major risks to business plan success

Business Plan Risk Analysis - What You Need to Know

The business plan risk analysis is a crucial and often overlooked part of a robust business plan. In the ever-changing world of business knowing potential pitfalls and how to mitigate them could be the difference between success and failure.  A well-crafted business plan acts as a guiding star for every venture, be it a startup finding its footing or a multinational corporation planning an expansion. However, amidst financial forecasts, marketing strategies, and operational logistics, the element of risk analysis frequently gets relegated to the back burner. In this blog, we will dissect the anatomy of the risk analysis section, show you exactly why it is important and provide you with guidelines and tips. We will also delve into real-life case studies to bring to life your learning your learning.

Table of Contents

• Risk Analysis - What is it?
• Types of Risks
• Components of Risk Analysis
• Real-Life Case Studies
• Tips & Best Practices
• Final Thoughts

Business Plan Risk Analysis - What Exactly Is It?

Risk analysis is like the radar system of a ship, scanning the unseen waters ahead for potential obstacles. It can forecast possible challenges that may occur in the business landscape and plan for their eventuality. Ignoring this can be equivalent to sailing blind into a storm. The business plan risk analysis section is a strategic tool used in business planning to identify and assess potential threats that could negatively impact the organisation's operations or assets. Taking the time to properly think about the risks your business faces or may face in the future will enable you to identify strategies to mitigate these issues.

Types of Business Risks

There are various types of risks that a business may face, which can be categorised into some broader groups:

• Operational Risks: These risks involve loss due to inadequate or failed internal processes, people, or systems. Examples could include equipment failure, theft, or employee misconduct.
• Financial Risks: These risks are associated with the financial structure of the company, transactions the company makes, and the company's ability to meet its financial obligations. For instance, currency fluctuations, increase in costs, or a decline in cash flow.
• Market Risks: These risks are external to the company and involve changes in the market. For example, new competitors entering the market changes in customer preferences, or regulatory changes.
• Strategic Risks: These risks relate to the strategic decisions made by the management team. Examples include the entry into a new market, the launch of a new product, or mergers and acquisitions.
• Compliance Risks: These risks occur when a company must comply with laws and regulations to stay in operation. They could involve changes in laws and regulations or non-compliance with existing ones.

The business risk analysis section is not a crystal ball predicting the future with absolute certainty, but it provides a foresighted approach that enables businesses to navigate a world full of uncertainties with informed confidence. In the next section, we will dissect the integral components of risk analysis in a business plan.

Components of a Risk Analysis Section

Risk analysis, while a critical component of a business plan, is not a one-size-fits-all approach. Each business has unique risks tied to its operations, industry, market, and even geographical location. A thorough risk analysis process, however, typically involves four main steps:

• Identification of Potential Risks: The first step in risk analysis is to identify potential risks that your business may face. This process should be exhaustive, including risks from various categories mentioned in the section above. You might use brainstorming sessions, expert consultations, industry research, or tools like a SWOT analysis to help identify these risks.
• Risk Assessment: Once you've identified potential risks, the next step is to assess them. This involves evaluating the likelihood of each risk occurring and the potential impact it could have on your business. Some risks might be unlikely but would have a significant impact if they did occur, while others might be likely but with a minor impact. Tools like a risk matrix can be helpful here to visualise and prioritise your risks.
• Risk Mitigation Strategies: After assessing the risks, you need to develop strategies to manage them. This could involve preventing the risk, reducing the impact or likelihood of the risk, transferring the risk, or accepting the risk and developing a contingency plan. Your strategies will be highly dependent on the nature of the risk and your business's ability to absorb or mitigate it.
• Monitoring and Review: Risk analysis is not a one-time task, but an ongoing process. The business landscape is dynamic, and new risks can emerge while old ones can change or even disappear. Regular monitoring and review of your risks and the effectiveness of your mitigation strategies is crucial. This should be an integral part of your business planning process.

Through these four steps, you can create a risk analysis section in your business plan that not only identifies and assesses potential threats but also outlines clear strategies to manage and mitigate these risks. This will demonstrate to stakeholders that your business is prepared and resilient, able to handle whatever challenges come its way.

Business Plan Risk Analysis - Real-Life Examples

To fully grasp the importance of risk analysis, it can be beneficial to examine some real-life scenarios. The following are two contrasting case studies - one demonstrating a successful risk analysis and another highlighting the repercussions when risk analysis fails.

Case Study 1: Google's Strategic Risk Mitigation

Consider Google's entry into the mobile operating system market with Android. Google identified a strategic risk : the growth of mobile internet use might outpace traditional desktop use, and if they didn't have a presence in the mobile market, they risked losing out on search traffic. They also recognised the risk of being too dependent on another company's (Apple's) platform for mobile traffic. Google mitigated this risk by developing and distributing its mobile operating system, Android. They offered it as an open-source platform, which encouraged adoption by various smartphone manufacturers and quickly expanded their mobile presence. This risk mitigation strategy helped Google maintain its dominance in the search market as internet usage shifted towards mobile.

Case Study 2: The Fallout of Lehman Brothers

On the flip side, Lehman Brothers, a global financial services firm, failed to adequately analyse and manage its risks, leading to its downfall during the 2008 financial crisis. The company had significant exposure to subprime mortgages and had failed to recognise the potential risk these risky loans posed. When the housing market collapsed, the value of these subprime mortgages plummeted, leading to significant financial losses. The company's failure to conduct a robust risk analysis and develop appropriate risk mitigation strategies eventually led to its bankruptcy. The takeaway from these case studies is clear - effective risk analysis can serve as an essential tool to navigate through uncertainty and secure a competitive advantage, while failure to analyse and mitigate potential risks can have dire consequences. As we move forward, we'll share some valuable tips and best practices to ensure your risk analysis is comprehensive and effective.

Business Plan Risk Analysis Tips and Best Practices

While the concept of risk analysis can seem overwhelming, following these tips and best practices can streamline the process and ensure that your risk management plan is both comprehensive and effective.

• Be Thorough: When identifying potential risks, aim to be as thorough as possible. It’s crucial not to ignore risk because it seems minor or unlikely; even small risks can have significant impacts if not managed properly.
• Involve the Right People: Diverse perspectives can help identify potential risks that might otherwise be overlooked. Include people from different departments or areas of expertise in your risk identification and assessment process. They will bring different perspectives and insights, leading to a more comprehensive risk analysis.
• Keep it Dynamic: The business environment is continually changing, and so are the risks. Hence, risk analysis should be an ongoing process, not a one-time event. Regularly review and update your risk analysis to account for new risks and changes in previously identified risks.
• Be Proactive, Not Reactive: Use your risk analysis to develop mitigation strategies in advance, rather than reacting to crises as they occur. Proactive risk management can help prevent crises, reduce their impact, and ensure that you're prepared when they do occur.
• Quantify When Possible: Wherever possible, use statistical analysis and financial projections to evaluate the potential impact of a risk. While not all risks can be quantified, putting numbers to the potential costs can provide a clearer picture of the risk and help prioritise your mitigation efforts.

Implementing these tips and best practices will strengthen your risk analysis, providing a more accurate picture of the potential risks and more effective strategies to manage them. Remember, the goal of risk analysis isn't to eliminate all risks—that's impossible—but to understand them better so you can manage them effectively and build a more resilient business.

In the ever-changing landscape of business, where uncertainty is a constant companion, the risk analysis section of a business plan serves as a guiding compass, illuminating potential threats and charting a course toward success. Throughout this blog, we have explored the critical role of risk analysis and the key components involved in its implementation. We learned that risk analysis is not just about identifying risks but also about assessing their potential impact and likelihood. It involves developing proactive strategies to manage and mitigate those risks, thereby safeguarding the business against potential pitfalls. In conclusion, a well-crafted business plan risk analysis section is not just a formality but a strategic asset that empowers your business to thrive in an unpredictable world. As you finalise your business plan, keep in mind that risk analysis is not a one-time task but an ongoing practice. Revisit and update your risk analysis regularly to stay ahead of changing business conditions. By embracing risk with a thoughtful and proactive approach, you will position your business for growth, resilience, and success in an increasingly dynamic and competitive landscape. Want more help with your business plan? Check out our Learning Zone for more in-depth guides on each specific section of your plan.

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12 Types of Business Risks and How to Manage Them

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90% of startups fail .

Thanks to the explosion of the digital economy, business founders have plenty of opportunities that they can tap into to build a winning business.

Unfortunately, there is a myriad of challenges your new business has to navigate through. These risks are inevitable, and they are a part of life in the business world.

However, without the right plan, strategy, and instruments, your business might be drowned by these challenges.

Therefore, we have created this guide to show you how can your business utilize risk management to succeed in 2022.

There are many types of startup and business risks that entrepreneurs can expect to encounter in 2022. Most of these threats are prevalent in the infancy stages of a business.

To know what you’ll be up against, here is a breakdown of the 12 most common threats.

12 Business Risks to Plan For

1) economic risks.

Failure to acquire adequate funding for your business can damage the chances of your business succeeding.

Before a new business starts making profits, it needs to be kept afloat with money. Bills will pile up, suppliers will need payments, and your employees will be expecting their salaries.

To avoid running into financial problems sooner or later, you need to acquire enough funds to shore up your business until it can support itself.

On the side, world and business country's economic situation can change either positively or negatively, leading to a boom in purchases and opportunities or to a reduction in sales and growth.

If your business is up and running, a great way to limit the effect of negative economic changes is to maintain steady cash flow and operate under the lean business method.

Here's an article from a founder explaining how he set up a lean budget on his $400k/year online business.

2) Market Risks

Misjudging market demand is one of the primary reasons businesses fail .

To avoid falling into this trap, conduct detailed research to understand whether you will find a ready market for what you want to sell at the price you have set.

Ensure your business has a unique selling point, and make sure what you offer brings value to the buyers.

To know whether your product will suit the market, do a survey, or get opinions from friends and potential customers.

Building a Minimum Viable Product of that business idea you've had is the recommendations made by most entrepreneurs.

This site, for example, was built in just 3 weeks and launched into the market to see if there was any interest in the type of content we offered.

The site was ugly, had little content and lacked many features. Yet, +7,700 users visited it within the first week, which made us realize we should keep working on this.

90% of startups fail. Learn how to not to with our weekly guides and stories. Join 40,000+ founders.

3) Competitive Risks

Competition is a major business killer that you should be wary of.

Before you even start planning, ask yourself whether you are venturing into an oversaturated market.

Are there gaps in the market that you can exploit and make good money?

If you have an idea that can give you an edge, register it. This will prevent others from copying your product, re-innovating it, and locking you out of what you started.

Competitive risks are also those actions made by competitors that prevent a business from earning more revenue or having higher margins.

4) Execution Risks

Having an idea, a business plan, and an eager market isn’t enough to make your startup successful.

Most new companies put a lot of effort into the initial preparation and forget that the execution phase is equally important.

First, test whether you can develop your products within budget and on time. Also, check whether your product will function as intended and whether it’s possible to distribute it without taking losses.

5) Strategic Risks

Business strategies can lead to the growth or decline of a company.

Every strategy involves some risk, as time & resources are generally involved to put them into practice.

Strategic risk in the chance that an implemented strategy, therefore, results in losses.

If, for example, the Marketing Department of a company implements a content marketing strategy and a lot of months, time & money later the business doesn't see any ROI, this becomes a strategic risk.

6) Compliance Risks

Compliance risks are those losses and penalties that a business suffers for not complying with countries' and states' regulations & laws.

There are some industries that are highly-regulated so the compliance risks of businesses within them are super high.

For example, in May 2018, the EU Commission implemented the General Data Protection Regulation (GDPR), a law in privacy and data protection in the EU, which affected millions of websites.

Those websites that weren't adapted to comply with this new rule, were fined.

7) Operational Risks

Operational risks arise when the day-to-day running of a company fail to perform.

When processes fail or are insufficient, businesses lose customers and revenue and their reputation gets ruined.

One example can be customer service processes. Customers are becoming every day less willing to wait for support (not to mention, receive bad quality one).

If a business customer service team fails or delays to solve customer's issues, these might find their solution in the business competitors.

8) Reputational Risks

Reputational risks arise when a business acts in an immoral and discourteous way.

This led to customer complaints and distrust towards the business, which means for the company a big loss of sales and revenue.

With the rise of social networks, reputational risks have become one of the main concerns for businesses.

Virality is super easy among Twitter so a simple unhappy customer can lead to a huge bad press movement for the company.

A recent example is the Away issue with their toxic work environment, as a former employee reported in The Verge .

The issue brought lots of critics within social networks which eventually led the CEO, Steph Korey, to step aside from the startup ( she seems to be back, anyway 🤷‍♂️! ).

9) Country Risks

When a business invests in a new country, there is a high probability it won't work.

A product that is successful in one market won't necessarily be in another one, especially when people within them are so different in cultures, climates, tastes backgrounds, etc.

Country risk is the existing failure probability businesses investing in new countries have to deal with.

Changes in exchange rates, unstable economic situations and moving politics are three factors that make these country risks be even more delicate.

10) Quality Risks

When a business develops a product or service that fails to meet customers' needs and quality expectations, the chance these customers will ever buy again is low.

In this way, the business loses future sales and revenue. Not to mention that some customers will ask for refunds, increasing business costs, as well as publicly criticize the company's products, leading to bad reputation (and a viral cycle that means even less $$ for the business).

11) Human Risk

Hiring has its benefits but also its risks.

Employees themselves involve a huge risk for a business, as they become to represent the company through how they work, mistakes committed, the public says and interactions with customers & suppliers,

A way to deal with human risk is to train employees and keep a motivated workforce. Yet, the risk will continue to exist.

12) Technology Risk

Security attacks, power outrage, discontinued hardware, and software, among other technology issues, are the events that form part of the technology risk.

These issues can lead to a loss of money, time and data, which has many connections with the previously mentioned risks.

Back-ups, antivirus, control processes, and data breach plans are some of the ways to deal with this risk.

How Businesses Can Use Risk Management To Grow Business

To mitigate any future threats, you need to prepare a comprehensive risk management plan.

This plan should detail the strategy you will use to deal with the specific challenges your business will encounter. Here’s what to do.

1) Identify Risks

Every business encounters a different set of challenges.

Before mapping the risks, analyze your business and note down its key components such as critical resources, important services or products, and top talent.

2) Record Risks

Once risks have been identified, you need to assess and document the threats that can affect each component.

Identify any warning signs or triggers of that recorded risk, also.

3) Anticipate

The best way to beat a threat is to detect and prepare for it in advance.

Once you know your business can be affected by a certain scenario, develop steps that you will take to stop the risk or to blunt its effects.

4) Prioritize Risks

Not all types of business risk have the same effect. Some can bring your startup to its knees, while others will only cause minimal effects.

To keep your business alive, start by putting in place measures that protect the vital functions from the most severe and most probable risks.

5) Have a Backup Plan

For every risk scenario, have at least two plans for countering the threat before it arrives.

The strategy you put in place should be in line with the current technology and trends.

Ensure your communicate these measures with all your team members.

6) Assign Responsibilities

When communicating measures with the team, assign responsibilities for each member in case any of the recorded risks affect the business.

These members should also be responsible for controlling the risks every certain time and maintaining records about them.

What is a Business Risk?

The term "business risk" refers to the exposure businesses have to factors that can prevent them from achieving their set financial goals.

