed to determine their likelihood and impact. The next step is to prioritize the risks based on their importance and develop strategies to mitigate them. This may involve developing contingency plans, establishing procedures for risk monitoring and reporting, or implementing preventative measures.

The roles and responsibilities for risk mitigation are critical. This involves assigning responsibilities for identifying, assessing, prioritizing, and mitigating risks to specific individuals or teams. The project manager is typically responsible for overall risk management, including the development and implementation of a risk management plan.

However, other stakeholders, such as team members or subject matter experts, may also play a critical role in risk mitigation. Effective communication and collaboration among stakeholders is essential for successful risk mitigation.

In summary, risk mitigation is an essential component of the risk management process. Developing and implementing effective risk mitigation strategies can help reduce the likelihood and impact of potential risk events, and ensure the success of a project or organization.

The methodology and roles and responsibilities for risk mitigation should be well-defined and involve input from all stakeholders. Regular review and updating of the mitigation plan is crucial to ensure its continued effectiveness.

Risk Monitoring And Control

The Risk Monitoring and Control subsection is an essential component of the Risk Management Plan. It involves the constant monitoring and evaluation of the identified risks by the project team.

The purpose of this process is to determine whether the agreed-upon mitigation strategies are effective in reducing the impact of the risks on the project. The process also involves taking corrective actions as necessary and initiating new mitigation strategies to address any new risks that may arise.

The methodology for Risk Monitoring and Control determines how the identified risks will be monitored and when corrective actions are initiated. Risk Monitoring and Control is usually an ongoing process, starting from the identification phase of the risk management plan to the closure of the project.

The methodology encompasses establishing the metrics to utilize in measuring the risks, determining the frequency of monitoring, corrective action procedures, identifying the resources required to perform the monitoring and control process, among others.

A critical aspect of Risk Monitoring and Control is the roles and responsibilities of all team members. The project manager is responsible for facilitating the monitoring and control process, including reporting on risk status updates to senior management, the client, and stakeholders.

The project team collaborates in identifying new risks, mitigating, and evaluating the effectiveness of implemented mitigation strategies. The risk owner is accountable for a specific risk, including implementing strategies to manage the risk and providing updates on risk progress during the monitoring process.

In conclusion, the risk monitoring and control process is necessary for ensuring that the project stays on track and accomplishes its objectives while managing any potential risks.

Applying an effective methodology, together with well-defined roles and responsibilities, is crucial to achieving project success.

Team collaboration, including stakeholders, is crucial to the process’s efficiency and effectiveness. By consistently monitoring the risks and taking corrective action as necessary, the project team can minimize the impact of risks on the project’s outcome.

Risk Management Plan Implementation

Risk management plan approval.

Once the risk management plan has been developed and all necessary personnel have been involved in the process, it’s time to submit the plan for approval. It’s important to receive approval from all necessary parties before proceeding with any risk management activities.

Typically, the approval process involves presenting the plan to upper-level management, including project sponsors or stakeholders. This presentation should include a comprehensive explanation of the plan, as well as any potential risks or benefits associated with it.

Demonstrating the rigor with which the plan was developed and the expertise of those involved can help to instill confidence in the plan and increase the likelihood of approval.

Once approved, it’s important to communicate the plan to all relevant parties. This includes any stakeholders, employees, or other individuals who may be impacted by the plan.

Clear communication can help to ensure that everyone is on board with the plan and understands their role in its implementation. It’s also important to provide training to those who will be involved in executing the plan. This can help to ensure that everyone is equipped with the knowledge and skills necessary to carry out their responsibilities effectively.

To ensure ongoing success, it’s also important to regularly review and update the risk management plan. This can help to ensure that it remains relevant and effective over time. Regular reviews can help to identify new risks or changes in existing risks, and allow for adjustments to be made to the plan accordingly.

Risk Management Plan Communication

Risk Management Plan Communication is a crucial aspect of any risk management plan. Communication refers to the process of sharing relevant information with all stakeholders involved in the project.

Effective communication is essential for ensuring that everyone involved in the project is aware of the potential risks and the measures that will be implemented to address them.

Communication is also critical for responding appropriately to any unexpected incidents or risks that arise during the project.

The first step in effective communication is identifying the stakeholders involved in the project. The stakeholders may include the project team, vendors, suppliers, customers, investors, regulators, and any other parties with an interest or involvement in the project.

Once the stakeholders are identified, a communication plan should be developed that outlines the type of information, the frequency of communication, and the channels for communication.

