All businesses have to handle risk. Each risk a company faces is different and can require a different approach for effective management. In this article, the CEO of Ferrari Energy, Adam Ferrari, lists the five main techniques of risk management.
1. Avoid Nonessential Risk
Not every risk is terrible or should be avoided. Common sense and logic will help guide which bets you want to take, and you will find yourself in big bet situations if you have an aggressive business approach. The balance is understanding what you can afford to lose and how valuable the gain is.
Don’t forget the importance of being mindful of emotional decisions. Some things are risky that simply are not essential. Using simple best practices will also eliminate significant nonessential risks but keep your eyes on the prize and try not to get distracted by non-essential risk or fall into the trap of business complacency.
2. Recognize Acceptable Risk
Sometimes risks are apparent, but the cost of avoiding the risk might much outweigh the cost of accepting the risk. For example, one way to prevent the risk of temporary power outage might be to install a back-up power source.
However, if the electric grid infrastructure is generally reliable and outages are typically short, if they occur, the high cost of purchasing and installing an alternate power source is likely to be prohibitively expensive. The risk of a temporary power outage is likely to be a real risk, but one that is easily accepted.
3. Transfer Risk
When working with multiple parties on large projects, advance agreements to transfer and assign responsibility for risk can be effective. If a third-party general contractor is involved in a construction project for a business, the general contractor might expressly assume responsibility for the risk of loss from weather-related delays.
In general, insurance is another method of transferring risk. Business and corporate insurance are available to cover a wide variety of risks, including natural disasters and organizational problems that can cause loss. Deciding on whether to insure against risk involves comparing the cost of premiums against the possible cost of the loss to be protected against.
4. Mitigate Risk
Identifying and mitigating risk is usually the nuts and bolts of much of daily corporate life. Mitigation involves understanding risks and taking steps in advance to reduce the likelihood of loss. As an example, consider the risk involved in developing and implementing a new software program for invoicing and managing accounts receivable.
The risk of failures in this new system is obvious, as problems will undoubtedly lead to lost revenue and possible accounting nightmares. The mitigation strategy for this risk can include adequate training provided by the developers for any employees who will use the system, appropriate system testing, and keeping a backup running of existing systems for some period of time.
5. Disperse Risk
Some risks involve routine and somewhat predictable system failures. In these cases, spreading or dispersing the risk can be an effective management tool. An example of risk dispersal is developing and using a reliable backup protocol for data and programs stored and used as part of an IT system.
Routine and multiple backups to additional drives and servers spread the risk beyond a single computer or server. The advent of cloud computing facilitates real-time backups to servers in the cloud and is a prototypical example of dispersing risk.
About Adam Ferrari
Adam Ferrari is the founder of the Denver-based mineral acquisitions company Ferrari Energy. He is a chemical engineer by degree and is an accomplished petroleum engineer by profession. He also has experience in the financial sector through his work at an investment banking firm. Under his leadership, his company supported organizations including; St. Jude Children’s Hospital, Freedom Service Dogs, Denver Rescue Mission, Coats for Colorado, and Next Steps of Chicago.
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