This exposure can come from a variety of situations, but they can be classified into two:

• Internal factors: The risk comes from sources within the company, and they tend to be related to human, technological, physical or operational factors, among others.
• External factors: The risk comes from regulations/changes affecting the whole country/economy.

Any of these factors led to the business being unable to return investors and stakeholders the adequate amounts.

What Is Risk Management?

Risk management is a practice where an entrepreneur looks for potential risks that their business may face, analyzes them, and takes action to counter them.

The steps you take can eliminate the threat, control it, or limit the effects.

A risk is any scenario that harms your business. Risks can emanate from a wide variety of sources such as financial problems, management errors, lawsuits, data loss, cyber-attacks, natural calamities, and theft.

The risk landscape changes constantly, therefore you need to know the latest threats.

By setting up a risk management plan, your business can save money and time, which in some cases can be the determinant to keep your startup in business.

Not to mention, on the side, that risk management plans tend to make managers feel more confident to carry out business decisions, especially the risky ones, which can put their startups in a huge competitive advantage.

Wrapping Up

Becoming your own boss is one of the most rewarding things you can do.

However, launching a business is not a walk in the park; risks and challenges lurk around every corner.

If you are planning to establish a new business come 2022, make sure you secure its future by creating a broad risk management plan.

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Taking Risks in Business the Right Way: Full Guide

As a  successful entrepreneur , business risks are essential to achieving growth and success. While it can be daunting to step outside of your comfort zone, the rewards can be significant.

In this article, we’ll explore the definition and importance of taking risks in business, provide examples of different types of business risks, and offer ideas and strategies for entrepreneurs looking to take calculated risks.

What Do We Mean By Taking Risks in Business?

Business risks refers to the process of identifying and pursuing opportunities that may be uncertain or have the potential for failure. It involves taking calculated risks to achieve  business objectives and goals , such as increasing revenue, market share, or expanding into new markets.

However, taking risks in business does not mean taking reckless or blind risks that may result in significant losses or problems to the business .

Should You Be Taking Risks in Business?

Taking risks in business is critical to achieving significant growth and success. According to the Bureau of Labor Statistics (BLS), 50% of small businesses fail within the first five years, while 65% fail within ten years.

However, businesses that take calculated risks are more likely to succeed and achieve long-term growth.

Are There Any Benefits?

• Increased innovation and creativity : Taking risks can encourage entrepreneurs to explore new and innovative ideas that can lead to breakthrough products or services.
• Competitive advantage : Businesses that take risks and innovate can gain a competitive advantage over their competitors, leading to increased market share and revenue.
• Improved decision-making skills : Taking risks requires entrepreneurs to make strategic decisions based on careful analysis and planning, which can improve their decision-making skills over time.
• Increased revenue and profitability : Taking calculated risks can lead to increased revenue and profitability, as businesses can identify new markets and revenue streams.
• Enhanced reputation : Successful risk-taking can enhance a business’s reputation, leading to increased customer loyalty and brand awareness.

9 Ideas for Taking Business Risks Effectively

There are many types of business risks out there. Some are better to take on than others.

Here are 9 examples of business risks and ideas to help take your business to the next level.

1. Launch a New Product or Service

Taking risks in product and service offerings can help businesses differentiate themselves from their competitors and appeal to new customers.

For instance, a restaurant may risk offering a new menu item, such as a vegan option, to attract a new customer base and create a competitive advantage.

2. Expand Into New Markets

Expanding into new markets can help businesses tap into new customer segments and increase revenue . It also helps to diversify their income streams and reduce risks associated with relying on one market.

Furthermore, entering new markets can help businesses gain insights into different cultures and new trends in the industry.

3. Invest in New Technology

Investing in new technology can help businesses increase efficiency, reduce costs, and improve the quality of their products or services. Companies that invest in technology are better equipped to compete in the global marketplace, as the technology helps them stay ahead of their competitors.

In addition, new technology can help businesses become more innovative and agile, allowing them to respond quickly to changing customer needs/

4. Take on Strategic Partnerships

5. diversify revenue streams, 6. hire new talent.

Hiring new talent can help businesses bring in fresh perspectives and ideas, leading to increased innovation and growth . New talent often brings with them fresh insights and skills that can help to grow a business in ways that existing staff may be unable to.

By bringing on new talent, businesses can tap into new markets, create new products and services, and open up new possibilities for growth.

7. Try New Marketing and Advertising Strategies

Trying new marketing and advertising strategies can help businesses reach new audiences and increase brand awareness. It can also help to boost sales and build customer loyalty. Companies should be open to experimenting with different strategies to achieve their desired results.

8. Pursue a New Business Model

Pursuing a new business model can help businesses adapt to changing market conditions and stay relevant. For instance, when the global pandemic hit, many businesses had to pivot to e-commerce or digital services in order to stay afloat.

9. Launch a New Business Venture

Challenges of taking risks in business and solutions, financial risks.

Taking financial risks can lead to significant losses if the business does not generate enough revenue to cover the investment.

To overcome this challenge, entrepreneurs should conduct a thorough financial analysis and consider alternative funding sources, such as loans or investors.

Market Risks

Entering new markets or launching new products can be risky if there is no demand or if the competition is too strong.

To overcome this challenge, entrepreneurs should conduct market research to identify customer needs and preferences and evaluate the competition.

Operational Risks

Making significant changes to business operations can be risky if they are not well-planned and executed.

To overcome this challenge, entrepreneurs should create a detailed vision and strategy and test the changes on a small scale before implementing them on a larger scale.

Reputational Risks

Taking risks that result in negative publicity can damage a business’s reputation and lead to a loss of customers.

To overcome this challenge, entrepreneurs should prioritize transparency and honesty in their operations and communication with customers.

Legal Risks

Taking risks that violate laws or regulations can lead to legal penalties and damage to the business’s reputation.

To overcome this challenge, entrepreneurs should consult with legal experts and ensure compliance with all relevant laws and regulations.

Take on Bigger Risks and Get 2X Success

Business coaching and mentoring can be an effective way for entrepreneurs to overcome the challenges of taking risks in business and achieve significant growth and success.

2X is a business coaching and mentoring company that helps entrepreneurs grow their business from 6 to 7 figures through customized coaching and mentorship programs.

Their book, From 6 to 7 Figures , provides practical advice and strategies for entrepreneurs looking to take their business to the next level .

Taking risks in business is critical to achieving significant growth and success. However, it requires careful analysis and strategic planning to minimize the potential for negative outcomes. Businesses that take calculated risks are more likely to succeed and achieve long-term growth.

By implementing the ideas and strategies outlined in this article and seeking guidance from a company like 2X, entrepreneurs can take risks that lead to accelerated growth and success in their business.

The Playbook To 7+ Figures

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PwC Pulse Survey: Managing business risks

Read time: 10 minutes

of executives are focusing business strategy on growth

Cyber #1 business risk, with 40% citing it as a serious risk

are changing processes to address labor shortages

In our second Pulse Survey of 2022, business leaders point to a wide range of challenges in the current environment, even as they take proactive steps to respond.

Key findings include:

• Business leaders are cautiously optimistic about their future prospects. More than four-fifths (83%) are focusing the business strategy on growth — more than any other objective. And only 30% see recession as a serious risk.
• Executives cite acquiring and retaining talent as a serious risk. Yet even as companies fret about human capital, in particular the need for people with the skills to help them grow, they’re taking steps to streamline the workforce.
• Cyber is the No. 1 business risk, with 40% of all respondents listing more frequent and/or broader cyber attacks as a serious risk (and another 38% calling it a moderate risk). Cyber threats are no longer solely the domain of the CISO.
• While companies continue to invest in many areas of the business, they’re scaling back the most in real estate and capex. After two years of remote work, many companies simply need less space, and they’re allocating capital accordingly.
• As the yardstick for company performance expands beyond financial metrics, companies have an imperative to build trust and transparency among their stakeholders. Almost two thirds (65%) of executives tell us they’re focused on developing or refining their trust strategy.
• Tested by the pandemic, business executives are now more prepared for the future, and 69% of respondents say that they’re referring to a lessons-learned playbook developed out of COVID-19.

Cautious optimism

Despite a wide range of business risks and mixed economic signals, companies remain focused on growth.

of companies are focusing their business strategy on growth, more than any other objective.

Business executives are cautiously optimistic despite a challenging business environment

Executives cite a long list of business issues as serious risks to their companies. Cyber tops the list, with 40% citing more frequent and/or broader cyber risks as a serious risk.  Talent  acquisition and retention (38%) and rising production costs (34%) are close behind.

Among the less-frequently-cited risks were geopolitical factors like US-China relations (27% of respondents consider this a serious risk), a prolonged conflict in Ukraine (22%) and US societal unrest (17%). Recession was also well down on the list of business risks (only 30% consider it a serious risk, despite 60% of executives saying a recession is likely in the next year).

This comes as some economic data indicates signs of improvement. The  unemployment rate , for instance, edged down to 3.5%.  Inflation , while still high, showed some signs of stabilizing in July. This slight shift is also reflected in our survey, with 62% of executives now saying it's likely that inflation will remain elevated for the next 12 months, down from 69% in January. As a result, executives may be shifting from an active concern about the business environment to focusing on growth. Climate change was also low (23% consider it a serious risk), even with the growing emphasis on  environmental sustainability  at most companies.

Despite these risks, business leaders see bright spots. When asked how they are responding to the current business environment, 83% say they’re focusing their business strategy on growth. This is somewhat surprising given the mixed signals in the economy right now, including rising interest rates and slowing economic growth. After more than two years dealing with uncertainty related to the pandemic, business leaders recognize the urgent need to focus on growth in order to compete, and they’re zeroing in on what they can control.

With growth in mind, executives are exploring both acquisitions and increases in internal investment. Seventy percent tell us they’re considering an acquisition as a result of the current business environment. Internally, they’re increasing investments in digital transformation (53%), IT (52%), cybersecurity and privacy (49%) and customer experience (48%). Many of these investment areas can help improve efficiency and scalability and introduce new technology to boost productivity as companies continue to deal with talent shortages.

What your company can do

• Lean into growth even amid uncertainty. Focusing on your growth agenda will be key to competing. Pay close attention to the changes and trends that may impact your business and assess which ones you can plan for. Success is more than solely managing costs and risks. For example, you may need to change products, services or pricing — all of which drive growth.
• Take a hard look at all parts of your portfolio and where you can optimize. Position it to drive both operational excellence and growth. 
• Consider whether an acquisition would help you get the talent you need. The recent rise in interest rates has slowed deal activity, but dealmaking should always be an option — and some prices have come down.
• Don’t try to do too many things. Focus on the areas that free up the most dollars with the least amount of pain. Then look for value creation opportunities for your investments. Rather than expanding your investments in digital technologies broadly, for example, focus on those that drive productivity.

Despite concerns about their ability to hire and retain the right talent, some companies are starting to streamline their workforce.

of respondents are reducing their overall headcount, even as business leaders remain concerned about hiring and retaining talent.

Walking a tightrope on talent

Nearly two-thirds of businesses (63%) have changed or are planning to change processes to address labor shortages, up from 56% in January 2022 . Ironically, as businesses pivot even more toward automation, it’s critical to find employees with the right combination of deep functional knowledge and technology know-how. Without the right talent, automations can fail to deliver on promised efficiencies and increase operational risk.

Finding the right talent continues to be a challenge for business leaders. Talent acquisition came in second as a risk behind cyber, with 38% of respondents citing it as a serious risk. Companies continue to look for and attract new talent in creative ways, including:

Expanding remote work options for roles that allow: A large majority (70%) of respondents say they have either implemented this or have a plan in place. 

Pursuing acquisitions to gain access to talent: About half (52%) of executives say they’re considering an acquisition to gain access to needed talent.

Customizing their HR strategy by employee type: 59% either have a plan to do this or have implemented one.

At the same time, respondents are also taking proactive steps to streamline the workforce and establish the appropriate mix of worker skills for the future. This comes as no surprise. After a frenzy of hiring and a tight labor market over the past few years, executives see the distinction between having people and having people with the right skills. For example, 50% of all respondents are reducing their overall headcount, 46% are dropping or reducing signing bonuses and 44% are rescinding offers.

We see these precautionary actions more in certain industries. Consumer markets and technology, media and telecommunications companies, for example, are more likely to invest in automation to address labor shortages. At the same time, healthcare is seeing bigger talent challenges than other industries and is more focused on rehiring employees who have recently left.

Analyze your strategic workforce needs to understand both the skills and capabilities required today as well as those that will be needed to execute your company’s future strategic initiatives. Customize your HR strategy based on the employee type you need to grow.

For each component of your people experience (e.g., recruiting and performance management), consider what changes you might need to make to drive the right culture, experience and outcomes.

Use performance management tools that use data to assess how employees and managers are doing — especially given the shift to hybrid work where in-person oversight is less common.

Conduct periodic culture assessments to help assess and create an inclusive environment even as the talent profile of the organization changes. In particular, avoid a “two-tiered” organization in which in-person and remote workers are treated differently. Balance your automation efforts with both your talent needs and what you want your company culture to be.

Cybersecurity and threats

Growing cyber threats and a greater reliance on data in business models mean that cybersecurity is now a central responsibility for the entire C-suite and board.

of executives cite cyber attacks as a serious risk — the top business risk companies are facing

Cybersecurity is now on the agenda of the entire C-suite

Cybersecurity is becoming an enterprisewide issue, beyond the CISO’s office. Cyber attacks top the list of business risks, with 40% of all respondents listing it as a serious risk (and another 38% citing it as a moderate risk). Virtually all roles ranked cyber attacks high on their list of risks, including tax leaders (with 47% citing it as a serious risk), CFOs (44%) and CMOs (41%).

An even bigger signal of the growing concern around cyber is that 51% of board members cited it as a serious risk (and another 35% as a moderate risk) — more than any other category of business leader. In March 2022, the SEC proposed to enhance and standardize cybersecurity disclosures , requiring that the registrant’s board of directors oversee cybersecurity risk. The proposal would also require annual reporting or certain proxy disclosure about the board of directors’ cybersecurity expertise. As a result, board members are becoming increasingly attuned to cyber threats and their role in overseeing cybersecurity risk management.

Cybersecurity — including the related realms of privacy and data protection — is also becoming a growing policy concern of business leaders. Not surprisingly, 84% say they’re either monitoring closely or taking action on potential regulatory changes. 

The importance of cyber reflects two things. First, virtually all companies are now digital companies, with a heavy reliance on data and analytics and a growing reliance on mobile and cloud. Second, cyber threats continue to grow and become more sophisticated.

View cybersecurity as a broad business concern and not just an IT issue. Build cybersecurity and data privacy into agendas across the C-suite and board. Increase investment to improve security . 

Educate your employees on effective cybersecurity practices. 

For each new business initiative or transformation, make sure there’s a cyber plan in place.

Use data and intelligence to regularly measure your cyber risks. Proactively look for blind spots in your third-party relationships and supply chains.

Investment changes reflect new ways of working

Investments in real estate are declining more than any other area of the business — likely a response to hybrid and remote work.

of companies are scaling back their investment in real estate, more than any other business area.

Companies rethink their investments

As the trend for hybrid and remote work continues, companies are reassessing their physical office footprint with some deciding that less is more. Most (70%) have either expanded or have plans to expand permanent remote work options for job roles that allow. In fact, 42% have already implemented such measures — up from 30% in our January Pulse survey .