It is recommended to use a combination of communication channels, such as email, phone, video conferencing, and regular meetings, to ensure that the information is disseminated promptly and efficiently.

The communication plan should also identify the person responsible for communicating the information, and the protocols for escalating any issues that require urgent attention or resolution.

Another critical aspect of effective communication is ensuring that the information communicated is accurate, concise, and easily understandable.

The risk management plan should be written using plain language, avoiding technical jargon or acronyms that may be unfamiliar to some stakeholders. Use of visual aids, such as flow charts or diagrams, may also be effective in communicating complex information in a simple and concise manner.

Finally, it is important to evaluate the effectiveness of the communication plan regularly. This will help to identify any gaps or deficiencies in the communication process and enable the implementation of corrective actions.

Regular communication with stakeholders can also help to build trust and credibility, creating a more positive and productive working environment.

Risk Management Plan Training

Risk management plan training is a crucial aspect of any effective risk management plan. It is essential to ensure that all personnel within an organization understand the plan and know how to implement it if and when necessary.

Training should cover the identification, assessment, mitigation, and monitoring of risks, as well as the procedures that must be followed during an emergency or crisis. It should also explain the roles and responsibilities of different stakeholders within the organization, including the risk management team, employees, and management.

Effective training programs should be tailored to the specific needs of the organization and its personnel. They should also be ongoing and incorporate feedback and evaluation to ensure that the program remains relevant and effective.

Training methods should include interactive exercises, simulations of different scenarios, and case studies to help employees understand how to manage different types of risks.

One critical aspect of risk management plan training is ensuring that all employees understand the importance of risk management and their role in the process. This includes understanding the potential consequences of not managing risks effectively and how individual actions can impact the overall effectiveness of the organization’s risk management plan.

The training should also cover the reporting process for identifying and assessing risks. All personnel should know how to report potential hazards or risks that they see in their day-to-day work, and they should understand the importance of reporting these risks promptly.

The reporting process should be simple and accessible, and employees should be reassured that any reports they make will be taken seriously.

Finally, it is essential to evaluate the effectiveness of the training program continually. Feedback should be solicited from employees, and data should be collected on the effectiveness of the plan in reducing risks and managing crises.

This will allow the organization to continually improve its risk management plan and training program, ensuring its continued relevance and effectiveness.

Risk Management Plan Review And Update

Risk management plan review.

One of the critical components of an effective risk management plan is reviewing the plan regularly. A risk management plan review evaluates the effectiveness of the plan, identifies new risks, and ensures that the organization is adequately prepared to handle potential incidents.

The review should be carried out periodically, as specified in the plan, or as dictated by changes in the business environment. There are numerous reasons why a review should be conducted, including regulatory compliance, changes in the organization’s operations, and upgrades to technology.

A review is also necessary when a potential risk materializes, and the management team needs to assess the plan’s adequacy to address the situation.

A risk management plan review should include an investigation of the current plan’s resources and commitments, an analysis of the risks identified in the plan, and a determination of whether the organization has implemented suitable controls to address them.

The review should identify any unaddressed risks, assess the effectiveness of current risk treatment plans, and determine whether the plan incorporates recent organizational changes. The review should also ensure that employees are aware of the plan and have received adequate training to execute their roles effectively.

Additionally, the review should assess the business impact of the risks and examine whether the organization’s insurance coverage aligns with the plan’s risk treatment strategy.

The review’s output should be a comprehensive report that details the identified risks, the effectiveness of the mitigation measures, and recommendations for improvements to the plan. The report should be shared with relevant stakeholders, including the management team, operational staff, and external parties such as regulators, auditors, and insurance providers.

Based on the findings, the organization’s management team should update the plan, implement any changes necessary to mitigate current risks, and ensure that employees are informed of new or updated procedures. A risk management plan review is fundamental to the success of any organization, as it ensures that the organization is prepared to handle unexpected events and minimizes the impact of incidents.

Risk Management Plan Update

As companies navigate through various business cycles, it is pertinent they update their risk management plans to ensure they remain relevant and effective in mitigating emerging risks.

Risk management plan update is a crucial part of the overall risk management process, which helps businesses identify, analyze, and manage potential risks that could impact their operations. The update process involves re-evaluating potential risks, assessing their impact, and determining the likelihood of their occurrence.

