A risk is the possibility of suffering loss or harm. A business risk is the possibility of loss or injury that might occur in the operation of a business.
Risk can be managed. Risk management is the process of evaluating risks and taking steps to avoid, reduce, transfer, or minimize loss.
Avoiding risk involves taking steps to eliminate it. A snow skiing equipment store located in a beachside town could potentially fail. The business owner can avoid this risk by opening the store in a more appropriate location.
Reducing risk is a strategy for minimizing risks that cannot be avoided. Stores run the risk of theft of merchandise by customers. Installing surveillance equipment and hiring security guards can reduce the risk of shoplifting.
Transferring risk is a strategy used to shift risk to another party. By purchasing an insurance policy, a business can transfer the costs or liabilities associated with certain risks to the insurance company.
Assuming risk is taking responsibility for losses that cannot be avoided, reduced, or transferred. If there is a downturn in the economy, a business’s sales may suffer. To assume this risk, the business can set up an emergency fund to cover unexpected financial losses.
A good risk management plan helps a business minimize or manage loss.