Only 31% of respondents plan to increase their investment in real estate, and 22% plan to decrease their investment (a higher decrease than any other investment area). Financial services and health industries are leading the way, with 30% and 29%, respectively, decreasing investments in real estate. Similarly, 15% of overall respondents say they will decrease their investment in facilities and general capex over the next 12 months. When a large swath of workers is no longer in the office on a regular basis, companies can significantly downscale their physical footprint.

On the other hand, executives are making investments in areas that will help drive growth. About half are increasing investments in digital transformation (53%), IT (52%) and cybersecurity and privacy (49%). Forty-eight percent are increasing investment in customer experience and 40% are putting more dollars toward research and development.

Align your investment plan with your company’s strategic direction. Make multi-year investments to drive both short- and long-term outcomes.

Embed clear return on investment expectations in the budget for every investment you make. Disciplined leaders are taking a very honest look at every part of their business.

Determine where your company wants to go with ways of working and how to most effectively optimize your talent, real estate and technology strategies to enable that plan.

As businesses grapple with risk and uncertainty, building and maintaining trust is key.

of respondents say they are focused on developing and/or refining their trust strategy.

The trust imperative

Trust is increasingly becoming a source of competitive advantage for companies that treat it as such — and a point of failure for companies that don’t. In our current survey, 42% of executives say businesses will be the most trusted entity in the next 12 months — up from 39% in January 2022. Executives are doubling down, with 65% saying they’re focused on developing and/or refining their trust strategy. 

As the yardstick for company performance expands beyond financial metrics, companies have an imperative to  build trust and transparency  among different stakeholder groups — employees, customers, suppliers, regulators and the communities in which they operate. This includes both doing the right things and communicating clearly on topics such as reporting and tax transparency.

One third (32%) of business executives tell us they’re very agile when changing business strategy to address stakeholder demands for transparency. That may not seem high in absolute terms, but it was second-highest among all responses regarding agility. 

As companies respond to an ever-shifting landscape of  risks , challenges and even crises, trust creates a multiplier effect — both positive and negative. Organizations that have cultivated trust as an asset and built up a reservoir of goodwill have more latitude in their response. Conversely, companies with a deficiency of trust make challenges that much tougher on themselves.

Identify the areas of your business that most significantly determine your ability to build (or lose) trust, including cybersecurity, supply chain and communications. Work with your teams to embed trust in those processes.

Trust can’t be limited to certain functions or business units. It needs to be an integral part of your organization’s DNA. 

Educate your leadership teams on their role in building trust and identifying areas where trust can be impaired. Senior executives should be consistent in aligning words to actions. Be visible and transparent with all stakeholders about your company’s plans for the future. If you’re considering actions such as rescinding offers, for instance, make sure you’re paying close attention to the potential impact on your reputation as an employer.

Create or refine your stakeholder plan, including your communication cadence for bringing each stakeholder along on your strategic journey. It’s critical to help your stakeholders understand the why. Set up listening channels to understand how stakeholders feel about your organization.

Pandemic lessons learned

Executives should take the time to reflect on their experiences of the past few years.

of respondents say they’re referring to a lessons-learned playbook developed out of COVID-19.

Tested by the pandemic, business executives feel more prepared for the future

If there’s a bright spot to the upheavals we’ve been experiencing over the past several years, it’s that companies and their leaders have become far more agile in how they respond. By the time executives could implement the changes they had scrambled to develop, something else would shift, causing the need for more changes. This time compression is forcing faster response times and, as a result, three- to five-year strategies can no longer be the go-to.

For manufacturers and other types of companies with long supply chains, many pivoted away from global just-in-time manufacturing after experiencing critical shortages due to production issues. Problem is, the processes were developed and used over decades because they were incredibly cost efficient. Smart executives are now reflecting on which investments made in response to the pandemic should be kept and which should be wound down.

Risks are also now more interconnected as well. The following examples highlight how business changes can result in new risks:

While heroic shifts to remote work happened overnight in early 2020, cybersecurity risks soared as employees were logging in from home. 

We’re now seeing companies settle on hybrid work models, with some employees working remotely all the time, some splitting their time between home and office and others working exclusively on-site. While this leads to added flexibility and allows companies to hire from a larger pool of employees, it also creates the potential for inequitable treatment of remote workers compared to in-office workers. In fact, 29% of CHROs say that finding a balance between in-office, remote and hybrid work will present a top-3 workforce-related concern for the next 12 months.

As companies continue to automate processes due to labor shortages, many are finding that they don’t have the talent they need. Without the right talent, automations can fail to deliver on promised efficiencies and increase operational risk.

• Conduct a lessons-learned exercise to explore how your company fared over the past few years. Do a gut check on any of the countermeasures you took as a result of the pandemic. Consider all aspects of your business, from supply chain to management to people to tax to systems. Make sure you involve the right people.
• Collaborate closely across the leadership team as you develop go-forward plans. Aligned leadership teams that connect dots are critical to driving effective execution. 
• Consider business partners and the idea of an ecosystem mentality. Business partners can help free up resources.
• Revisit the models that your company uses to drive decisions. Many models do not include consideration of new risks that can materially impact your business. For example, how will increasing political polarization impact your revenue goals? Bring all voices to the table to help develop new ideas and ways to drive growth and build trust.

This won’t be the last unusual business experience you face. Avoid the temptation to rush to consider how to emerge stronger.

Sector implications

• Health industries
• Financial services
• Industrial products
• Consumer markets
• Tech, media, telecom
• Energy and utilities
• Private companies

Health executives see cyber attacks, supply chain, tax policy as top business risks

Cyber attacks top the list of risks for health industries. Forty-three percent of health industries executives cite cyber attacks as a serious risk to their organization, compared to 40% of respondents overall. Amid the rising threat of data breaches, ransomware attacks and leaking of sensitive patient data, companies increasingly are using technology in real-time detection and defense. Almost one quarter of health industry executives tell us they’re already seeing  benefits from using artificial intelligence  in cyber defense.

These executives also rank supply chain disruptions and tax policy as more serious business risks than other sector leaders, with 41% citing these risks compared to 34% and 28% of other respondents, respectively. Pharmaceutical and life sciences companies in particular should develop strategies to prepare for the tax implications of the Inflation Reduction Act, which contains provisions aimed at  lowering the cost of prescription drugs and health insurance .

Rising production costs (37%) and talent acquisition and retention (31%) rounded out the top five most serious business risks for health industries. Our January 2022  PwC Pulse Survey  found health industry executives already grappling with staffing shortages and the risks COVID-19 variants pose to growth. We expect payer, provider and pharmaceutical and life sciences executives to continue preparing for those risks, along with the potential for recession as we move further into the inflation cycle.

Looking ahead to the next 12 months, health industries leaders are increasing their investments in IT (59%), digital transformation (57%) and cybersecurity and privacy (57%). Those are smart investments as  digitally connected health ecosystems  emerge for health services organizations and  pharmaceutical and life sciences companies use digital technologies  to become more consumer-centric. Health industries respondents are also more likely to say that they’re increasing investments in R&D and innovation in the next 12 months (51% versus 40% overall).

Awaiting a recession, FS leaders still seek talent

Financial services (FS) respondents are more bearish on the economy than their counterparts in other industries. Seventy percent tell us they think a recession is likely in the next 12 months, compared to 60% overall. Moreover, a full third (33%) of FS respondents — tied with respondents in industrial products — consider recession a serious risk, the highest among all industries. Despite these concerns, FS executives say they’ll continue investing in certain key areas over the next year. Sixty percent plan to increase spending on digital transformation (compared to 53% overall) and 56% say they’ll raise expenditures on customer experience (versus 48% overall). 

FS respondents also see talent acquisition and retention as a potentially bigger pitfall than anyone else. Forty-four percent say it’s a serious risk (versus 38% overall). In response, the sector is among the most likely to offer flexible work options, with 68% saying they’ve expanded remote work choice where possible or plan to do so, and only 27% say they’ve implemented a plan for having employees on-site more often (compared to 32% overall). In addition, FS is least likely to reduce headcount, with 36% of respondents saying they have no plans to do so. Perhaps as a result of these workforce policies, 30% of FS executives say they plan to cut investments in real estate over the next year, the most in any industry.

Interestingly, and in contrast to the above, only 38% of FS respondents indicate their companies will increase investments in the workforce, the lowest figure among all industries. Also of note, 31% of FS respondents, eight percentage points more than the average, report that their companies have no plans to make acquisitions to acquire talent. This indicates that most of them will make do with existing investments and develop needed skills on their own.

For US manufacturers, inflation, supply chain woes beg greater agility

While industrial products (IP) sector leaders still grapple with supply chain disruptions and labor shortages, they’re also being hit by the double-whammy of inflation and the specter of a recession, making agility ever more important. Due to these and other pressures on the sector, US manufacturing output contracted in both May and June. However, looking ahead, the  Inflation Reduction Act  and the  CHIPS and Science Act  may have important, positive implications.

Nearly three in four sector leaders (73%) cite rising production costs (e.g., wages, materials, energy, inventory) as posing a “moderate or serious” risk to their business. As a result, even more leaders (77%) say they’re increasing prices for products and services. Meanwhile, most IP executives (57%) report that their businesses are  streamlining their product portfolios  in the face of the challenging current environment presumably in order to protect shrinking margins.

The sector continues to be beleaguered by supply chain woes, with 71% saying they pose either a moderate or serious risk to their business. Still, yet, nearly as many, (75%) report that they’re  improving supply chain resiliency . Looking ahead, 45% of sector leaders believe that supply chain disruptions will ease in the next year.

Workforce issues, too, are still a pain point, with 77% of respondents agreeing that problems surrounding talent acquisition and retention pose risks to their business. IP executives are expanding permanent remote work options for roles that allow for it (64%) and increased compensation for existing employees (retention bonuses, off-cycle raises). Despite the challenging workforce environment, most IP leaders (69%) describe their businesses as “very or moderately” agile in responding to the shifts in the workforce and in attracting talent. Efforts underway may be paying dividends, as  payrolls in US manufacturing  rose unexpectedly by 30,000 jobs in July 2022.

Given the recent spike in cyber attacks on the industry , 75% of IP executives say that more frequent and/or broader attacks are either a moderate or serious risk to their companies. A vast majority (82%) say they’re taking action or closely monitoring policy around cybersecurity, privacy and data protection, and 76% are revising or enhancing their cyber risk management. Most IP sector leaders (73%) describe their companies as “very or moderately” agile in the changing cyber environment.

Investing for the future in uncertain times

Consumer-facing companies are more likely than their peers to expect a dip in earnings in 2022 due to a confluence of business risks ranging from supply chain issues and inflation to geopolitical concerns and residual COVID-19 considerations. 

In response, nearly two-thirds (65%) of consumer markets (CM) leaders have cut earnings forecasts (versus 58% for all sectors), 62% are reducing prices (versus 50% overall) and 58% (versus 52%) have either instituted hiring freezes or plan to do so. 

Close to half of CM leaders (44%) tell us supply chain disruptions pose a serious risk to their business (versus 34% for all sectors). Most (77%) plan to  digitize their supply chains  for resilience and flexibility. Rising production costs are also top of mind as is the role of inflation in depressing consumer demand. 

As consumers focus on necessities such as food and gas, CM executives are contending with unsold inventory and increasingly scarce warehouse space. Meanwhile, longer lead times stemming from supply chain disruption have further complicated the balance of supply and demand, exacerbating already  shifting consumer preferences . 

Despite these headwinds, CM companies are charting future moves. Almost 60% report increasing investments in both tech and digital transformation. CM leaders also expect to invest more in operations (51% versus 41% overall), R&D (48% versus 40%) and ESG initiatives (52% versus 45%). 

Their focus on tech-enabled innovation acknowledges that consumers  reward companies  for a seamless, one-of-kind customer experience with a business they can  trust  and whose values they identify with. To that end, CM leaders are closely monitoring policy developments in cybersecurity, data protection and privacy. 

Most CM companies (71%) are expanding permanent remote work opportunities, as roles allow, and 70% (versus 63% overall) are introducing automation to address labor shortages. Meanwhile, 68% (versus 59% overall) are customizing their HR strategy to meet employee needs in various roles. CM leaders’ commitment to growth signals their vision of an agenda for the future that they can navigate, regardless of current uncertainty and unforeseen disruptions.

Talent in flux: Preparing for growth as recession risk rises

The talent paradox is real. Forty percent of the technology, media and telecommunications (TMT) leaders who responded to our Pulse Survey ranked talent acquisition and retention as a serious risk to their companies. Yet TMT leaders were more likely than their peers to reduce employee headcount (58%), implement hiring freezes (58%), lower or eliminate signing bonuses (57%) or rescind job offers (49%).

The Pulse Survey comes as TMT companies recalibrate following a pendulum swing from pandemic boom to economic slowdown. But even as inflation and recession fears roil the markets, 88% of TMT leaders reported that they’re focusing their business strategies on growth. These findings dovetail with PwC’s recent  Global Entertainment & Media Outlook , which describes how priorities have shifted as the sector emerged transformed by a period of social upheaval. 

Identifying and capitalizing on growth alternatives may be essential to remaining competitive in today’s economic environment. Companies nimble enough to pivot to new growth opportunities may require a plan to cultivate talent well-suited to this moment. That may mean a smaller workforce, but one that’s more focused on new areas of development. Incentivizing current and recent employees may be key in this effort.

TMT companies were more likely to have increased compensation for existing employees (70% versus 64% overall). For roles that allow it, 81% of TMT leaders report that they have expanded or plan to expand remote work options (versus 70% for all sectors). They’re also more likely than their peers to encourage employees who recently left to return (58% versus 49% overall), potentially reducing the time necessary for onboarding and training.

Bold ambitions for energy and utilities in a world of amplified risks

Energy and utilities executives have  bold ambitions  for the future along with very real, present-day obligations. It’s a balancing act playing out amid a backdrop of emerging threats, economic uncertainty and rising costs as well as societal, political and regulatory pressures. Sector leaders feel the weight of this, citing cyber attacks, high US interest rates, supply chain disruptions, climate change, the US regulatory environment and tax policy changes as serious risks facing their companies. Notably, industry respondents rank these risks higher than executives overall.

The risks may feel amplified, and for good reason. Leaders are balancing the growing demand for net-zero sources of energy with the realities of today’s energy supply. Many cleaner energy initiatives hinge on the ability to procure solar panels and other materials including critical minerals. Meanwhile, new and evolving threats to grids, pipelines and energy infrastructure emerge daily.  

With the important task of protecting the nation’s energy supply, it’s increasingly important to make cybersecurity  everyone’s priority . Energy and utilities executives are aligned on the need to revise and enhance cyber risk management, naming it as the top action (84%) the industry is taking in response to today’s business environment. Executives are also looking to invest in cybersecurity, with 59% planning to increase investments in the next 12 months, the top area for investment. IT, digital transformation, customer experience and ESG round out the top five areas for investment.

Trust is top of mind for energy and utilities executives. At a level much higher than other industries, 63% of energy and utilities expect business to be the most trusted entity in the next 12 months. More than half (53%) plan to proactively become more transparent with all stakeholders. This includes taking action to address or monitor proposed  SEC climate disclosure rules , one of the top policy areas on their radars. The adoption of investor-grade climate and emissions reporting is one step in a bigger effort that’s underway. It also includes  operationalizing  ESG commitments, embedding ESG in business strategy and pursuing opportunities to lead the march toward a cleaner energy future.

