Last updated November 30, 2022
What is a Risk Management Plan?
A Risk Management Plan is a document that allows you to address and prepare for potential business risks. Within this plan, you:
- Identify business risks
- Assess each risk’s severity and probability
- Outline responses and solutions
Every business deals with risk. At any time, unexpected events can interrupt or prevent your business’s development, causing financial loss.
By addressing potential risks and planning how you would respond to them, you proactively get ahead of problems instead of reacting impulsively at the moment of occurrence.
All types of organizations can benefit from our Risk Management Plan template, including corporations, small family-owned businesses, and nonprofits. Please note, our template caters to high-level organizational planning rather than detailed project-level planning.
What is the purpose of a Risk Management Plan?
Preparing for potential risks is essential to the success of a business. The best way to prepare is with a Risk Management Plan.
A written plan prompts you to look ahead and foresee risks which can reduce the chance of a problem occurring in the first place. This adds immeasurable value to your business.
Unfortunately, having a plan does not eliminate risks and future problems as some external forces, such as market demand and the economy, are out of your control.
A Risk Management Plan can, however, help you make smart decisions for your business when it inevitably encounters a problem. With a plan, you’ll have an organized, concise document to reference when a risk becomes a reality.
In this sense, it acts as a set of instructions, or a blueprint, ensuring that your business makes sound decisions.
When you can reference a plan to respond to problems, you can reduce the negative impact on your business’s finances.
Why is it essential to create a Risk Management Plan?
Talking or thinking about your business's risks is not enough.
If you rely on past conversations or thoughts and don’t create a Risk Management Plan, it can be challenging to recall specific strategies once a problem occurs.
Furthermore, thinking clearly and putting together a game plan while a crisis is unfolding can be tricky. This is why having a written plan is vital.
Also, if your business involves multiple people, a written Risk Management Plan provides clarity for everyone and gets everyone on the same page.
When to make a Risk Management Plan
Ideally, you should create a Risk Management Plan before you start your business. However, if you have already launched your business or bought an existing one, it’s never too late to make a plan.
Of course, it’s best to have a Risk Management Plan before a risk becomes a reality. Therefore, establish a plan as soon as possible to ensure that your business is prepared for its next challenge.
For most businesses, Risk Management Plans are not something you create once. As a business evolves and grows, you may find it helpful to make new plans, or at least update your existing ones, to account for new challenges and risks. Evolving and growing your business may include:
- Building or moving into a new location
- Expanding into a new sector or industry
- Rebranding
Four types of business risk
In our Risk Management Plan template, we cover the following four types of business risk.
1. Strategic risk
Strategic risks are threats that could cause a business strategy to fail, negatively impacting business progress and profits.
For the most part, strategic risks are external threats. They may stem from uncontrollable market forces.
Here are some examples of strategic risks:
- Competitors dominating your industry and market
- Dwindling demand for your product or service
- Limited distribution channels
- Emerging technologies or industries posing competitive threats
- Economic downturn affecting your customer base
To identify strategic risks, ask yourself the following questions:
- What challenges does the market pose?
- Who are your competitors, and how does your business compare?
- Is the market stable, or does demand fluctuate frequently?
- Is it possible that your product or service will become obsolete or be replaced?
- Is your pricing competitive?
2. Operational risk
Operational risk refers to the potential loss your business could experience due to disrupted day-to-day operations. Often, these disruptions stem from your business itself.
Inefficient internal processes, systems, and equipment could all be considered operation risks because they could interrupt business operations. External events that disrupt the flow of business operations may also be operational risks.
Here are some examples of common operational risks:
- Lack of experience or critical skillsets among employees
- Outdated or unreliable technology or facilities
- Dangerous work conditions or job-related hazards
- High staff turnover
- Susceptibility to fire or other environmental disasters
To identify operational risks, ask yourself the following questions:
- What areas of your business need improvement?
- Is your business’s equipment and infrastructure reliable?
- Are there on-site or in-office hazards that could result in injury?
- How well do your processes reduce employee error?
- Do you ever fall short on quotas or fail to meet production deadlines?
- Do your employees lack relevant skills or expertise?
3. Financial risk
Financial risk is the threat that your business cannot manage its debts and other financial obligations. This type of risk may come from your business's interactions with the market, such as losses in the stocks, or can stem from unstable business performance.
Here are some common examples of financial risks:
- Negative net revenue or operating at a loss
- Heavy dependence on venture funding, loans, etc.
- Increasing operational costs due to business expansion or upgrading
- Previous record of insurance claims
- Vulnerability to fraud
To identify financial risks, ask yourself the following questions:
- What is your annual revenue (gross) and income (net profit and earnings)?
- What are your operational expenses?
- Do you expect your expenses to change in the foreseeable future?
- Is your business profitable?
- Do you require additional funding such as venture capital?
4. Compliance risk
Compliance risk is the threat that your business’s finances or reputation could be harmed due to violations of laws, regulations, codes of conduct, or standards of practice.
With these types of risks, your business could encounter issues such as losing customers, paying fines, or even being forced to close.
Industries that are highly regulated, such as the food and alcohol industry, have to be more mindful of compliance risks.
Here are some common examples of compliance risks:
- Potential negative impact on the environment
- Failure to meet production quality standards
- Violations of health and safety standards
- Risk of corruption among employees or shareholders
- Data breaches and other cyber risks
To identify compliance risks, ask yourself the following questions:
- Does your business follow government laws?
- Does your business adhere to the rules of other official regulatory bodies?
- Does your business have a pre-existing history of non-compliance?
- Are there ethical standards in place?
- Are all business transactions monitored for quality and safety?
Steps to create a Risk Management Plan
To create a Risk Management Plan, follow these steps.
1. Identify your risks
The first step in developing a Risk Management Plan is identifying your risks. Understanding the different types of risk is essential for this step. As stated above, our template outlines the following four risk types.
- Strategic
- Operational
- Financial
- Compliance
2. Determine severity and probability
To create an effective Risk Management Plan, you must estimate each risk’s severity and probability.
- Severity refers to how much damage or disruption a risk could potentially cause to your business.
- Probability refers to how likely the risk will occur.
In our template, we ask you to rate each risk’s severity and probability on a scale from one to five, one being low and five being high.
To find out how important a risk is to address, it's vital that you consider severity and probability together. The best way to do this is with a risk assessment matrix.
A risk assessment matrix is a visual tool that illustrates how a risk’s severity and probability interact. Here is an example:
Once you assess the severity and probability of a risk, you can chart it in the matrix to understand how much attention it needs. If a risk falls in the orange or red area, it may require more attention, planning, and resources.
3. Outline risk response plan
After identifying a specific risk and estimating its severity and probability, outline how you will respond.
By including responses and solutions to potential problems, your Risk Management Plan becomes an extremely valuable document. During a crisis or challenge, you’ll be able to refer to your plan and follow instructions.
There are four main strategies when it comes to responding to or mitigating risks.
Avoidance
With a risk avoidance strategy, you take action or make changes to entirely prevent a risk from happening in the first place.
Reduction
With a risk reduction approach, you take measures to reduce the likelihood of a risk happening.
Transference
With a transference strategy, you pass the responsibility or liability to a third party should a risk become an actual problem. For many businesses, risk transference translates into paying an insurance company to cover certain risks.
Acceptance
With an acceptance approach, you don’t attempt to prevent risk. Instead, you plan to deal with risk if it does arise. In simpler words, you accept the risk. Businesses may use this strategy because a certain risk is unlikely to occur or is offset by a greater chance of success.