Additionally, it involves identifying risk mitigation strategies and developing contingency plans to address any potential risks that may arise. Failure to conduct regular risk management plan updates could expose businesses to unanticipated risks, leading to financial losses or reputational damage.

The frequency of risk management plan updates depends on various factors such as the organization’s business cycle, compliance requirements, and industry best practices.

For instance, organizations operating in highly regulated industries, such as the healthcare and financial sector, may be required by law to conduct regular risk assessments to remain compliant. Similarly, companies operating in rapidly changing industries, such as technology, may need to update their plans more frequently to keep up with the evolving landscape.

It’s important for businesses to involve key stakeholders in the risk management plan update process, including top management, risk management teams, and relevant department heads. Having a diverse group of individuals involved in the process ensures that potential risks are thoroughly analyzed and that mitigation strategies are developed from a holistic perspective.

Additionally, it’s crucial to ensure that the risk management plan is communicated to all stakeholders and employees to ensure everyone is aware of the potential risks and how to manage them.

In conclusion, regular risk management plan updates are critical for organizations to effectively manage potential risks and minimize the impact on their operations. The update process ensures that the risk mitigation strategies remain relevant and effective in the face of emerging risks.

By involving key stakeholders and communicating the updated plan to all employees, businesses can proactively manage risks and avoid financial losses or reputational damage.

Roles And Responsibilities

Role of the project manager.

The role of the project manager in a risk management plan is critical to ensuring the successful completion of the project. The project manager is responsible for identifying, assessing, and managing risks that could impact the project’s success.

They must be able to communicate effectively with the risk management team and stakeholders to ensure everyone is aware of the risks and the steps being taken to mitigate them. It is also essential for the project manager to develop a risk management plan that outlines the procedures for identifying and managing risks throughout the project lifecycle.

The plan should include a risk register that tracks each risk’s status and the actions being taken to address them.

In addition to managing risks, the project manager must also ensure that the project is progressing as planned. They must be able to monitor and control project activities to ensure they are within the constraints of the project scope, schedule, and budget.

The project manager must also be able to adapt to changes in the project environment, such as new risks or unexpected issues that may arise. They must be able to develop contingency plans and make quick decisions to ensure the project stays on track.

The project manager plays a significant role in establishing a risk management culture within an organization. They must ensure that everyone involved in the project understands the importance of risk management and follows the established procedures.

The project manager must also encourage open communication and collaboration among all stakeholders to ensure the successful identification and management of risks.

Overall, the project manager plays a critical role in ensuring the successful identification and management of risks throughout the project lifecycle. They must be able to effectively communicate with the risk management team and stakeholders, monitor and control project activities, and adapt to changes in the project environment.

The project manager must also establish a risk management culture within the organization to ensure the successful identification and management of risks in future projects.

Risk Management Team

The Risk Management Team is a critical component of any risk management plan. This team’s primary responsibility is to identify, assess, and mitigate risks throughout the project lifecycle. The Risk Management Team should be composed of individuals with varying backgrounds and expertise to provide a comprehensive risk management approach.

The team should include a Project Manager, who will serve as the leader of the Risk Management Team. The Project Manager’s role will be to ensure that risks are identified and mitigated effectively, timely, and within budget.

In addition to the Project Manager, the Risk Management Team should include subject matter experts in various areas such as finance, legal, engineering, project controls, and operations. These experts will provide a diversity of perspective and knowledge.

The team should also include individuals who understand the project’s objectives, stakeholders, and potential risks involved. The team should be large enough to manage risk effectively but small enough to avoid conflicts in risk management decision-making.

The Risk Management Team members should have a clear understanding of their roles, responsibilities, and expectations. They should have the necessary training and experience to carry out their duties effectively. The team should establish a communication plan that will allow them to communicate effectively and efficiently.

The communication plan should ensure that all stakeholders are kept informed of risks, mitigation strategies, and risk management activities.

The Risk Management Team should be created early in the project lifecycle to ensure that risks are identified and addressed timely. The team should also align its efforts with the project schedule and budget. The team should meet regularly to monitor risk management activities and adjust mitigation strategies where necessary.

The team should maintain a risk register throughout the project lifecycle. The risk register should include: potential risks, risk severity, probability, mitigation strategies, responsible parties, and deadlines for risk mitigation.

In conclusion, the Risk Management Team plays a critical role in the success of any project. Effective risk management requires the collaboration of a diverse team with clear roles, responsibilities, and expectations. The team must establish a communication plan to ensure all stakeholders are informed throughout the risk management process.