Threats and talent top risks for private companies

Private companies are playing catch-up to public companies, as many delayed investments and deferred maintenance over the past few years. They’re also squarely focused on growth and the aspects of business that directly tie to the bottom line.

The vast majority of private company respondents tell us they’re both transforming business processes and revising/enhancing their cyber management (89% for both). Private companies are also increasing investments in several areas more so than other executives: IT (59% versus 52% overall), cyber (59% versus 49% overall) and digital transformation (57% versus 53% overall). Private company executives know that making investments in the right technologies and business processes will be essential to growth. 

Private companies are more concerned about talent acquisition and retention than public companies, with 61% of private company executives listing it as a serious risk (versus 38% overall). Private companies have traditionally found it harder to recruit top talent because they often don’t have the same access to capital, career development opportunities and brand recognition. 

Interestingly, private companies trail when it comes to raises for existing employees, with only 34% planning to increase compensation (versus 64% overall). On the other hand, only 20% of private company executives say they plan to — or have already — reduced headcount (versus 52% of public companies). Many private companies are outsourcing and using managed services more for non-core activities, which can help them focus on attracting key personnel for core activities.

Cyber tops the list of risks for both private and public companies. Fifty-seven percent of private companies mention more frequent and/or broader cyber threats as a serious risk (versus 39% of public companies). While cyber attacks are a risk for all businesses, public companies have spent years investing in security technologies and protocols. Private companies may not have the same resources, potentially leaving them more vulnerable to cyber attacks.

Private companies have a more pessimistic view of the economy, with 80% citing it likely that inflation will remain elevated (versus 62% overall) and 84% saying a recession is likely (versus 60% overall). The private sector typically feels the impact of both recession and recovery before the public sector. Still, nimble private companies that adjust their strategies quickly can take advantage of the opportunities that changes in the economic environment present.

Managing business risks: What’s top of mind in the C-suite?

About the survey.

Between August 1 and August 5, 2022, PwC surveyed 722 US executives including CFOs and finance leaders (13%), CHROs and human capital leaders (14%), tax leaders (13%), risk management leaders, including CROs, CAEs and CISOs (12%), COOs and operations leaders (12%), CIOs, CTOs and technology leaders (13%), CMOs and marketing leaders (13%) and corporate board directors (10%). Respondents were from public and private companies in six sectors: industrial products (24%), consumer markets (25%), financial services (22%), technology, media and telecom (14%), health industries (7%) and energy and utilities (4%). The Pulse Survey is conducted on a periodic basis to track the changing sentiment and priorities of business executives.

Download the chart pack Get access to the complete survey responses and data

Related content, pwc pulse survey: executive views on business in 2022.

Businesses are stymied by inflation, the pandemic and a talent shortage. The C-suite is uniting to prioritize investments that accelerate growth.

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J.C. Lapierre

Chief Strategy and Communications Officer, PwC US

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What Is Risk Management & Why Is It Important?

• 24 Oct 2023

Businesses can’t operate without risk. Economic, technological, environmental, and competitive factors introduce obstacles that companies must not only manage but overcome.

According to PwC’s Global Risk Survey , organizations that embrace strategic risk management are five times more likely to deliver stakeholder confidence and better business outcomes and two times more likely to expect faster revenue growth.

If you want to enhance your job performance and identify and mitigate risk more effectively, here’s a breakdown of what risk management is and why it’s important.

Access your free e-book today.

What Is Risk Management?

Risk management is the systematic process of identifying, assessing, and mitigating threats or uncertainties that can affect your organization. It involves analyzing risks’ likelihood and impact, developing strategies to minimize harm, and monitoring measures’ effectiveness.

“Competing successfully in any industry involves some level of risk,” says Harvard Business School Professor Robert Simons, who teaches the online course Strategy Execution . “But high-performing businesses with high-pressure cultures are especially vulnerable. As a manager, you need to know how and why these risks arise and how to avoid them.”

According to Strategy Execution , strategic risk has three main causes:

• Pressures due to growth: This is often caused by an accelerated rate of expansion that makes staffing or industry knowledge gaps more harmful to your business.
• Pressures due to culture: While entrepreneurial risk-taking can come with rewards, executive resistance and internal competition can cause problems.
• Pressures due to information management: Since information is key to effective leadership , gaps in performance measures can result in decentralized decision-making.

These pressures can lead to several types of risk that you must manage or mitigate to avoid reputational, financial, or strategic failures. However, risks aren’t always obvious.

“I think one of the challenges firms face is the ability to properly identify their risks,” says HBS Professor Eugene Soltes in Strategy Execution .

Therefore, it’s crucial to pinpoint unexpected events or conditions that could significantly impede your organization’s business strategy .

Related: Business Strategy vs. Strategy Execution: Which Course Is Right for Me?

According to Strategy Execution , strategic risk comprises:

• Operations risk: This occurs when internal operational errors interrupt your products or services’ flow. For example, shipping tainted products can negatively affect food distribution companies.
• Asset impairment risk: When your company’s assets lose a significant portion of their current value because of a decreased likelihood of receiving future cash flows . For instance, losing property assets, like a manufacturing plant, due to a natural disaster.
• Competitive risk: Changes in the competitive environment can interrupt your organization’s ability to create value and differentiate its offerings—eventually leading to a significant loss in revenue.
• Franchise risk: When your organization’s value erodes because stakeholders lose confidence in its objectives. This primarily results from failing to control any of the strategic risk sources listed above.

Understanding these risks is essential to ensuring your organization’s long-term success. Here’s a deeper dive into why risk management is important.

4 Reasons Why Risk Management Is Important

1. protects organization’s reputation.

In many cases, effective risk management proactively protects your organization from incidents that can affect its reputation.

“Franchise risk is a concern for all businesses,“ Simons says in Strategy Execution . “However, it's especially pressing for businesses whose reputations depend on the trust of key constituents.”

For example, airlines are particularly susceptible to franchise risk because of unforeseen events, such as flight delays and cancellations caused by weather or mechanical failure. While such incidents are considered operational risks, they can be incredibly damaging.

In 2016, Delta Airlines experienced a national computer outage, resulting in over 2,000 flight cancellations. Delta not only lost an estimated $150 million but took a hit to its reputation as a reliable airline that prided itself on “canceling cancellations.”

While Delta bounced back, the incident illustrates how mitigating operational errors can make or break your organization.

2. Minimizes Losses

Most businesses create risk management teams to avoid major financial losses. Yet, various risks can still impact their bottom lines.

A Vault Platform study found that dealing with workplace misconduct cost U.S. businesses over $20 billion in 2021. In addition, Soltes says in Strategy Execution that corporate fines for misconduct have risen 40-fold in the U.S. over the last 20 years.

One way to mitigate financial losses related to employee misconduct is by implementing internal controls. According to Strategy Execution , internal controls are the policies and procedures designed to ensure reliable accounting information and safeguard company assets.

“Managers use internal controls to limit the opportunities employees have to expose the business to risk,” Simons says in the course.

One company that could have benefited from implementing internal controls is Volkswagen (VW). In 2015, VW whistle-blowers revealed that the company’s engineers deliberately manipulated diesel vehicles’ emissions data to make them appear more environmentally friendly.

This led to severe consequences, including regulatory penalties, expensive vehicle recalls, and legal settlements—all of which resulted in significant financial losses. By 2018, U.S. authorities had extracted $25 billion in fines, penalties, civil damages, and restitution from the company.

Had VW maintained more rigorous internal controls to ensure transparency, compliance, and proper oversight of its engineering practices, perhaps it could have detected—or even averted—the situation.

Related: What Are Business Ethics & Why Are They Important?

3. Encourages Innovation and Growth

Risk management isn’t just about avoiding negative outcomes. It can also be the catalyst that drives your organization’s innovation and growth.

“Risks may not be pleasant to think about, but they’re inevitable if you want to push your business to innovate and remain competitive,” Simons says in Strategy Execution .

According to PwC , 83 percent of companies’ business strategies focus on growth, despite risks and mixed economic signals. In Strategy Execution , Simons notes that competitive risk is a challenge you must constantly monitor and address.

“Any firm operating in a competitive market must focus its attention on changes in the external environment that could impair its ability to create value for its customers,” Simons says.

This requires incorporating boundary systems —explicit statements that define and communicate risks to avoid—to ensure internal controls don’t extinguish innovation.

“Boundary systems are essential levers in businesses to give people freedom,” Simons says. “In such circumstances, you don’t want to stifle innovation or entrepreneurial behavior by telling people how to do their jobs. And if you want to remain competitive, you’ll need to innovate and adapt.”

Netflix is an example of how risk management can inspire innovation. In the early 2000s, the company was primarily known for its DVD-by-mail rental service. With growing competition from video rental stores, Netflix went against the grain and introduced its streaming service. This changed the market, resulting in a booming industry nearly a decade later.

Netflix’s innovation didn’t stop there. Once the steaming services market became highly competitive, the company shifted once again to gain a competitive edge. It ventured into producing original content, which ultimately helped differentiate its platform and attract additional subscribers.

By offering more freedom within internal controls, you can encourage innovation and constant growth.

4. Enhances Decision-Making

Risk management also provides a structured framework for decision-making. This can be beneficial if your business is inclined toward risks that are difficult to manage.

By pulling data from existing control systems to develop hypothetical scenarios, you can discuss and debate strategies’ efficacy before executing them.

“Interactive control systems are the formal information systems managers use to personally involve themselves in the decision activities of subordinates,” Simons says in Strategy Execution . “Decision activities that relate to and impact strategic uncertainties.”

JPMorgan Chase, one of the most prominent financial institutions in the world, is particularly susceptible to cyber risks because it compiles vast amounts of sensitive customer data . According to PwC , cybersecurity is the number one business risk on managers’ minds, with 78 percent worried about more frequent or broader cyber attacks.

Using data science techniques like machine learning algorithms enables JPMorgan Chase’s leadership not only to detect and prevent cyber attacks but address and mitigate risk.

Start Managing Your Organization's Risk

Risk management is essential to business. While some risk is inevitable, your ability to identify and mitigate it can benefit your organization.

But you can’t plan for everything. According to the Harvard Business Review , some risks are so remote that no one could have imagined them. Some result from a perfect storm of incidents, while others materialize rapidly and on enormous scales.

By taking an online strategy course , you can build the knowledge and skills to identify strategic risks and ensure they don’t undermine your business. For example, through an interactive learning experience, Strategy Execution enables you to draw insights from real-world business examples and better understand how to approach risk management.

Do you want to mitigate your organization’s risks? Explore Strategy Execution —one of our online strategy courses —and download our free strategy e-book to gain the insights to build a successful strategy.

About the Author

Why Are Major Risks in the Business Plan?

• Small Business
• Business Planning & Strategy
• Business Risk
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Purpose of Financial Analysis

Strategic analysis of a company, what is 'systems thinking' in business.

• The Purpose of Analytical Business Reports
• Fundamental Principles of Strategic & Business Planning Models

Risk factors are possible events that, should they happen, could cause a company’s revenues or profits to be lower than what the owner had forecast. They are a standard part of a thorough business plan, whether the plan is designed for internal use by the management team or will be presented to outside investors. Risk factors are also called threats, because they threaten the business’s success and in extreme circumstances even its survival.

Encourages Contingency Planning

The risk factors section of the business plan should go beyond simply listing what might go wrong. Being aware of what could negatively impact the company is important, but the real value of including risk factors is the business owner’s thinking process to determine how she would mitigate the risks to minimize the financial damage to her company. The thinking process is referred to as contingency planning, also know as “what if” analysis. The business owner will make changes to her marketing strategies, operations and financial management in response to these risks becoming a reality.

Focus on the Business Environment

A company should have a system in place to gather information about emerging or potential risks. Monitoring competitors on an ongoing basis is one aspect of this system. The decisions a company’s competitors make pose threats, because they are designed to give the competitors a stronger market position by taking potential business away from the company. Risk factors are not just considered at the time the company is preparing its annual business plan -- they are year-round considerations, because new threats emerge throughout the year.

Alert Potential Investors

A venture capital firm or angel investor that is contemplating putting money into a business enterprise must assess the risk that the company’s financial results will be lower than forecast. The value of the company grows as the revenues and profits of the business grow. The risk factors alert the investor to the fact there is always a possibility of losing part or all of the money he puts into the company. If the investor believes the risks could severely hurt the company should they occur, he may decline to make the investment. As a practical matter, sophisticated investors do their own risk analysis prior to putting money in a company, but the fact the management team is aware of, and has strategies for dealing with, the risks can make the investors more confident about the management team’s abilities.

Moving Forward Confidently

Analyzing risk factors allows the management team to be confident it is ready for whatever business environment the company may face in the upcoming year and beyond. The team has strategies in place that can be quickly implemented to minimize the damage caused by threats from competitors or changes in the overall economy. The management team assesses which risks are most likely to become actual threats and which have a very low likelihood of occurring. Owners of companies will always have external threats to worry about, but the risk analysis process helps reduce the number of worries to those that have the potential to negatively impact their revenues or profits.

• Inc.: Managing Risk in a New Venture

Brian Hill is the author of four popular business and finance books: "The Making of a Bestseller," "Inside Secrets to Venture Capital," "Attracting Capital from Angels" and his latest book, published in 2013, "The Pocket Small Business Owner's Guide to Business Plans."

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What is business risk?

You know about death and taxes. What about risk? Yes, risk is just as much a part of life as the other two inevitabilities. This became all the more apparent during COVID-19, as each of us had to assess and reassess our personal risk calculations as each new wave of the pandemic— and pandemic-related disruptions —washed over us. It’s the same in business: executives and organizations have different comfort levels with risk and ways to prepare against it.

Where does business risk come from? To start with, external factors can wreak havoc on an organization’s best-laid plans. These can include things like inflation , supply chain  disruptions, geopolitical upheavals , unpredictable force majeure events like a global pandemic or climate disaster, competitors, reputational  issues, or even cyberattacks .

But sometimes, the call is coming from inside the house. Companies can be imperiled by their own executives’ decisions or by leaks of privileged information, but most damaging of all, perhaps, is the risk of missed opportunities. We’ve seen it often: when companies choose not to adopt disruptive innovation, they risk losing out to more nimble competitors.

The modern era is rife with increasingly frequent sociopolitical, economic, and climate-related shocks. In 2019 alone, for example, 40 weather disasters caused damages exceeding $1 billion each . To stay competitive, organizations should develop dynamic approaches to risk and resilience. That means predicting new threats, perceiving changes in existing threats, and developing comprehensive response plans. There’s no magic formula that can guarantee safe passage through a crisis. But in situations of threat, sometimes only a robust risk-management plan can protect an organization from interruptions to critical business processes. For more on how to assess and prepare for the inevitability of risk, read on.

Learn more about McKinsey’s Risk and Resilience  Practice.

What is risk control?

Risk controls are measures taken to identify, manage, and eliminate threats. Companies can create these controls through a range of risk management strategies and exercises. Once a risk is identified and analyzed, risk controls can be designed to reduce the potential consequences. Eliminating a risk—always the preferable solution—is one method of risk control. Loss prevention and reduction are other risk controls that accept the risk but seek to minimize the potential loss (insurance is one method of loss prevention). A final method of risk control is duplication (also called redundancy). Backup servers or generators are a common example of duplication, ensuring that if a power outage occurs no data or productivity is lost.

