The Psychology of Risk and How It Affects Business
All business owners face risk on a daily basis. How we anticipate and handle risky situations determines the success of our business. Research shows that if you are not prepared for risks associated with your business, you are likely to make mistakes which might seriously affect your ventures.
In order to properly deal with a crisis, you require a pre-crisis preparation. Understanding the psychology of risk as well as how to handle potential risks is crucial for the survival of a business. In this article, we will deal with risk management and how it affects your business.
What is the Psychology of Risk?
Before we delve deeper into the matter, let us first define the psychology of risk. The term might be unfamiliar to you and refers to the study and understanding of the mental processes related to our responses to risky situations, the recognition of risk’s impact, and the development of frameworks which can help us make sound judgments when facing risk, according to Risk Management magazine.
It is believed that businesses are just beginning to realize that there are frameworks which can help them handle risk better. Pre-crisis training can make all the difference when it comes to risk management.
How Risk Impacts Your Business
Business risk can cause many difficulties, especially to small businesses with low budgets. It is generally believed that due to lack of capital, small businesses face more risk than big companies.
Chron divided the implications of business risk into several categories:
- Strategic risk
- Compliance risk
- Financial risk
- Operational risk
Strategic risk implies the amount of competition present in the market. As the competition increases, the market share lowers which poses a risk to your business. That means you need to spend more time researching your competition and educating your potential customers on why your product is better than that of your competitors.
Compliance is another way risk can affect your business. As government regulations change, business owners must stay up to date with the new regulations in order to ensure that their company complies with them.
Perhaps the greatest risk of all is the financial risk. Many companies, especially small businesses, struggle to pay their business expenses. In order to collect money, they might resort to selling their products at discount prices. Anticipating and preparing for risky situations which could cost your company a lot of money could alleviate the difficulties.
Operational risk is related to your operational and administrative procedures such as supply chain, IT systems, recruitment, accounting controls, etc. Basically, operational risk implies events which could affect your production process. That includes broken or stolen equipment, inefficient tools, facilities, etc.
How to Manage Risk
Risk is defined as the probability of an event and its consequences. Risk management is the process of using tools and methods to manage that risk.
So what does risk management imply? It implies defining what could go wrong and working on strategies to deal with that possible situation.
Identifying risky situations and preparing for them in a timely manner can help minimize the losses (money, time, productivity) and potentially save your business. Businesses that have identified potential risks will be prepared to deal with them when the time comes.
In order to successfully prepare for a risky situation, you need to adhere to the risk management process:
- Identify the risk your business is facing
- Assess the likelihood of such an event happening
- Understand how to respond to these situations
- Apply proper systems to deal with these situations
- Monitor the effectiveness of your risk management measures
Once you identify risks, you should evaluate and rank them. You do so by considering the possible consequences of each risky situation as well as the probability of these situations. Then, you use tools and methods to deal with the consequences of these events in order to mitigate the implications.
One way to protect your business from risky situations is to get insurance. This will protect you from huge financial loses that might put your business in danger. If you get fire insurance, for example, you will receive some financial compensation if a fire damages your office premises.
If you don’t know what kind of insurance you should get, it is best to consult a financial planner like Opes Fidelio to advise you on the matter. They will provide insightful tips and help you choose the best insurance for your company.
When it comes to risk management, it is important to continue to monitor and identify risks that could affect your business. If you are prepared for a possible negative outcome that could jeopardize your business, you will be able to apply adequate measures to alleviate the consequences. Needless to say, the best insurance you can get is prevention. That is why it is essential to prepare and train your employees on how to properly deal with risky situations.