Risk management scenarios

When the idea of managing risks in your business doesn’t seem like an everyday occurrence you need to think about, then think again. Here are some scenarios that will make you think twice about risk management.

Identify risks

Jane runs a catering business and is thinking about buying a new delivery van. She works out the risks of buying a van, such as extra expenses if the van breaks down.

However, Jane should also focus on the other opportunities she could take with the same amount of money. Her other choices include buying new equipment or hiring more staff.

If she buys a van instead of hiring more staff, she risks missing out on the benefits of having more staff, such as faster customer service in her business. She should try to compare the future impacts of each possible choice before making her decision.

After identifying the risks, Jane can work out which ones are urgent. To analyse the risks related to an event, you should first look at:

  • the damage that the risk would cause (for example, the risk of fewer customers means lower sales for your business)
  • the likelihood of the risk happening (for example, think about how similar the competitor's business is to yours, and how loyal your customers are).

Work out a rating system for damage and likelihood. For example, you could have:

  • ratings of 1 to 4 for damage (1 for slight damage, and 4 for severe damage)
  • ratings of 1 to 4 for likelihood (1 for not likely, and 4 for extremely likely).

Finally, to work out the level of risk for an event, use this formula: risk level = damage x likelihood.

Based on our example above, the lowest risk level you could get is 1 (1 x 1), and the highest risk level you could get is 16 (4 x 4). You can use the risk levels to rank your risks from least urgent to urgent.

Evaluating risks

Petra runs a clothing retail store. She worries about the rise in theft during the busy end of year period. To manage this, she does a detailed assessment.  She works out that she lost $5000 to theft last December. As a result, she has security cameras installed in her store which leads to a 40% reduction in loss due to theft.  She works out the expected loss at:

Expected loss (current year) = $5000 – ($5000*40%) = $3000

She expects similar levels of theft this year. To reduce the risk of theft even more, the next step will be to hire a security guard during working hours. The cost of hiring a security guard for a month will be $4000 which is more than the expected loss, so she decides to accept the risk.

Instead of hiring a security guard, Petra meets with her staff to brainstorm possible ways to reduce the theft. They decide to move the shelves so staff can see customers more clearly. She also hires more staff for peak times to check on theft.

Risking opportunities

Mimi’s story

Mimi, a business owner, has $20,000 in the bank at an interest rate of 2.5%. She chooses to buy new equipment for her business to increase the efficiency of her workers. The risks of this choice include:

  • missing out on a higher interest rate in the future
  • the equipment doesn't increase efficiency as she expected.

Steve’s story

Steve runs a clothing retail store in the shopping strip of a suburb in Perth. Most of his sales come from people walking past his shop. Recently, a new shopping centre opened about 1km from his shop. This new shopping centre decreases the number of people who pass by Steve’s shop. He has to decide if he should move his business to the new shopping centre or stay where he is and increase marketing to attract new customers. He must think about the opportunities and the risks of changing location.

Steve notes the opportunities of changing location:

  • increase in sales as more people will walk past his new store
  • lower marketing expenses because of the busy location and co-marketing with other tenants.

And the risks of changing location:

  • increase in competition from similar clothing stores within the shopping centre
  • loss of regular customers and damage to business goodwill in local community.

Steve must decide if the opportunities are greater than the risks of moving to the new location. He also has to think about whether increasing his marketing budget will give him a better return on investment than moving.

Bob's story

Bob owns a takeaway restaurant. He understands the risks to his employees from hot cooking surfaces and sharp objects in the kitchen. He trains his staff to use appliances and knives safely to reduce the risk of injury. However, Bob didn’t plan for the drop in sales when a new restaurant opened nearby selling similar food.

Bob had noted a common risk to his employees, but failed to plan for a less obvious risk to his business.

John's story

John runs a suburban bakery. He wants to introduce new menu items to increase revenue. Before deciding on the menu change, he does a thorough risk assessment and identifies two risks. He sees that some new menu items will contain ingredients with a short shelf life but the current supplier doesn’t stock the ingredients throughout the year.

John is concerned about the risk of food poisoning due to short shelf life. He's also worried about creating unhappy customers due to the lack of new menu items.

After John discusses these concerns with his staff and suppliers, he decides not to add the new items to the menu yet and looks for other menu items he can add instead.

What to do…

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