But in order to develop appropriate risk controls, an organization should first understand the potential threats.

What are the three components to a robust risk management strategy?

A dynamic risk management plan can be broken down into three components : detecting potential new risks and weaknesses in existing risk controls, determining the organization’s appetite for risk taking, and deciding on the appropriate risk management approach. Here’s more information about each step and how to undertake them.

1. Detecting risks and controlling weaknesses

A static approach to risk is not an option, since an organization can be caught unprepared when an unlikely event, like a pandemic, strikes. So it pays to always be proactive. To keep pace with changing environments, companies should answer the following three questions for each of the risks that are relevant to their business.

• How will a risk play out over time? Risks can be slow moving or fast moving. They can be cyclical or permanent. Companies should analyze how known risks are likely to play out and reevaluate them on a regular basis.
• Are we prepared to respond to systemic risks? Increasingly, risks have longer-term reputational or regulatory consequences, with broad implications for an industry, the economy, or society at large. A risk management strategy should incorporate all risks, including systemic ones.
• What new risks lurk in the future? Organizations should develop new methods of identifying future risks. Traditional approaches that rely on reviews and assessments of historical realities are no longer sufficient.

2. Assessing risk appetite

How can companies develop a systematic way of deciding which risks to accept and which to avoid? Companies should set appetites for risk that align with their own values, strategies, capabilities, and competitive environments—as well as those of society as a whole. To that end, here are three questions companies should consider.

• How much risk should we take on? Companies should reevaluate their risk profiles frequently according to shifting customer behaviors, digital capabilities, competitive landscapes, and global trends.
• Are there any risks we should avoid entirely? Some risks are clear: companies should not tolerate criminal activity or sexual harassment. Others are murkier. How companies respond to risks like economic turmoil and climate change depend on their particular business, industry, and levels of risk tolerance.
• Does our risk appetite adequately reflect the effectiveness of our controls? Companies are typically more comfortable taking risks for which they have strong controls in place. But the increased threat of severe risks challenges traditional assumptions about risk control effectiveness. For instance, many businesses have relied on automation to increase speed and reduce manual error. But increased data breaches and privacy concerns can increase the risk of large-scale failures. Organizations, therefore, should evolve their risk profiles accordingly.

3. Deciding on a risk management approach

Finally, organizations should decide how they will respond when a new risk is identified. This decision-making  process should be flexible and fast, actively engaging leaders from across the organization and honestly assessing what has and hasn’t worked in past scenarios. Here are three questions organizations should be able to answer.

• How should we mitigate the risks we are taking? Ultimately, people need to make these decisions and assess how their controls are working. But automated control systems should buttress human efforts. Controls guided, for example, by advanced analytics can help guard against quantifiable risks and minimize false positives.
• How would we respond if a risk event or control breakdown happens? If (or more likely, when) a threat occurs, companies should be able to switch to crisis management mode quickly, guided by an established playbook. Companies with well-rehearsed crisis management capabilities weather shocks better, as we saw with the COVID-19 pandemic.
• How can we build true resilience? Resilient companies not only better withstand threats—they emerge stronger. The most resilient firms can turn fallout from crises into a competitive advantage. True resilience stems from a diversity of skills and experience, innovation, creative problem solving, and the basic psychological safety that enables peak performance.

Change is constant. Just because a risk control plan made sense last year doesn’t mean it will next year. In addition to the above points, a good risk management strategy involves not only developing plans based on potential risk scenarios but also evaluating those plans on a regular basis.

Learn more about McKinsey’s  Risk and Resilience  Practice.

What are five actions organizations can take to build dynamic risk management?

In the past, some organizations have viewed risk management as a dull, dreary topic, uninteresting for the executive looking to create competitive advantage. But when the risk is particularly severe or sudden, a good risk strategy is about more than competitiveness—it can mean survival. Here are five actions leaders can take to establish risk management capabilities .

• Reset the aspiration for risk management.  This requires clear objectives and clarity on risk levels and appetite. Risk managers should establish dialogues with business leaders to understand how people across the business think about risk, and share possible strategies to nurture informed risk-versus-return decision making—as well as the capabilities available for implementation.
• Establish agile  risk management practices.  As the risk environment becomes more unpredictable, the need for agile risk management grows. In practice, that means putting in place cross-functional teams empowered to make quick decisions about innovating and managing risk.
• Harness the power of data and analytics.  The tools of the digital revolution  can help companies improve risk management. Data streams from traditional and nontraditional sources can broaden and deepen companies’ understandings of risk, and algorithms can boost error detection and drive more accurate predictions.
• Develop risk talent for the future.  Risk managers who are equipped to meet the challenges of the future will need new capabilities and expanded domain knowledge in model risk management , data, analytics, and technology. This will help support a true understanding of the changing risk landscape , which risk leaders can use to effectively counsel their organizations.
• Fortify risk culture.  Risk culture includes the mindsets and behavioral norms that determine an organization’s relationship with risk. A good risk culture allows an organization to respond quickly when threats emerge.

How do scenarios help business leaders understand uncertainty?

Done properly, scenario planning prompts business leaders to convert abstract hypotheses about uncertainties into narratives about realistic visions of the future. Good scenario planning can help decision makers experience new realities  in ways that are intellectual and sensory, as well as rational and emotional. Scenarios have four main features  that can help organizations navigate uncertain times.

• Scenarios expand your thinking.  By developing a range of possible outcomes, each backed with a sequence of events that could lead to them, it’s possible to broaden our thinking. This helps us become ready for the range of possibilities the future might hold—and accept the possibility that change might come more quickly than we expect.
• Scenarios uncover inevitable or likely futures.  A broad scenario-building effort can also point to powerful drivers of change, which can help to predict potential outcomes. In other words, by illuminating critical events from the past, scenario building can point to outcomes that are very likely to happen in the future.
• Scenarios protect against groupthink.  In some large corporations, employees can feel unsafe offering contrarian points of view for fear that they’ll be penalized by management. Scenarios can help companies break out of this trap by providing a “safe haven” for opinions that differ from those of senior leadership and that may run counter to established strategy.
• Scenarios allow people to challenge conventional wisdom.  In large corporations in particular, there’s frequently a strong bias toward the status quo. Scenarios are a nonthreatening way to lay out alternative futures in which assumptions underpinning today’s strategy can be challenged.

Learn more about McKinsey’s Strategy & Corporate Finance  Practice.

What’s the latest thinking on risk for financial institutions?

In late 2021, McKinsey conducted survey-based research with more than 30 chief risk officers (CROs), asking about the current banking environment, risk management practices, and priorities for the future.

According to CROs, banks in the current environment are especially exposed to accelerating market dynamics, climate change, and cybercrime . Sixty-seven percent of CROs surveyed cited the pandemic as having significant impact on employees and in the area of nonfinancial risk. Most believed that these effects would diminish in three years’ time.

Introducing McKinsey Explainers : Direct answers to complex questions

Climate change, on the other hand, is expected to become a larger issue over time. Nearly all respondents cited climate regulation as one of the five most important forces in the financial industry in the coming three years. And 75 percent were concerned about climate-related transition risk: financial and other risks arising from the transformation away from carbon-based energy systems.

And finally, cybercrime was assessed as one of the top risks by most executives, both now and in the future.

Learn more about the risk priorities of banking CROs here .

What is cyber risk?

Cyber risk is a form of business risk. More specifically, it’s the potential for business losses of all kinds  in the digital domain—financial, reputational, operational, productivity related, and regulatory related. While cyber risk originates from threats in the digital realm, it can also cause losses in the physical world, such as damage to operational equipment.

Cyber risk is not the same as a cyberthreat. Cyberthreats are the particular dangers that create the potential for cyber risk. These include privilege escalation (the exploitation of a flaw in a system for the purpose of gaining unauthorized access to resources), vulnerability exploitation (an attack that uses detected vulnerabilities to exploit the host system), or phishing. The risk impact of cyberthreats includes loss of confidentiality, integrity, and availability of digital assets, as well as fraud, financial crime, data loss, or loss of system availability.

In the past, organizations have relied on maturity-based cybersecurity approaches to manage cyber risk. These approaches focus on achieving a particular level of cybersecurity maturity by building capabilities, like establishing a security operations center or implementing multifactor authentication across the organization. A maturity-based approach can still be helpful in some situations, such as for brand-new organizations. But for most institutions, a maturity-based approach can turn into an unmanageably large project, demanding that all aspects of an organization be monitored and analyzed. The reality is that, since some applications are more vulnerable than others, organizations would do better to measure and manage only their most critical vulnerabilities.

What is a risk-based cybersecurity approach?

A risk-based approach is a distinct evolution from a maturity-based approach. For one thing, a risk-based approach identifies risk reduction as the primary goal. This means an organization prioritizes investment based on a cybersecurity program’s effectiveness in reducing risk. Also, a risk-based approach breaks down risk-reduction targets into precise implementation programs with clear alignment all the way up and down an organization. Rather than building controls everywhere, a company can focus on building controls for the worst vulnerabilities.

Here are eight actions that comprise a best practice for developing  a risk-based cybersecurity approach:

• fully embed cybersecurity in the enterprise-risk-management framework
• define the sources of enterprise value across teams, processes, and technologies
• understand the organization’s enterprise-wide vulnerabilities—among people, processes, and technology—internally and for third parties
• understand the relevant “threat actors,” their capabilities, and their intent
• link the controls in “run” activities and “change” programs to the vulnerabilities that they address and determine what new efforts are needed
• map the enterprise risks from the enterprise-risk-management framework, accounting for the threat actors and their capabilities, the enterprise vulnerabilities they seek to exploit, and the security controls of the organization’s cybersecurity run activities and change program
• plot risks against the enterprise-risk appetite; report on how cyber efforts have reduced enterprise risk
• monitor risks and cyber efforts against risk appetite, key cyber risk indicators, and key performance indicators

How can leaders make the right investments in risk management?

Ignoring high-consequence, low-likelihood risks can be catastrophic to an organization—but preparing for everything is too costly. In the case of the COVID-19 crisis, the danger of a global pandemic on this scale was foreseeable, if unexpected. Nevertheless, the vast majority of companies were unprepared: among billion-dollar companies in the United States, more than 50 filed for bankruptcy in 2020.

McKinsey has described the decisions to act on these high-consequence, low-likelihood risks as “ big bets .” The number of these risks is far too large for decision makers to make big bets on all of them. To narrow the list down, the first thing a company can do is to determine which risks could hurt the business versus the risks that could destroy the company. Decision makers should prioritize the potential threats that would cause an existential crisis  for their organization.

To identify these risks, McKinsey recommends using a two-by-two risk grid, situating the potential impact of an event on the whole company against the level of certainty about the impact. This way, risks can be measured against each other, rather than on an absolute scale.

Organizations sometimes survive existential crises. But it can’t be ignored that crises—and missed opportunities—can cause organizations to fail. By measuring the impact of high-impact, low-likelihood risks on core business, leaders can identify and mitigate risks that could imperil the company. What’s more, investing in protecting their value propositions can improve an organization’s overall resilience.

Articles referenced:

• “ Seizing the momentum to build resilience for a future of sustainable inclusive growth ,” February 23, 2023, Børge Brende and Bob Sternfels
• “ Data and analytics innovations to address emerging challenges in credit portfolio management ,” December 23, 2022, Abhishek Anand , Arvind Govindarajan , Luis Nario  and Kirtiman Pathak
• “ Risk and resilience priorities, as told by chief risk officers ,” December 8, 2022, Marc Chiapolino , Filippo Mazzetto, Thomas Poppensieker , Cécile Prinsen, and Dan Williams
• “ What matters most? Six priorities for CEOs in turbulent times ,” November 17, 2022, Homayoun Hatami  and Liz Hilton Segel
• “ Model risk management 2.0 evolves to address continued uncertainty of risk-related events ,” March 9, 2022, Pankaj Kumar, Marie-Paule Laurent, Christophe Rougeaux, and Maribel Tejada
• “ The disaster you could have stopped: Preparing for extraordinary risks ,” December 15, 2020, Fritz Nauck , Ophelia Usher, and Leigh Weiss
• “ Meeting the future: Dynamic risk management for uncertain times ,” November 17, 2020, Ritesh Jain, Fritz Nauck , Thomas Poppensieker , and Olivia White
• “ Risk, resilience, and rebalancing in global value chains ,” August 6, 2020, Susan Lund, James Manyika , Jonathan Woetzel , Edward Barriball , Mekala Krishnan , Knut Alicke , Michael Birshan , Katy George , Sven Smit , Daniel Swan , and Kyle Hutzler
• “ The risk-based approach to cybersecurity ,” October 8, 2019, Jim Boehm , Nick Curcio, Peter Merrath, Lucy Shenton, and Tobias Stähle
• “ Value and resilience through better risk management ,” October 1, 2018, Daniela Gius, Jean-Christophe Mieszala , Ernestos Panayiotou, and Thomas Poppensieker

Want to know more about business risk?

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What Is Business Risk? Definition, Factors, and Examples

What Is Business Risk?

Business risk is the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail. Anything that threatens a company's ability to achieve its financial goals is considered a business risk . There are many factors that can converge to create business risk. Sometimes it is a company's top leadership or management that creates situations where a business may be exposed to a greater degree of risk.

However, sometimes the cause of risk is external to a company. Because of this, it is impossible for a company to completely shelter itself from risk. However, there are ways to mitigate the overall risks associated with operating a business ; most companies accomplish this by adopting a risk management strategy.

Key Takeaways

• Business risk is any exposure a company or organization has to factor(s) that may lower its profits or cause it to go bankrupt.
• The sources of business risk are varied but include changes in consumer taste and demand, the state of the overall economy, and government rules and regulations.
• Risk can be created by external factors that the business doesn't control, as well as by decisions made within the company's management or executive team.
• While companies may not be able to completely avoid business risk, they can take steps to mitigate its impact, including the development of a strategic risk plan.

Investopedia / Xiaojie Liu

Understanding Business Risk

When a company experiences a high degree of business risk, it may impair its ability to provide investors and stakeholders with adequate returns. For example, the CEO of a company may make certain decisions that affect its profits, or the CEO may not accurately anticipate certain events in the future, causing the business to incur losses or fail.

Business risk is influenced by a number of different factors including:

• Consumer preferences, demand, and sales volumes
• Per-unit price and input costs
• Competition
• The overall economic climate
• Government regulations

A company with a higher amount of business risk may decide to adopt a capital structure with a lower debt ratio to ensure that it can meet its financial obligations at all times. With a low debt ratio, when revenues drop the company may not be able to service its debt (and this may lead to bankruptcy). On the other hand, when revenues increase, a company with a low debt ratio experiences larger profits and is able to keep up with its obligations.

To calculate risk, analysts use four ratios: contribution margin, operation leverage effect, financial leverage effect, and total leverage effect. For more complex calculations, analysts can incorporate statistical methods.

Business risk usually occurs in one of four ways: strategic risk, compliance risk, operational risk, and reputational risk .

Types of Business Risk

Strategic risk.

Strategic risk arises when a business does not operate according to its business model or plan. When a company does not operate according to its business model, its strategy becomes less effective over time, and the company may struggle to reach its defined goals.