Early creation of the Risk Management Team and regular meetings throughout the project lifecycle will ensure that risks are identified and addressed effectively and timely.

Stakeholders Play A Crucial Role

Stakeholders play a crucial role in the success of a risk management plan. These are individuals or groups that have an interest or investment in the project, and may be affected by the potential risks. It is essential to identify stakeholders early in the risk management process and engage with them throughout.

The main stakeholders include project sponsors, customers, end-users, investors, regulatory bodies, contractors, employees, and the public.

The project sponsor is a key stakeholder who funds, initiates, and advocates for the project. They have significant influence over the goals, scope, and direction of the project, and want to ensure successful delivery. Customers and end-users are important stakeholders who will use the product or service and rely on its functionality.

Their needs and expectations must be considered when assessing risks and developing mitigation strategies. Investors have a vested interest in the financial returns of the project and need assurance that risks are being managed effectively. Regulatory bodies and other external stakeholders may have legal or ethical requirements that must be adhered to.

Internal stakeholders such as contractors and employees are also important as they provide the necessary skills and resources to carry out the project. Their safety and well-being must be considered when identifying and mitigating project risks.

The public may also be impacted by the project, whether through environmental, social, or economic factors. Their concerns and feedback must be considered and addressed as part of a risk management plan.

Effective communication with stakeholders is critical for successful risk management. Regular updates on risk assessments, potential impacts, and mitigation strategies must be provided to ensure stakeholders are informed and engaged. Stakeholder feedback and concerns must be considered and addressed in a timely manner.

The risk management team must create a collaborative environment that fosters trust, transparency, and accountability. By involving stakeholders in the risk management process, their support and buy-in can be gained, which can help mitigate potential risks and ensure successful project delivery.

Appendix A: Risk Register Template

The risk register template is a critical component of the risk management plan. It is a document that outlines all identified risks for a project or organization, including their potential impacts, likelihood of occurrence, and proposed mitigation strategies. The risk register template is an essential tool for managing risks effectively throughout the project lifecycle.

It allows project managers to identify potential threats and opportunities, prioritize risks based on their likelihood and impact, and develop comprehensive risk mitigation plans. The template should include categories such as risk description, risk category, likelihood of occurrence, impact rating, risk owner, and mitigation strategy.

The risk register template should be updated regularly throughout the project and communicated to all stakeholders to ensure that everyone is aware of the project’s risks and how they are being managed. By utilizing a risk register template, project managers can effectively manage risks and ensure the success of their projects.

Appendix B: Risk Assessment Matrix

The risk assessment matrix is an essential tool for any risk management plan. It is a visual representation of the likelihood and impact of identified risks. This matrix enables the risk management team to prioritize and determine which risks require immediate attention.

The matrix is divided into four quadrants, each representing a different level of risk. The top left quadrant indicates risks that are high in likelihood and impact and should receive immediate attention. The top right quadrant represents risks that are high in impact but low in likelihood and require mitigation strategies.

The bottom left quadrant represents risks that are low in impact but high in likelihood and require monitoring. The bottom right quadrant represents risks that are low in both impact and likelihood and require little or no action.

Furthermore, this matrix helps in identifying the risk tolerance level of the organization, i.e., the level of risk that the organization is willing to accept. This matrix provides a more objective and consistent approach to risk assessment, avoiding subjective evaluations that may vary from evaluator to evaluator.

In summary, the risk assessment matrix is a vital component of the risk management plan, providing a visual representation of the prioritization of risks and enabling the identification of the organization’s risk tolerance level.

Appendix C: Risk Mitigation Plan Template

The Risk Mitigation Plan Template is an essential component of the larger Risk Management Plan process. It provides a comprehensive guide to manage and mitigate risks that are identified within a project or program.

The main purpose of the template is to acknowledge potential risks in advance and develop effective strategies to avoid or minimize their impacts. The template includes a description of each risk, its potential impact on the project, and the likelihood of it occurring.

The risk mitigation plan identifies the owner of each risk and outlines the corresponding mitigation strategies that must be put in place to manage the risks effectively. The template also outlines a contingency plan in case the risk arises despite the management strategies.

The key elements of the Risk Mitigation Plan include the development of a mitigation strategy, the identification of risk triggers, the creation of risk indicators, and the establishment of response plans.

