Categorising risk in your business
Risk is a normal feature of being in business. How do you categorise the risks your company faces so as to ensure that they are understood and managed effectively by key personnel?
Risk impact and likelihood
As the financial controller, you will have the most comprehensive view of the risks that your business faces. Risk can be viewed from the point of view of low to high impact as well as low to high likelihood. The impact and likelihood of most, but not all, risks tends to differ from business to business.
Example 1. A fire in most business office premises might be considered to be high impact, but low likelihood, whereas in a factory environment this risk may become high impact with a high likelihood.
Example 2. In some businesses, the risk of employing illegal casual labour may be highly likely and have a relatively high impact, but would be low likelihood, low impact in other businesses.
Step 1. Analyse the risks you identify in your business by both impact and likelihood, high, medium and low.
Step 2. Focus on high impact, high likelihood risks first, then any risk where either impact or likelihood is high etc.
Measuring impact
The impact of a risk can sometimes, but not always, be measured and a monetary value allocated.
Tip. Don’t ignore risks where the impact is difficult to measure as it may nevertheless be very significant.
Example. The damage caused by a former key employee who removes customer information when leaving the business could be difficult to measure but have very serious consequences.
Likelihood
Unlike impact, the likelihood of any given risk occurring depends on a number of factors which can change over time. For example, the likelihood of a given risk can depend on how good the relevant controls are in the business.
Well trained staff, operating to relevant and effective procedures, will reduce the likelihood of many business risks; for example the likelihood of undetected falsification of expenses or fraud.
Note. Change usually increases the likelihood of risk. This could be change in personnel or process or a new product being introduced.
Business overview
Think of the business as a whole when considering risk. Talk to key management responsible for areas such as operations, production, distribution, sales and HR. The risks your business faces can be analysed by headings such as operational, regulatory or legal, financial assets and liabilities, IT, markets, people and strategic.
Once you have categorised the risks in your business you will be better prepared to consider how each risk may best be dealt with, whether via insurance, avoidance, improved procedures or training.
For a model to help categorise risk in your business, visit http://financialcontroller.indicator.co.uk (FC 02.04.11).
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