For example, imagine ABC Store is a big box store that strategically positions itself as a low-cost provider for working-class shoppers. Its main competitor is XYZ Store, which is seen as a destination for more middle-class consumers. However, if XYZ decides to undercut ABC's prices, this becomes a strategic risk for ABC.

Compliance Risk

The second form of business risk is compliance risk, sometimes known as regulatory risk. Compliance risk primarily arises in industries and sectors that are highly regulated. For example, in the wine industry, there is a three-tier system of distribution that requires wholesalers in the U.S. to sell wine to a retailer, who then sells it to consumers. This system prohibits wineries from selling their products directly to retail stores in some states.

However, there are many U.S. states that do not have this type of distribution system; compliance risk arises when a brand fails to understand the individual requirements of the state in which it is operating. In this situation, a brand risks becoming non-compliant with state-specific distribution laws and may face fines or other legal action.

Operational Risk

The third type of business risk is operational risk . This risk arises from within the corporation, especially when the day-to-day operations of a company fail to perform. For example, in 2012, the multinational bank HSBC faced a high degree of operational risk and as a result, incurred a large fine from the U.S. Department of Justice when its internal anti-money laundering operations team was unable to adequately stop money laundering in Mexico.

Reputational Risk

Any time a company's reputation is ruined, either by an event that was the result of a previous business risk or by a different occurrence, it runs the risk of losing customers and its brand loyalty suffering. The reputation of HSBC faltered in the aftermath of the fine it was levied for poor anti-money laundering practices.

Reducing Business Risk

Business risk cannot be entirely avoided because it is unpredictable. However, there are many strategies that businesses employ to cut back the impact of all types of business risk, including strategic, compliance, operational, and reputational risk.

The first step that brands typically take is to identify all sources of risk in their business plan . These aren't just external risks—they may also come from within the business itself. Taking action to cut back the risks as soon as they present themselves is key. Management should come up with a plan in order to deal with any identifiable risks before they become too great.

Finally, most companies adopt a risk management strategy . This can be done either before the business begins operations or after it experiences a setback. Ideally, a risk management strategy will help the company be better prepared to deal with risks as they present themselves. The plan should have tested ideas and procedures in place in the event that risk presents itself.

Once the management of a company has come up with a plan to deal with the risk, it's important that they take the extra step of documenting everything in case the same situation arises again. After all, business risk isn't static—it tends to repeat itself during the business cycle. By recording what led to risk the first time, as well as the processes used to mitigate it, the business can implement those strategies a second time with greater ease. This reduces the timeframe in which unaddressed risk can impact the business, as well as lowering the cost of risk management.

What Are the 4 Main Types of Business Risk?

The four main types of risk that businesses encounter are strategic, compliance (regulatory), operational, and reputational risk. These risks can be caused by factors that are both external and internal to the company.

Why Is Risk Management Important In Business?

Businesses face a great deal of uncertainty in their operations, much of it outside their control. This uncertainty creates risk that can jeopardize not both a company's short-term profits and long-term existence. Because risk is unavoidable, risk management is an important part of running a business. When a business has a thorough and carefully created risk management plan in place, and when they are able to iterate on that plan to deal with new an unexpected risks, the business is more likely to survive the impact of both internal and external risk.

What Are Internal Risks That Can Impact a Business?

Internal risks that can impact a business often come from decisions made by the management or executive team in pursuit of growth. These decisions can create physical or tangible risks. For example, on-site risks such as fires, equipment malfunctions, or hazardous materials can jeopardize production, endanger employees, and lead to legal or financial penalties. Policies that guarantee a safe working environment would, in this instance, be an effective strategy for managing internal risks.

The Bottom Line

In business, risks are factors that an organization encounters that may lower its profits or cause it to go fail. Sources of risk can be external, such as changes in what consumers want, changes in competitor behavior, external economic factors, and government rules or regulations. They can also be internal such as decisions made by management or the executive team.

No company can completely avoid risks, especially because many risk factors are external. However, businesses can put risk management strategies into place. These strategies can be used both to reduce risk and to mitigate the impact of risks when they arise. By documenting the sources of risk and creating a strategic plan that can be repeated, businesses can reduce the overall impact of risk and deal with it more efficiently and effectively in the future.

United State Department of Justice. " HSBC Holdings Plc. and HSBC Bank USA N.A. Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement ."

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Business Plan 101: Critical Risks and Problems

When starting a business, it is understood that there are risks and problems associated with development. The business plan should contain some assumptions about these factors. If your investors discover some unstated negative factors associated with your company or its product, then this can cause some serious questions about the credibility of your company and question the monetary investment. If you are up front about identifying and discussing the risks that the company is undertaking, then this demonstrates the experience and skill of the management team and increase the credibility that you have with your investors.  It is never a good idea to try to hide any information that you have in terms of risks and problems.

Identifying the problems and risks that must be dealt with during the development and growth of the company is expected in the business plan. These risks may include any risk related to the industry, risk related to the company, and risk related to its employees. The company should also take into consideration the market appeal of the company, the timing of the product or development, and how the financing of the initial operations is going to occur. Some things that you may want to discuss in your plan includes: how cutting costs can affect you, any unfavorable industry trends, sales projections that do not meet the target, costs exceeding estimates, and other potential risks and problems.  The list should be tailored to your company and product. It is a good idea to include an idea of how you will react to these problems so your investors see that you have a plan.

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Identifying and managing business risk

Risk is a part of doing business. Find ways to minimise risks and impacts to ensure your business can safely run and grow.

What is business risk

Business risks are factors that threaten your ability to operate, leading to lost profits or business failure.

When identifying and managing risks, consider:

• the possible causes and impacts
• how these risks affect your business objectives
• how they could be recorded in a risk management plan
• steps you could take to minimise the risk or the impact.

By considering potential risks and impacts in advance, you can develop procedures without the added pressure of trying to manage the risk at the time.

Understanding business risk

Types of risks include:

• direct risk—a threat to your business that is within your control
• indirect risk—a threat to your business that is out of your control
• internal risk—risks you have the power to prevent or mitigate within your business
• external risk—risks you have no control over.

Risks, potential business impacts and resources

(e.g. flood, fire, cyclone, storm, drought)

Type of risk

Potential impact on business objectives.

• Unable to trade
• Premises closed
• Cost of time for cleaning up and rebuilding
• Customers cannot get through
• Suppliers cannot provide stock

Resources to assist

• Natural disaster preparation for small businesses
• Business insurance
• Understand your risk – advice from the Queensland Reconstruction Authority

(e.g. COVID-19, swine flu, bird flu)

• Staff unable to work
• Cleaning and restocking time and costs
• Customer behaviour changes
• Loss of livestock
• Pandemic and health event risk management
• Major health event preparation for small business
• Disaster recovery for livestock farms

(e.g. wars, political disruption, supply chain disruption)

• Cannot get or send stock through normal import/export channels
• Need to change suppliers or find other markets
• Market profiles from Trade and Investment Queensland
• IBISWorld industry reports available for free from State Library of Queensland

(e.g. import and export regulations, change in tax obligations)

• New policies and procedures to implement
• Changes in trading
• Changes in taxation and financial obligations
• Changes in environmental allowances (e.g. water allocations, waste management)
• Meeting your legal obligations
• Complying with payroll tax obligations
• Meeting environmental obligations and duties

(e.g. hazards, equipment)

• Hazards and injuries to staff
• Failure to provide a safe workplace
• WorkSafe Queensland

(e.g. sustainable practices, ethical practices)

• Climate change
• Chemical spills and failing to protect the environment
• Consumer trends towards desiring sustainability
• Environment and business
• Adapting to climate change
• Climate change risk management tool for small businesses (PDF, 10.2MB)

(e.g. power outages, transport disruption, road works)

• Electrical, gas, and water disruption to the business premises
• Access to business premises disrupted including parking, deliveries, and pedestrian traffic
• Works with small business — guidelines for agencies to proactively engage with small businesses when undertaking capital works projects.

(e.g. computers, internet, networks, client databases, telecommunications)

• Older technology and software failures
• Software does not meet new regulations
• Cyber security compromised causing disruptions and loss of data or intellectual property
• Failure in maintaining privacy of customer data
• IT risk management
• IT threat preparation for small business
• Cyber security – protect your online business activity

(e.g. supplier agreements, lease agreements, staff contracts)

• Contractual problems
• Failing to meet legislation, regulations, or obtaining licences and permits
• Australian Business Licence and Information Service (ABLIS)
• Resolving business disputes
• Assistance for small businesses from the Queensland Small Business Commissioner

(e.g. shoplifting, internal theft, staff safety)

• Shoplifting
• Fraud causing loss of equipment
• Stock and cash flow
• Vandalism causing cost of time to replace and repair
• Shoplifting, stealing, fraud, and burglary
• Security and crime prevention

(e.g. online reviews, customer feedback)

• Negative media coverage
• Social media rumours
• Staff leave the business
• Reputation incident preparation for small business
• Social media
• Online communication and customer reviews

(e.g. recruitment, staff, training)

• Difficulty in finding new staff
• Bullying and harassment
• Staff not well trained leading to mistakes and poor customer service
• Managing conflict in the workplace
• Staff training, development and mentoring
• Help to hire staff from Workforce Australia.

(e.g. economic downturns, inflation)

• A reduction in consumer spending
• Changing market leading to reduced income
• Increasing expense costs, e.g. fuel, transport, energy
• Suppliers may be affected
• Surviving an economic downturn
• Marketing, advertising and promotion
• IBISWorld industry reports available for free from the State Library of Queensland

Analysing risk impact

It can be overwhelming to consider all possible risks a business faces. Assessing the impact of each can help prioritise where to invest your time and energy.

Completing this exercise will help you focus on risks with the highest scores and therefore the greatest potential to impact your business.

Risks come in different forms. Some will have a big impact and others a moderate impact. Working out which to focus on can be considered by looking at a 'level of risk' scale.

This scale determines the likelihood of the risk occurring and looks at the impact if the event does occur to determine a level of risk score. The higher the score, the higher the priority to reduce the risk or impact.

Likelihood × Impact = Level of risk

Likelihood scale

Impact scale, level of risk (likelihood x impact).

Developing and using risk analysis methods can help to assess the levels of risk within the business and where to focus.

A business in its 5 th year of operation is using a computer to access and record high volumes of sales in a customer database.

Due to rapid growth over the past 2 years, the computer has not been updated in some time, changes to software packages installed have not taken place, and passwords for online accounts have not been changed. Staff are reporting odd phone calls from 'IT officers' seeking account information to prevent 'emergency situations'.

There is some risk this business could be the target of hackers who are interested in customer data, information about sales and other information collected by the business.

The impact of getting hacked is losing sensitive customer data, jeopardising the business's reputation and depending on the nature of the hack, potential compromise of the business's banking information.

The current situation is sitting on the scale as a:

• Likelihood: High (level 3)
• Impact: Very High (level 4)
• Level of risk: Likelihood 3 x Impact 4 = 12 Severe

This presents as a severe risk.

Reducing this risk level immediately is recommended.

Action item

Use this section to help you complete a risk level assessment.

Record this in your business continuity plan template —risk management plan section and business impact analysis section.

Treating risks to your business

Once you have completed the analysis and identified the areas of concern, the next step is to consider how to reduce the level on the scale.

You can treat risks by assessing the factors attached to the risk and identifying areas for improvement.

In the case study above, the level of risk can be reduced by updating software, changing passwords and reminding staff to be very careful with business information and decline requests to provide information over the phone.

While these actions might not remove the risk, they can reduce a highly likely, very high impact situation to a medium likelihood, moderate impact situation.

Often, high-risk situations can be reduced to medium or low risk with some careful planning and action.

Ask yourself

• What is one high risk in your business right now?
• How likely is it?
• What would you rate the impact of this risk occurring?
• How could you reduce the likelihood or the impact for this high-level risk?

Creating a risk management plan and business impact analysis

Once you have identified risks to your own business, manage them by developing a risk management plan to assist:

• avoiding the impact
• eliminating the impact
• reducing the impact.

A risk management plan identifies risk. Business impact analysis considers strategies to manage risks.

Your business continuity plan is key to recording risks to the business and coming up with plans to manage them.

Download the business continuity plan template

This template includes a:

• risk management plan section
• business impact analysis section

Download the business continuity planning template .

Use this page (and other resources provided) to complete the risk management plan and business impact sections of the template.

To prepare:

• identify significant risks to your business
• analyse the potential impact of each risk
• create strategies to treat and reduce the risks
• create or review and update your risk management plan and business impact analysis.

The business continuity plan is a good point of reference to record this information and to refer to in the event of an emergency.

Find out more about writing a business continuity plan .

Reviewing and updating your risk management plan and business impact analysis

Risk management plans and business impact analysis are part of your business continuity plan.

As time goes by, and as the business changes, updating these sections of your business continuity plan will help you consider new risks, downgrade treated risks and highlight areas for improvement.

Conducting tests or trials to see what would happen if risks eventuated can help with this process. A good example of these is an emergency evacuations drill.

By conducting an evacuation drill, you will be able to determine:

• how the business performed
• did the process and systems work effectively
• what areas need to be reviewed or improved.

Upon review, update your risk management plan with revised procedures and communicate these changes to your staff.

By planning for challenges, your business is better prepared to meet them.

Also consider...

• Find out about managing risk with business insurance .
• Read about writing a business continuity plan .
• Explore managing risks when starting up .
• Find out about IT risk management .
• View our Cyber security for small business webinar for information, tips and resources on protecting yourself and your business from cyber security threats.
• Last reviewed: 24 Nov 2022
• Last updated: 24 Nov 2022

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• 7 common project risks and how to preve ...

7 common project risks and how to prevent them

Analyzing risk is an important part of the project planning process. Having a clear sense of the project risks you face, can help you prevent or prepare for upcoming risks. In this article, learn about seven of the most common project risks. Then, empower your team to find solutions before these issues derail important initiatives.

As a project manager, knowing what could go wrong during your project can help you set your team members up for success. For example, what if project stakeholders propose a new app and you don’t consider the time and resources it will take to create it? When the app heads to the development team, the project is at risk of falling apart before it starts.

1. Scope creep

Scope risk, also known as scope creep , occurs when the initial project objectives aren’t well-defined. It’s important to communicate your project roadmap with stakeholders from the beginning and hold firm to those parameters. If you don’t communicate your project scope effectively, stakeholders may try to change requirements mid-project.

How to mitigate scope creep: Creating clear project parameters from the start will strengthen your project scope. Agreeing upon the project scope and communicating that vision with stakeholders from the beginning will leave less room for scope creep. Scheduling regular progress check-ins can also ensure the project stays in line with the original project scope. 

2. Low performance

Performance risk occurs when the project doesn’t perform as well as initially expected. While you can’t always identify the root cause of low performance, you can identify project risks that may lead to low performance and look for ways to prevent those risks. Examples of these risks include a time crunch and miscommunication among team members. 

How to mitigate low performance: Anticipating potential performance risks early on in the planning process can help you prepare. Using project management software lets you follow your processes in real time, plan your project thoroughly, and promote open communication between team members.

3. High costs

Cost risk occurs when your project goes over the budget you initially set. Cost risk can occur because of unrealistic or lack of detailed budgeting in the project planning phase. For example, you may feel confident that your project will be completed under-budget. However, creating a detailed list of every project element and what they cost can help you anticipate project needs.

