The best way to calculate risk when scaling a business

Growing and scaling your business will involve taking risks. To increase your chances of success, make sure the risks you take are calculated.

Taking risks is a natural part of being in business. As a business coach, one of the main things I do with leadership teams is to help them identify the risks in their strategic plan and help them find ways of mitigating them to increase their chances of success.

The key to dealing with risks in business is to make sure that you’re balancing the downsides with the upsides. It’s perfectly acceptable and even necessary to take risks to make big wins.

The challenge is that you can err both ways. You can fail to properly assess the downside of a particular decision and find yourself in trouble. You can also miss significant opportunities because you missed the upside.

Here are a few key steps you can take to better calculate the trade-offs in order to make better decisions over time.

1. Brainstorm all possible risks

Once you develop a plan, the first thing is to brainstorm all the possible risks that you might face. This includes internal risks associated with your ability to deliver on your tasks and efforts. It also includes external risks that might impact or influence your ability to successfully complete your plan.

Like all brainstorming efforts, the trick here is to create the right context and mindset to really explore all possibilities. Once you’ve created a sufficiently long and broad list, you can begin to filter and prioritize.

2. Determine the likelihood of each occurring

Using the list you’ve brainstormed, determine how likely each one of the events is to occur. I like using a scale of 1 to 5 or a rating of highmedium, and low. Your system should be simple enough to use quickly, yet varied enough to separate out your list in several different buckets.

What most teams get wrong is that, while certain specific risks are highly unlikely, general categories of risks are actually more likely. While the chance of your facility getting hit by a tornado is low, having some type of weather-related event that disrupts operations is quite a bit higher. A solution here is to focus more on categories and types of events than specific scenarios.

3. Assess the impact on your business

Once you’ve identified the likelihood of each one of these events, you can assess how it would affect your business and your project. Take the impact assessment and categorize it on a similar scale as you did probability.

Once you have the likelihood and the impact ratings, you can plot each risk to see how they relate together on these two axes. This will allow you to decide which actions you should take for each situation.

4. Ignore all low-impact risks

The first thing I do is ignore anything that’s low impact, even if it’s a high likelihood. I do this because, if it’s low impact, it’s something you can just deal with if and when it occurs. Investing time, energy, and money into managing and mitigating a low-impact risk just isn’t worth it.

Unfortunately, I see a lot of teams spending time and energy here. Usually, it’s because these are easier to deal with and feel good to solve. But in fact, it’s not a good strategic decision and will be a waste of your effort.

5. Create a plan of action for low-likelihood risks

For low-likelihood risks that have a chance to significantly affect the business or project, we want to make sure that we have a plan of action. We want to know what we would do should this risk occur and how we would minimize its impact. This could be things like taking out insurance or having a backup plan or an alternate strategy if this risk materializes.

6. Adjust your plans to avoid/minimize high-likelihood risks

High-likelihood, high-impact risks are where you want to spend the bulk of your time, energy, and money. First, you want to look at how to change your plans and strategies to avoid these risks in the first place.

If you can’t avoid these risks, you want to have a plan for how to mitigate their impact if they do occur. This could be having backups or redundant systems, finding ways of offsetting the risk to third parties, or alternate plans and paths we can take should they materialize.

The key part of the process for these risks is to set up a system for continuously monitoring and updating the plan. The sooner you know that risk is more likely to occur or specifically when it may occur, the more time you have to respond appropriately and to put your plans into action.

By properly assessing all the risks you potentially face and categorizing them into the appropriate buckets, you can make smart plans to deal with them, or hopefully even avoid them altogether.

The post The Best Way to Calculate Risk When Scaling a Business appeared first on Inc.

Original source: Inc.

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