The strategy developed must directly address the potential impact of the risk and should include a timeline, resource allocation, and targeted outcomes. Identifying risk triggers involves recognizing the signs and signals that indicate the likelihood of a risk occurring. This information is essential in implementing the mitigation strategy properly.

Moreover, risk indicators are crucial in measuring the effectiveness of the mitigation strategy. The indicators could be quantitative, such as cost or schedule, or qualitative, such as stakeholder satisfaction or reputation.

Response plans are developed based on likelihood and severity scores of each risk, and they provide a step-by-step guide on what action must be taken when a particular risk happens.

The Risk Mitigation Plan Template, when used effectively, is a valuable tool in the overall Risk Management Plan process.

By providing project managers with a robust framework for identifying and managing risks, the template enables prompt action to be taken to prevent or mitigate the impact of unwanted events.

When utilized with the Risk Register Template and Risk Assessment Matrix, the Risk Mitigation Plan Template can result in a comprehensive and effective Risk Management Plan that ensures project success.

Appendix D: Risk Monitoring And Control Plan Template

The Risk Monitoring and Control Plan Template is a vital part of any comprehensive risk management plan. This template is used to identify potential risks, evaluate their likelihood and severity, and develop an appropriate plan to mitigate and control them.

The plan typically includes procedures for identifying and reporting risks, determining their potential impact, and assessing the effectiveness of mitigation measures.

Additionally, the template outlines the roles and responsibilities of various stakeholders in the risk management process, including risk managers, project managers, and subject matter experts.

The Risk Monitoring and Control Plan Template is an essential tool for ensuring that a project or business is prepared for potential risks and can respond effectively if they occur.

By systematically identifying and addressing potential risks, organizations can reduce the impact of these risks on their operations and their bottom line.

One of the key benefits of using this template is that it helps organizations create a structured framework for monitoring and controlling risks, which can save them time and money in the long run.

When creating a Risk Monitoring and Control Plan, it is important to closely follow the template and ensure that all relevant information is included. The template typically includes sections for identifying the risk, assessing its likelihood and impact, developing mitigation strategies, and monitoring and controlling the risk over time.

Additionally, it is important to regularly review and update the plan as new risks arise or existing risks change. By doing so, organizations can ensure that they are always prepared to respond to potential risks and can minimize their impact on their business operations.

Risk Management Plan: FAQs

What is a risk management plan.

A Risk Management Plan is a strategy document that identifies, assesses, and prioritizes potential risks and measures to mitigate or avoid them. This plan outlines how risks will be managed during a project or operation.

Why Is Having A Risk Management Plan Important?

A Risk Management Plan is important as it enables organizations to be proactive in identifying and managing potential risks. It assists in ensuring that risks are appropriately mitigated, reducing the likelihood of disruptions, and helps to avoid significant negative impacts that could negatively affect the organization.

What Are The Key Components Of A Risk Management Plan?

A Risk Management Plan typically comprises the following components: risk identification, risk assessment, risk mitigation, communication plan, monitoring, and review. Other components may include contingency planning, risk response planning, and risk reporting.

How Do You Conduct A Risk Assessment In A Risk Management Plan?

A risk assessment typically involves identification of potential risks, analysis of the likelihood of risks occurring, and determining potential impact. A risk matrix is often employed, which assigns a level of significance (high, medium, or low) to each risk, based on likelihood and impact.

How Does A Risk Management Plan differ From A Contingency Plan?

A Risk Management Plan and Contingency Plan are closely related; however, a Contingency Plan is a more specific version of the Risk Management Plan. A Contingency Plan outlines specific actions to take in the event of an identified risk occurring, while a Risk Management Plan identifies and assesses potential risks and outlines strategies to mitigate them.

When Should A Risk Management Plan Be Reviewed And updated?

A Risk Management Plan should be reviewed and updated regularly, especially when changes occur within the project or operation, such as changes in scope, resources, or the external environment. In general, Risk Management Plan reviews should occur as needed to ensure it is current and relevant.

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What Does a Business Continuity Plan Typically Include? [Complete Guide]

Last Updated: September 19, 2023

Introduction

A business continuity plan (BCP) is your first line of defense against any challenge that threatens the core functionalities of your organization’s operations. When disaster strikes, your BCP should be there to reduce the time it takes to get things back up and running as usual again – as quickly as possible.

If you’re not able to react quickly to these types of incidents, your company could suffer physical harm, monetary losses, reputational damage, data integrity loss, litigation and much more.