How to mitigate high costs: To mitigate cost risk, estimate each element of your project accurately and stick closely to your budget. The best way to stick to your budget is to create a project plan template to align on deliverables, scope, and schedule. When your project goes into development, consider scheduling regular check-ins to review your budget and how you’re pacing.  

4. Time crunch

Time risk, also known as project schedule risk, is the risk that tasks in your project will take longer than expected. Delayed timelines might impact other things like your budget, delivery date, or overall performance. This is a common risk that you may run into as project manager. When you’re not doing the work yourself across lots of moving pieces, it’s easy to underestimate the time it’ll take team members to complete a project during the initial planning phase.

How to mitigate a time crunch: To mitigate time risk, a rule of thumb is to overestimate the time needed to complete tasks in the planning phase and build in time contingency. That way, you’ll have wiggle room for scheduling later on. You can also create a project schedule using a Timeline or Gantt chart . Having clarity into work, dependencies between work, and any delays can help project managers dynamically adapt to time risk as it crops up. Understanding your project lifecycle can also help you determine how long each task will take. 

5. Stretched resources

Resource risk occurs if you don’t have enough resources to complete the project. Resources may include time, skills, money, or tools. As a project manager, you’re responsible for the procurement of resources for your team and communicating with your team about the status of resources. Resource allocation should happen early in the project planning process, typically 1-2 months before project execution, depending on project size.

How to mitigate stretched resources: The best way to mitigate resource risk is to create a resource allocation plan . A resource allocation plan makes the best use of team resources while maximizing resource impact and supporting team goals. When you know what resources you need from the beginning, you minimize the chance of running out of resources later.

6. Operational changes

Operational risk involves changes in company or team processes, like an unexpected shift in team roles, changes in management, or new processes that your team must adjust to. These things can create distractions, require adjustments in workflows, and may impact project timelines.

How to mitigate operational mishaps: You can’t predict or prevent all operational risks, but if you know a team shift or process change is coming, you can mitigate the effects of the transition. Make sure your team is prepared for the change and has time to adjust through team meetings, scheduling tools, or additional trainings. 

7. Lack of clarity

Lack of clarity may come in the form of miscommunication from stakeholders, vague project scopes, or unclear deadlines. The result can be a lack of visibility due to siloed work, going over budget, falling behind project deadlines, changing project requirements, having to pivot project direction, or disappointing project outcomes.

How to mitigate lack of clarity: When planning your project, check and recheck your requirements to ensure everything is in place. Is everyone involved on the same page? Are developers prepared for the next phase? Is the scope clearly defined? It's also important to make sure project information is accessible to all. By keeping information in a central tool, you can ensure everyone stays updated as the project progresses.

How to use risk management to prepare your team

Risk management involves identifying what risk categories are most likely to affect your project and making a plan to mitigate those risks. 

Project management tools make risk management easier because they allow you to organize your projects from start to finish. You can also use work management software to collaborate across teams, which will make the most common risks less likely. 

Using the following four steps, you can anticipate risk and keep your projects running smoothly. 

1. Risk identification

The first step in the risk analysis process is identifying risks you think could affect your project. We mentioned the seven most common risk events above, but other project risks could include contractor failure, unexpected life events, data transfer issues, shifting priorities, legal risk, market risk, and project deferral. 

Ask yourself these questions below to begin the risk identification process:

What is the likelihood of this risk event?

What are the impact and severity if the risk occurs?

What is our risk response plan?

Given the likelihood and impact, what is the priority level?

Who owns this risk?

Once you have an answer to these questions, you’ll continue the risk management process through prioritization of risks, actionable solutions, and regular monitoring. 

2. Determine the likelihood and impact

You can sort through your list of risks by determining which ones are most likely to occur. Placing the risks in order of likelihood will give you a better idea of which risks to prioritize as you prepare a plan of action. 

Not only is the likelihood of occurrence important when prioritizing risks, but assessing the business impact of each risk matters as well. You should plan more carefully for the risks that have the potential to cause significant business impact.

3. Find solutions for each risk

Creating a game plan on how your team will deal with each risk is the goal when conducting risk assessments. Sorting risks based on likelihood and business impact will give you a starting point for finding solutions. Conducting a risk assessment will make your projects more successful because you can prevent risk along the way. 

You can meet with relevant project stakeholders to proactively identify reasonable solutions for project risks that might be top of mind for them. Take a look at lessons learned from past projects to gauge how risks were handled.

4. Monitor your risk assessment regularly

Once you’ve developed your risk assessment, it’s important to monitor it regularly because circumstances can change. The likelihood of risk can shift and so can the business impact. 

It’s also possible that new risks can come into play or risks that were once possible may become less likely. Monitoring your risk assessment regularly can make you feel the most prepared for uncertain events. 

Project risk management tools

The right tools can make the risk assessment process easier because they allow you to analyze and prioritize risk. With real-time tracking and shared information in one place, everyone on your team can have instant access to project materials and you can monitor team progress. 

Project management tools can also help your team develop strong project planning skills. Knowing your process and the project management phases can prevent risks before they occur. 

Risk register

A risk register is the ultimate tool for identifying and prioritizing risk. A risk register should include the likelihood of each risk, the business impact, how you hope to prevent the risk, how you plan to respond to the risk if it occurs, and who will take action.

Below is an example of what a risk register might look like. The left side shows the type of risk followed by the likelihood of the risk, the level of business impact, the person responsible for taking action, and the mitigating action.

After completing a risk register, you’ll have a living document to use when working through projects. You can reference this information as you encounter risks and use it to reduce long-term damage. 

SWOT analysis

SWOT stands for strengths, weaknesses, opportunities, and threats. A SWOT analysis goes beyond identifying the risks for a project because it also identifies the strong points in your project. You can use your project’s strong points to stand out among competitors.

To complete a SWOT analysis, go through each letter of the acronym and ask questions like the ones below to uncover new ways to improve your project and prepare your team. 

Strength: What do we do well?

Weakness: What could be improved?

Opportunity: What are our goals for the year? 

Threat: Where are our competitors outperforming us? 

After creating a SWOT analysis, you can feel confident moving forward with projects because you’ll have a better understanding of where you stand in relation to competitors. You’ll also know your strengths and weaknesses, which can help you improve future projects and mitigate risk. 

Brainstorming

Brainstorming is a powerful way to come up with ideas, but its effectiveness can often get overlooked. When you have a team with different perspectives, brainstorming is a great way to spark creativity and assess risk. 

Brainstorming is often the first step in creating a risk register because to identify risk, you must start somewhere. Learning new brainstorming techniques can help your team identify risk, keep your team agile, and potentially prevent risk from occurring. 

Plan ahead to mitigate project risk

The project planning phase is the most important part of any project. You may think that the development phase is where the magic happens, but planning for your project is what prevents project risks and leads your team to success.

There are various types of project management software out there that allow you to automate processes, streamline communication, share information, and provide real-time tracking. With these tools in tow, you can transform your projects from good to great. 

Related resources

How to use a feasibility study in project management

How to track utilization rate and drive team profitability

How to accomplish big things with long-term goals

Smooth product launches are simpler than you think

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Why A Risk Management Plan Is Important For Business

by Mike Vestil  

Risk management is an essential practice for any organization looking to minimize the impact of potential threats and uncertainties to their operations. A risk management plan is a strategic document that helps organizations identify, assess, prioritize and manage risks in a systematic and structured manner.

This plan enables businesses to develop contingency plans and resolutions that can help them respond effectively to potential crisis situations. In this article, we explore the importance of a risk management plan , and how organizations can develop one to safeguard their operations.

Introduction To Risk Management Plan

Purpose of risk management plan.

A Risk Management Plan is a crucial aspect of any project plan in any organization. It is a comprehensive document that outlines the strategies that a firm employs to identify, assess, and mitigate risks that may affect the project’s success.

The purpose of a Risk Management Plan is to allow companies to achieve their objectives by identifying risks and taking the necessary measures to prevent them from derailing their projects.

The plan helps organizations to put in place proactive measures, such as risk mitigation and risk avoidance, that minimize the impact of potential risks. Additionally, it provides a structured approach for decision-making to all stakeholders involved in the project, and enables them to work collaboratively.

The primary objective of a well-defined Risk Management Plan is to identify the risks that could negatively impact the project objectives. It also defines how the risks will be assessed, analyzed, prioritized, and controlled.

The document serves as a tool for effective communication between the project team, project manager, and stakeholders. The plan provides clear guidance on how to identify potential risks, assign ownership of risks, and explain how risks should be managed.

It is essential to consider the risk appetite of the organization when developing a Risk Management Plan. This is because the risk appetite of an organization will influence how risks are managed and what measures are taken to control them. Therefore, it is important to define the objectives and the scope of the project before developing a Risk Management Plan.

In conclusion, the Purpose of a Risk Management Plan is to identify risks that could negatively impact a project, prioritize them, and define how they will be controlled. The Risks Management Plan also provides a way for stakeholders to communicate effectively, assigns ownership of risks, and outlines how they will be managed.

It provides a structure that allows organizations to work collaboratively towards their objectives by proactively identifying, analyzing, and preventing potential risks. To that, it is crucial to develop a Risk Management Plan that consider the scope and objectives of a project so that it can account for the risk appetite of the organization.

Scope Of Risk Management Plan

The scope subsection of a Risk Management Plan outlines the boundaries of the project that will be subject to risk management procedures.

The scope defines the limits of the risk management plan, including the types of risks that will be addressed, the stakeholders to be involved, and the level of detail that is necessary to manage risks effectively.

The scope will also define the goals and objectives of the project. In this subsection, it is important to describe the project in detail and identify all stakeholders who will participate in the plan.

Stakeholders can include project sponsors, team members, vendors, and customers. It is also important to establish the timeframe for the project and the processes that will be used to manage risks.

The scope subsection should provide the reasoning behind the need for a risk management plan.

This includes identifying the potential impact that risk events could have on the project and how risk management strategies can help mitigate those risks. Additionally, an overview of the risk management plan’s relationship to other management plans should also be included.

The scope subsection should also include a description of the methodology that will be used to assess risks. This can include information on the tools and techniques that will be used, how risks will be identified and analyzed, and how they will be prioritized.

This helps stakeholders understand how risks will be identified and managed throughout the project, making it easier to mitigate risks when they arise.

Finally, the scope subsection should describe the deliverables that will be produced as part of the risk management plan.

This includes the documentation that will be used to manage risks, such as a risk register, and any reports or analysis that will be produced identifying the effectiveness of the risk management plan.

Having a clear understanding of the deliverables ensures that all stakeholders know what to expect and what they need to produce, which helps to ensure that the risk management plan is successful.

Objectives Of Risk Management Plan

Risk management is a vital component of any project, business, or entity. It involves identifying, assessing, and mitigating risks that could hinder the achievement of objectives. Objectives are significant goals a project or business endeavors to achieve.

Objectives establish the direction and scope of the work, and they are the foundation upon which the risk management plan is built. The purpose of the objectives subsection is to define the objectives and articulate how risk management will help achieve them.

The objectives should be specific, measurable, achievable, relevant, and time-bound. A well-formulated risk management plan ensures the objectives are achieved with minimal setbacks, and the organization remains resilient against unforeseen challenges.

Risk Management Process

Risk identification subsection.

The Risk Identification subsection is an essential phase of the risk management plan. This step entails identifying and documenting all potential risks that could affect the project’s objectives.

The risks identified in this phase can be categorized as internal (within the organization) or external (outside the organization). A project manager must have a robust understanding of the project activities, its scope, timeline, and resources to be able to identify potential risks accurately.

Risk identification is a continuous process that involves all project stakeholders, including team members, customers, and suppliers, and can be done through brainstorming sessions, root cause analysis, SWOT analysis, and other techniques.

The primary documentation produced in this phase is the risk register, which includes a detailed description of the risks, their likelihood, impact, and priority level.

The risk register serves as a reference for the risk assessment and mitigation phases , and the success of the entire risk management plan depends on the accuracy and comprehensiveness of the risk identification phase.

Risk Assessment Section

The Risk Assessment section of the Risk Management Plan involves evaluating the identified risks and determining their level of potential harm and probability of occurring. This process is crucial in creating a plan of action to mitigate the risk and prevent potential negative consequences.

The methodology for this section typically involves a systematic approach that includes identifying the risks, assessing their likelihood and impact, and prioritizing them based on their level of risk.

It is important to involve all parties who are responsible for managing the risk and ensure that they understand the risks and potential consequences.

The roles and responsibilities in this section should clearly define who is responsible for assessing the risks and implementing mitigation strategies. It may be necessary to enlist the help of outside experts to ensure the best possible risk assessment.

The final outcome of the Risk Assessment section is a list of prioritized risks and a detailed plan of action to address each one. This list should be regularly reviewed and updated to ensure that the organization is adequately prepared to manage its risks.

Risk Mitigation Process

Risk Mitigation is the process of managing risks that have been identified and assessed, in order to reduce the likelihood or impact of the risk event. This process involves developing and implementing strategies to prevent, or minimize, the occurrence of the identified risks.

Risk mitigation requires a thorough understanding of the risks involved, as well as the potential impact on the project or organization. This includes determining the likelihood and impact of each risk, and prioritizing them based on their importance.

The mitigation plan should be developed with input from all stakeholders, and should be regularly reviewed to ensure its effectiveness.

The methodology for risk mitigation involves several steps. The first step is to identify the risks that pose a threat to the project or organization. This involves brainstorming sessions, interviews with stakeholders, and reviewing historical data.

Once the risks have been identified, they must be assessed to determine their likelihood and impact. The next step is to prioritize the risks based on their importance and develop strategies to mitigate them. This may involve developing contingency plans, establishing procedures for risk monitoring and reporting, or implementing preventative measures.

The roles and responsibilities for risk mitigation are critical. This involves assigning responsibilities for identifying, assessing, prioritizing, and mitigating risks to specific individuals or teams. The project manager is typically responsible for overall risk management, including the development and implementation of a risk management plan.

However, other stakeholders, such as team members or subject matter experts, may also play a critical role in risk mitigation. Effective communication and collaboration among stakeholders is essential for successful risk mitigation.

In summary, risk mitigation is an essential component of the risk management process. Developing and implementing effective risk mitigation strategies can help reduce the likelihood and impact of potential risk events, and ensure the success of a project or organization.

The methodology and roles and responsibilities for risk mitigation should be well-defined and involve input from all stakeholders. Regular review and updating of the mitigation plan is crucial to ensure its continued effectiveness.

Risk Monitoring And Control

The Risk Monitoring and Control subsection is an essential component of the Risk Management Plan. It involves the constant monitoring and evaluation of the identified risks by the project team.

The purpose of this process is to determine whether the agreed-upon mitigation strategies are effective in reducing the impact of the risks on the project. The process also involves taking corrective actions as necessary and initiating new mitigation strategies to address any new risks that may arise.

The methodology for Risk Monitoring and Control determines how the identified risks will be monitored and when corrective actions are initiated. Risk Monitoring and Control is usually an ongoing process, starting from the identification phase of the risk management plan to the closure of the project.

The methodology encompasses establishing the metrics to utilize in measuring the risks, determining the frequency of monitoring, corrective action procedures, identifying the resources required to perform the monitoring and control process, among others.

A critical aspect of Risk Monitoring and Control is the roles and responsibilities of all team members. The project manager is responsible for facilitating the monitoring and control process, including reporting on risk status updates to senior management, the client, and stakeholders.

