What Is Risk Management in Business?

For every business, no matter how big or small, risk is inevitable. Small startups, medium companies, and global corporations can all be impacted by market shifts, financial uncertainty, public perception, and operational challenges. This makes risk management a vital skill for business owners, managers, leaders, and investors alike. 

Whether you’re pursuing a business degree or already leading an organization, understanding how to identify, assess, and respond to risk is essential. Business risks are often mismanaged when company leaders don’t understand how to anticipate challenges and make strategic decisions to protect organizations. Poor risk management can stem from relying on past data, overly narrow parameters, overlooking or disregarding potential threats, and miscommunication. When risk is mismanaged, the consequences can be severe, from financial loss and legal troubles to safety breaches, reputation damage, and even total failure. 

Effective business leaders prioritize risk management by allocating the time, resources, and attention to identifying and addressing potential threats. By developing strong risk management strategies, organizations minimize potential harm, safeguard organizations, and make confident decisions. 

Understanding Risk Management 

Understanding risk management is essential for business leaders. A key part of this is risk assessment—finding, assessing, and controlling vulnerabilities to a company’s financial security and stability, evaluating potential problem areas, considering the best strategies for addressing them, and putting safeguards in place to reduce the likelihood of those risks. Businesses that adopt strong risk management strategies are better prepared to handle financial, operational, and strategic challenges. If concerns do arise, there are methods in place for responding effectively.  

This guide explores common examples and techniques used for risk management to help business owners and leaders protect their organizations and position for success. 

How Risk Management Works

Risk management planning can look different for every business, depending on a company’s size, industry, and resources. Large organizations may have dedicated risk management teams, while smaller businesses may assign risk oversight to an individual or incorporate it as one responsibility of a broader role. 

Identify risks. Even before launching a business, product, or service, risk identification should take place. Types of risk include financial losses, safety hazards, operational risk, and market shifts.  

Evaluate risks. Once identified, a thorough risk analysis should be conducted to determine potential impact. This includes estimating potential risks like financial loss, historical occurrences, possibility of recurrence, and how it will affect customers, stakeholders, and the business as a whole. 

Risk preparation. Companies should have strategies in place to mitigate and manage risks in the event they occur. This includes putting safeguards in place, creating contingency plans, and allocating resources to rectify issues. 

Allocate resources. Successful risk management requires time, money, and oversight. Companies that don’t invest enough in risk management are prone to bigger potential damage down the road. 

Monitor and respond. Organizations should regularly review their risk management strategies. Circumstances may change over time, and risk monitoring processes should adapt and respond to emerging situations.  

Strategic risk management is vital in making sure a company and leadership understand what the potential problems could be, helping them create solutions for those problems and mitigate their risk. Taking risk management seriously can help a company be prepared for the future.   

Risk Management Examples:

Examples of risk management in business are easier to understand when applied to real companies and real-world situations. Here are some common ones:

• A company might choose to continue leasing instead of buying a new building if they’re unsure they can sell enough product to justify the cost. 

• An investor may opt out of funding a company due to an overly competitive market, or their goals do not align. 

• Car manufacturers reduce risk by conducting rigorous quality and safety inspections before vehicles are sold to consumers.

• Retailers may launch new products in stages to see how it does with consumers before releasing the full line. 

Many businesses mitigate risk through purchasing insurance. And certain industries, like healthcare, accept a degree of risk as part of their operations. 

Real-World Case Study

When COVID-19 disrupted global supply chains, Amazon took a comprehensive approach to mitigate risk. They prioritized essential goods, diversified their supplier base, and leveraged their own shipping company to bypass ports and expand their logistics infrastructure. These measures allowed operations to continue and maintain customer trust during a time of unprecedented upheaval. 

Why Risk Management Is Essential in Business 

The relationship between risk and business is unavoidable—and how risks are managed can determine whether a company thrives or fails. Large organizations may have a dedicated enterprise risk management department and predetermined strategies, while entrepreneurs often handle risks as they arise. In either case, the goal is the same—to keep the company as secure as possible and be prepared for the likelihood of a financial, physical, or technological problem.  

