It’s important to take risks. Jumping out of airplanes, moving to Singapore, revealing the feelings you have for your best friend: these are all actions we take to remind ourselves we’re alive.
Without risk, life is all white bread and no grilled cheese. We have to be bold if we wish to succeed.
Elements often included in a risk management plan
- Risk Register
- Implementation and Closeout
But with too much risk, that grilled cheese turns into a grease fire. That’s where risk management comes into play, as we take precautions to ensure we don’t cross boundaries into dangerous territory, whether that be physical, or financial.
Risk management is a huge part of the business world. If you could predict a company’s or project’s complete or partial failure, wouldn’t you?
In this article, we’ll go more in-depth as to what risk management is, and how you can prepare for the risks ahead.
What is risk management?
Risk management is the process of researching and analyzing the effects of potential decisions so as to mitigate negative impacts.
To put it simply, say you want to go skydiving, as I mentioned earlier. What is a possible risk of skydiving? Well, your parachute could malfunction and you could plummet to the earth. If you’re looking at it from a risk management perspective, you’d double and triple-check your parachute.
You might even make sure you have a backup chute, if that’s possible.
In business, you’d do the same thing for your professional endeavors. Examples of this are reaching out to a candidate’s references before hiring them to lead your sales team, or running comprehensive studies of stock market patterns before deciding where your investments will go.
Image depicting financial forecasting courtesy of Corporate Finance Institute
Risks aren’t just limited to these examples. If you build your business in California, you might consider the risk of natural disasters such as earthquakes or fires. If you’re developing a medical product, you would consider the risks of users having an adverse reaction.
Perhaps the most recent and worst example of inattention to risk is through the housing crisis of 2007, also known as the subprime meltdown. Lenders recklessly handed out home loans to borrowers with poor credit, which led to a financial recession.
By developing a risk management plan, your company could avoid some potentially disastrous circumstances.
How to create a risk management plan
A risk management plan helps you map out your project or business endeavor in such a way that helps you determine potential problems. For the purpose of this article, we’ll discuss a risk management plan as it relates to projects.
A risk management plan is a completed document that outlines all the potential risks associated with an idea. The risk management plan is usually outlined in the business plan or business case which is submitted to stakeholders at the start of a project.
Image courtesy of Manuka Projects
A comprehensive risk management plan will most often include outlines of all of the following elements.
In this stage, you would perform market research or look at your competitors’ history to see what kinds of problems you should anticipate.
An in-depth analysis details all the risks you are anticipating in relation to this particular project. The “analysis” aspect also takes into account a risk’s likelihood of occurring.
In this section of the plan, you’d outline the various financial risks of the project, and determine how you plan to overcome them. This is not a breakdown of the project’s budget, but rather an outline of how cost could become a risk.
Not all risks can be avoided. In this section, you determine which actions to take should a risk be unavoidable in order to lessen the damage of that risk.
A risk register is a type of comprehensive document that defines and details all risks associated with the project. This document should be continuously updated as new risks develop or are made known to the project manager.
In this part of the plan, you communicate who is responsible for troubleshooting or otherwise mitigating certain risks.
Throughout a project’s life cycle, the chance for risk waxes and wanes. It’s in the project implementation stage that it’s important to report on whether certain risks were avoided, mitigated, etc.
During closeout, the project participant responsible for reporting will analyze the success or failure of the risk management strategy. This will set project managers up for success should they attempt to do something similar in the future.
Like I said, many risks are impossible to avoid. But without the risk, how can we get the reward?
Following the steps outlined in this risk management plan will help you pursue projects boldly without taking on any unnecessary debt or other complications.
Read more about project management! I recommend How to Conduct a Feasibility Study that Saves Time and Money.