Designing a BCP can feel overwhelming, as it’s such a critical document; where should you start? Who should be involved in the process? How should it be disseminated? These are all questions we’ll answer in this guide, including what is typically included in a BCP.

Bonus Material: Free BCP Checklist

How to Create a Business Continuity Plan

It’s important to actively invest time and energy into preparing for any potential risk before a potential event of a disaster so that if or when it does, your BCP directs you to the necessary resources to return to business as usual. That’s why creating and developing your BCP needs to involve a great deal of strategy and intention.

Taking a risk-based approach is the best way to go about developing your business continuity plan and avoid the need to use implement a disaster recovery plan. Through a risk-based approach, you follow the following steps: identify, assess, mitigate, monitor, connect and report. Here’s how to apply each of these steps during the lifecycle of your BCP:

• Start by identifying your most critical processes. When a business continuity event occurs, taking a risk-based approach ensures that you understand what the most critical processes to your organization are that need to be prioritized first to get back up and running to minimize any impacts.
• Next, assess your various risks. By evaluating all of the various types of risks that an incident could bring up – such as financial, reputational, customer, legal or strategic impact – you’re able to adequately determine which steps must be included in your BCP to minimize those impacts.
• Be sure to implement strategic mitigations as part of your business impact analysis. Building a business continuity plan through a risk-based lens empowers you to design more effective policies and procedures that simultaneously minimize the impact of the disruption at hand.
• Monitor the effectiveness of your controls over time. Otherwise, your BCP won’t align with your risks, leaving you likely to be caught off guard next time a business continuity event occurs.
• Your BCP does not exist in isolation, so be sure to connect departmental efforts. This allows you to identify interdependencies that must be known if an event occurs to ensure all steps are taken.
• Reporting is a key step in the risk-based approach, as it reveals patterns over time so that you can improve your BCP development where needed and keep your organization protected from any future disruption.

What Should my Business Continuity Plan Include?

Your BCP should include:

• An analysis of all critical functions within your business. This will allow for preparation of resources.
• A prioritized list of risks that pose a severe or even catastrophic threat to your business. These can be prioritized through risk tolerances and risk appetite so you can visualize which ones fall farthest out of that range.
• A list of specific strategies (or mitigation activities) that help protect the critical components you identified earlier in the BCP.
• Evidence that the strategies have been tested across critical business functions, using key metrics, indicators and financial scenarios.
• Dashboards and reports that uncover challenges and allow you to update the plan and your business processes over time.

Examples of Potential Unforeseen Risks

Naturally, your BCP will include risks that you deem a threat to your business. It can be difficult to begin writing that list when you’re not sure exactly what should be on it. In Risk Management, it’s important to consider potential risks that others may not have ever predicted to become reality (many people today say they never imagined in their lifetime that they would experience a pandemic).

Here is a list of potential unforeseen risks that pose a threat to business continuity:

• The sudden unavailability of a key vendor-provided service
• A regional power outage
• Abandonment in leadership
• Data protection issue
• Supply chain issues
• Privacy policy issues
• Getting sued
• An industry strike
• Pest infestation
• Natural disasters
• Winning the lottery
• Receiving a life-threatening diagnosis
• Getting in an accident
• A threat to national security, such as a terrorist attack
• Collapse of infrastructure
• And perhaps the most timely example of all, a pandemic (check out our complete guide to building a BCP for COVID-19 here )

BCP Best Practices

Like we mentioned earlier in this guide, it’s important to take a risk-based approach when creating your BCP. This will help you better preserve your business reputation, build up customer confidence and allow you to gain a competitive advantage. It will also ensure that you can avoid situations of disaster recovery. (Read our full guide on Business Continuity vs. Disaster Recovery )

To receive these benefits, it’s best practice to leverage robust business continuity planning software . This enables you to inherently take a risk-based approach and demonstrates to customers and stakeholders that you are prioritizing business continuity planning. This is especially true today amidst our ever-evolving disruptive business environment and the See-Through Economy.

Your business continuity plan will be different from anyone else’s, which is why it’s important to dedicate time and resources to creating one that fits your unique needs and risk factors. Working with a professional risk consultant is just one added benefit that’s included with your partnership with LogicManager. With their help, you’ll be able to better leverage the tools and resources included in our integrated ERM software, as well as our solution package for business continuity development .

Complimentary Download: BCP Checklist

Download our free BCP checklist to ensure that you are on the right track with your business continuity planning.

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COMPLIMENTARY DOWNLOAD: BCP Checklist

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