Risks are real, and statistics show why proactive risk management matters:

• Microsoft estimates that there are 600 million cyberattacks per day

• 70% of organizations experienced at least two critical risk events in the past year

• Global losses due to cybercrime are projected to reach $10.5 trillion

• The average cost of a data breach for an American company was $9.36 million

• A significant number of overall data breaches are financially motivated

Effective business risk management protects company finances and reputation while also keeping employees, customers, and stakeholders safe.

Meeting Business Objectives  

When businesses effectively mitigate potential risks, they are better able to meet their business objectives. From financial benchmarks to delivering exceptional customer service, risk management is a key to success. 

Both internal and external risks can influence an organization’s likelihood of meeting objectives. Internal risks include employees, technology, safety hazards, and more. External risks include the economy, natural disasters, and politics. Business goals are often focused around making sales and generating revenue, keeping customers satisfied, and ensuring employee satisfaction. These objectives are far easier to meet when risks are managed effectively.

Risk management can be more complex than just deciding whether or not to take action. In some situations, the potential cost of the risk itself might be lower than the cost of prevention, in which case business owners may choose not to take risk management measures. In other cases, certain risks are unavoidable but necessary to move forward. Regardless of industry, risk management is a complex yet vital component of business operations. 

Compliance

Every business operates under specific industry rules and regulations. Failure to comply can have legal, financial, and reputational repercussions. Common compliance requirements include:

Data protection. Regulations such as the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA) set strict rules for collecting, storing, and using customer data. Noncompliance can result in millions of dollars in fines.

Internal requirements. Corporate governance laws may require companies to form a board of directors, hold regular meetings, update bylaws, and provide stock options. 

Fair Labor Standards Act. This rule establishes minimum wage, overtime pay, recordkeeping requirements, and more. 

Industry-specific regulations. Many industries require certain paperwork and tax obligations based on the type and size of the corporation.  

Compliance helps ensure that companies operate ethically and legally. Non-compliance can result in financial penalties, operational disruptions, employee dissatisfaction, customer trust, and damage to a company’s reputation. 

Risk Management Techniques 

There are many techniques an organization can use to lower risk. It’s important to carefully evaluate which risks exist and determine the strategies that work best for each business. Common techniques include: 

Avoiding Risk  

A thorough risk assessment is usually the first step in an effective risk management strategy. If successful, there is minimal to no chance of loss from that particular risk factor. For this reason, avoidance is usually the first risk management technique organizations consider. Examples include conducting background checks on prospective employees or choosing not to invest in an industry experiencing economic decline. 

Transferring Risk  

Transferring risk occurs when a company recognizes risk that cannot be avoided and shifts it to an insurance provider or other third-party. Examples include purchasing insurance for buildings or products to protect against fire, theft, and flooding. Or creating legally binding contracts with employees or clients to offset potential liabilities.

Preventing Loss  

Putting preventative measures in place helps reduce the impact of risk that cannot be avoided. For example, a company storing inventory in a warehouse might install security cameras or hire a security guard to protect against theft or damage. Another example is requiring passwords and authentication measures to safeguard against data breaches.

Retaining Risk  

This risk management technique involves handling risk internally instead of relying on outside sources. Companies may choose this method when they believe that they can manage risks more cost effectively on their own than with an insurance company or other vendor. For example, a company may use an in-house IT department to maintain cybersecurity rather than contracting with a third party. Similarly, a company might opt not to buy an insurance policy for a certain risk because it’s less costly to manage incident occurrences than pay for monthly premiums. 

Spreading Risk  

Spreading risk is most common in the insurance industry, where insurers work with other companies to share the liability of large clients. For example, if an oil supertanker purchases insurance, the provider may spread the coverage among multiple other insurers so in the event of a disaster the cost and risk is shared. 

Building Risk Management Skills for Every Career

While risk is an inevitable part of business, having a risk management plan is essential to protecting a company’s long-term success. That’s why it’s important for business leaders and owners to understand and implement risk management strategies. With a flexible, online business degree from WGU, students can develop essential risk management skills that are valuable in any workplace or industry. Learn more today.