The project team collaborates in identifying new risks, mitigating, and evaluating the effectiveness of implemented mitigation strategies. The risk owner is accountable for a specific risk, including implementing strategies to manage the risk and providing updates on risk progress during the monitoring process.

In conclusion, the risk monitoring and control process is necessary for ensuring that the project stays on track and accomplishes its objectives while managing any potential risks.

Applying an effective methodology, together with well-defined roles and responsibilities, is crucial to achieving project success.

Team collaboration, including stakeholders, is crucial to the process’s efficiency and effectiveness. By consistently monitoring the risks and taking corrective action as necessary, the project team can minimize the impact of risks on the project’s outcome.

Risk Management Plan Implementation

Risk management plan approval.

Once the risk management plan has been developed and all necessary personnel have been involved in the process, it’s time to submit the plan for approval. It’s important to receive approval from all necessary parties before proceeding with any risk management activities.

Typically, the approval process involves presenting the plan to upper-level management, including project sponsors or stakeholders. This presentation should include a comprehensive explanation of the plan, as well as any potential risks or benefits associated with it.

Demonstrating the rigor with which the plan was developed and the expertise of those involved can help to instill confidence in the plan and increase the likelihood of approval.

Once approved, it’s important to communicate the plan to all relevant parties. This includes any stakeholders, employees, or other individuals who may be impacted by the plan.

Clear communication can help to ensure that everyone is on board with the plan and understands their role in its implementation. It’s also important to provide training to those who will be involved in executing the plan. This can help to ensure that everyone is equipped with the knowledge and skills necessary to carry out their responsibilities effectively.

To ensure ongoing success, it’s also important to regularly review and update the risk management plan. This can help to ensure that it remains relevant and effective over time. Regular reviews can help to identify new risks or changes in existing risks, and allow for adjustments to be made to the plan accordingly.

Risk Management Plan Communication

Risk Management Plan Communication is a crucial aspect of any risk management plan. Communication refers to the process of sharing relevant information with all stakeholders involved in the project.

Effective communication is essential for ensuring that everyone involved in the project is aware of the potential risks and the measures that will be implemented to address them.

Communication is also critical for responding appropriately to any unexpected incidents or risks that arise during the project.

The first step in effective communication is identifying the stakeholders involved in the project. The stakeholders may include the project team, vendors, suppliers, customers, investors, regulators, and any other parties with an interest or involvement in the project.

Once the stakeholders are identified, a communication plan should be developed that outlines the type of information, the frequency of communication, and the channels for communication.

It is recommended to use a combination of communication channels, such as email, phone, video conferencing, and regular meetings, to ensure that the information is disseminated promptly and efficiently.

The communication plan should also identify the person responsible for communicating the information, and the protocols for escalating any issues that require urgent attention or resolution.

Another critical aspect of effective communication is ensuring that the information communicated is accurate, concise, and easily understandable.

The risk management plan should be written using plain language, avoiding technical jargon or acronyms that may be unfamiliar to some stakeholders. Use of visual aids, such as flow charts or diagrams, may also be effective in communicating complex information in a simple and concise manner.

Finally, it is important to evaluate the effectiveness of the communication plan regularly. This will help to identify any gaps or deficiencies in the communication process and enable the implementation of corrective actions.

Regular communication with stakeholders can also help to build trust and credibility, creating a more positive and productive working environment.

Risk Management Plan Training

Risk management plan training is a crucial aspect of any effective risk management plan. It is essential to ensure that all personnel within an organization understand the plan and know how to implement it if and when necessary.

Training should cover the identification, assessment, mitigation, and monitoring of risks, as well as the procedures that must be followed during an emergency or crisis. It should also explain the roles and responsibilities of different stakeholders within the organization, including the risk management team, employees, and management.

Effective training programs should be tailored to the specific needs of the organization and its personnel. They should also be ongoing and incorporate feedback and evaluation to ensure that the program remains relevant and effective.

Training methods should include interactive exercises, simulations of different scenarios, and case studies to help employees understand how to manage different types of risks.

One critical aspect of risk management plan training is ensuring that all employees understand the importance of risk management and their role in the process. This includes understanding the potential consequences of not managing risks effectively and how individual actions can impact the overall effectiveness of the organization’s risk management plan.

The training should also cover the reporting process for identifying and assessing risks. All personnel should know how to report potential hazards or risks that they see in their day-to-day work, and they should understand the importance of reporting these risks promptly.

The reporting process should be simple and accessible, and employees should be reassured that any reports they make will be taken seriously.

Finally, it is essential to evaluate the effectiveness of the training program continually. Feedback should be solicited from employees, and data should be collected on the effectiveness of the plan in reducing risks and managing crises.

This will allow the organization to continually improve its risk management plan and training program, ensuring its continued relevance and effectiveness.

Risk Management Plan Review And Update

Risk management plan review.

One of the critical components of an effective risk management plan is reviewing the plan regularly. A risk management plan review evaluates the effectiveness of the plan, identifies new risks, and ensures that the organization is adequately prepared to handle potential incidents.

The review should be carried out periodically, as specified in the plan, or as dictated by changes in the business environment. There are numerous reasons why a review should be conducted, including regulatory compliance, changes in the organization’s operations, and upgrades to technology.

A review is also necessary when a potential risk materializes, and the management team needs to assess the plan’s adequacy to address the situation.

A risk management plan review should include an investigation of the current plan’s resources and commitments, an analysis of the risks identified in the plan, and a determination of whether the organization has implemented suitable controls to address them.

The review should identify any unaddressed risks, assess the effectiveness of current risk treatment plans, and determine whether the plan incorporates recent organizational changes. The review should also ensure that employees are aware of the plan and have received adequate training to execute their roles effectively.

Additionally, the review should assess the business impact of the risks and examine whether the organization’s insurance coverage aligns with the plan’s risk treatment strategy.

The review’s output should be a comprehensive report that details the identified risks, the effectiveness of the mitigation measures, and recommendations for improvements to the plan. The report should be shared with relevant stakeholders, including the management team, operational staff, and external parties such as regulators, auditors, and insurance providers.

Based on the findings, the organization’s management team should update the plan, implement any changes necessary to mitigate current risks, and ensure that employees are informed of new or updated procedures. A risk management plan review is fundamental to the success of any organization, as it ensures that the organization is prepared to handle unexpected events and minimizes the impact of incidents.

Risk Management Plan Update

As companies navigate through various business cycles, it is pertinent they update their risk management plans to ensure they remain relevant and effective in mitigating emerging risks.

Risk management plan update is a crucial part of the overall risk management process, which helps businesses identify, analyze, and manage potential risks that could impact their operations. The update process involves re-evaluating potential risks, assessing their impact, and determining the likelihood of their occurrence.

Additionally, it involves identifying risk mitigation strategies and developing contingency plans to address any potential risks that may arise. Failure to conduct regular risk management plan updates could expose businesses to unanticipated risks, leading to financial losses or reputational damage.

The frequency of risk management plan updates depends on various factors such as the organization’s business cycle, compliance requirements, and industry best practices.

For instance, organizations operating in highly regulated industries, such as the healthcare and financial sector, may be required by law to conduct regular risk assessments to remain compliant. Similarly, companies operating in rapidly changing industries, such as technology, may need to update their plans more frequently to keep up with the evolving landscape.

It’s important for businesses to involve key stakeholders in the risk management plan update process, including top management, risk management teams, and relevant department heads. Having a diverse group of individuals involved in the process ensures that potential risks are thoroughly analyzed and that mitigation strategies are developed from a holistic perspective.

Additionally, it’s crucial to ensure that the risk management plan is communicated to all stakeholders and employees to ensure everyone is aware of the potential risks and how to manage them.

In conclusion, regular risk management plan updates are critical for organizations to effectively manage potential risks and minimize the impact on their operations. The update process ensures that the risk mitigation strategies remain relevant and effective in the face of emerging risks.

By involving key stakeholders and communicating the updated plan to all employees, businesses can proactively manage risks and avoid financial losses or reputational damage.

Roles And Responsibilities

Role of the project manager.

The role of the project manager in a risk management plan is critical to ensuring the successful completion of the project. The project manager is responsible for identifying, assessing, and managing risks that could impact the project’s success.

They must be able to communicate effectively with the risk management team and stakeholders to ensure everyone is aware of the risks and the steps being taken to mitigate them. It is also essential for the project manager to develop a risk management plan that outlines the procedures for identifying and managing risks throughout the project lifecycle.

The plan should include a risk register that tracks each risk’s status and the actions being taken to address them.

In addition to managing risks, the project manager must also ensure that the project is progressing as planned. They must be able to monitor and control project activities to ensure they are within the constraints of the project scope, schedule, and budget.

The project manager must also be able to adapt to changes in the project environment, such as new risks or unexpected issues that may arise. They must be able to develop contingency plans and make quick decisions to ensure the project stays on track.

The project manager plays a significant role in establishing a risk management culture within an organization. They must ensure that everyone involved in the project understands the importance of risk management and follows the established procedures.

The project manager must also encourage open communication and collaboration among all stakeholders to ensure the successful identification and management of risks.

Overall, the project manager plays a critical role in ensuring the successful identification and management of risks throughout the project lifecycle. They must be able to effectively communicate with the risk management team and stakeholders, monitor and control project activities, and adapt to changes in the project environment.

The project manager must also establish a risk management culture within the organization to ensure the successful identification and management of risks in future projects.

Risk Management Team

The Risk Management Team is a critical component of any risk management plan. This team’s primary responsibility is to identify, assess, and mitigate risks throughout the project lifecycle. The Risk Management Team should be composed of individuals with varying backgrounds and expertise to provide a comprehensive risk management approach.

The team should include a Project Manager, who will serve as the leader of the Risk Management Team. The Project Manager’s role will be to ensure that risks are identified and mitigated effectively, timely, and within budget.

In addition to the Project Manager, the Risk Management Team should include subject matter experts in various areas such as finance, legal, engineering, project controls, and operations. These experts will provide a diversity of perspective and knowledge.

The team should also include individuals who understand the project’s objectives, stakeholders, and potential risks involved. The team should be large enough to manage risk effectively but small enough to avoid conflicts in risk management decision-making.

The Risk Management Team members should have a clear understanding of their roles, responsibilities, and expectations. They should have the necessary training and experience to carry out their duties effectively. The team should establish a communication plan that will allow them to communicate effectively and efficiently.

The communication plan should ensure that all stakeholders are kept informed of risks, mitigation strategies, and risk management activities.

The Risk Management Team should be created early in the project lifecycle to ensure that risks are identified and addressed timely. The team should also align its efforts with the project schedule and budget. The team should meet regularly to monitor risk management activities and adjust mitigation strategies where necessary.

The team should maintain a risk register throughout the project lifecycle. The risk register should include: potential risks, risk severity, probability, mitigation strategies, responsible parties, and deadlines for risk mitigation.

In conclusion, the Risk Management Team plays a critical role in the success of any project. Effective risk management requires the collaboration of a diverse team with clear roles, responsibilities, and expectations. The team must establish a communication plan to ensure all stakeholders are informed throughout the risk management process.

Early creation of the Risk Management Team and regular meetings throughout the project lifecycle will ensure that risks are identified and addressed effectively and timely.

Stakeholders Play A Crucial Role

Stakeholders play a crucial role in the success of a risk management plan. These are individuals or groups that have an interest or investment in the project, and may be affected by the potential risks. It is essential to identify stakeholders early in the risk management process and engage with them throughout.

The main stakeholders include project sponsors, customers, end-users, investors, regulatory bodies, contractors, employees, and the public.

The project sponsor is a key stakeholder who funds, initiates, and advocates for the project. They have significant influence over the goals, scope, and direction of the project, and want to ensure successful delivery. Customers and end-users are important stakeholders who will use the product or service and rely on its functionality.

Their needs and expectations must be considered when assessing risks and developing mitigation strategies. Investors have a vested interest in the financial returns of the project and need assurance that risks are being managed effectively. Regulatory bodies and other external stakeholders may have legal or ethical requirements that must be adhered to.

Internal stakeholders such as contractors and employees are also important as they provide the necessary skills and resources to carry out the project. Their safety and well-being must be considered when identifying and mitigating project risks.

The public may also be impacted by the project, whether through environmental, social, or economic factors. Their concerns and feedback must be considered and addressed as part of a risk management plan.

Effective communication with stakeholders is critical for successful risk management. Regular updates on risk assessments, potential impacts, and mitigation strategies must be provided to ensure stakeholders are informed and engaged. Stakeholder feedback and concerns must be considered and addressed in a timely manner.

The risk management team must create a collaborative environment that fosters trust, transparency, and accountability. By involving stakeholders in the risk management process, their support and buy-in can be gained, which can help mitigate potential risks and ensure successful project delivery.

Appendix A: Risk Register Template

The risk register template is a critical component of the risk management plan. It is a document that outlines all identified risks for a project or organization, including their potential impacts, likelihood of occurrence, and proposed mitigation strategies. The risk register template is an essential tool for managing risks effectively throughout the project lifecycle.

It allows project managers to identify potential threats and opportunities, prioritize risks based on their likelihood and impact, and develop comprehensive risk mitigation plans. The template should include categories such as risk description, risk category, likelihood of occurrence, impact rating, risk owner, and mitigation strategy.

The risk register template should be updated regularly throughout the project and communicated to all stakeholders to ensure that everyone is aware of the project’s risks and how they are being managed. By utilizing a risk register template, project managers can effectively manage risks and ensure the success of their projects.

Appendix B: Risk Assessment Matrix

The risk assessment matrix is an essential tool for any risk management plan. It is a visual representation of the likelihood and impact of identified risks. This matrix enables the risk management team to prioritize and determine which risks require immediate attention.

The matrix is divided into four quadrants, each representing a different level of risk. The top left quadrant indicates risks that are high in likelihood and impact and should receive immediate attention. The top right quadrant represents risks that are high in impact but low in likelihood and require mitigation strategies.

The bottom left quadrant represents risks that are low in impact but high in likelihood and require monitoring. The bottom right quadrant represents risks that are low in both impact and likelihood and require little or no action.

Furthermore, this matrix helps in identifying the risk tolerance level of the organization, i.e., the level of risk that the organization is willing to accept. This matrix provides a more objective and consistent approach to risk assessment, avoiding subjective evaluations that may vary from evaluator to evaluator.

In summary, the risk assessment matrix is a vital component of the risk management plan, providing a visual representation of the prioritization of risks and enabling the identification of the organization’s risk tolerance level.

Appendix C: Risk Mitigation Plan Template

The Risk Mitigation Plan Template is an essential component of the larger Risk Management Plan process. It provides a comprehensive guide to manage and mitigate risks that are identified within a project or program.

The main purpose of the template is to acknowledge potential risks in advance and develop effective strategies to avoid or minimize their impacts. The template includes a description of each risk, its potential impact on the project, and the likelihood of it occurring.

The risk mitigation plan identifies the owner of each risk and outlines the corresponding mitigation strategies that must be put in place to manage the risks effectively. The template also outlines a contingency plan in case the risk arises despite the management strategies.

The key elements of the Risk Mitigation Plan include the development of a mitigation strategy, the identification of risk triggers, the creation of risk indicators, and the establishment of response plans.

The strategy developed must directly address the potential impact of the risk and should include a timeline, resource allocation, and targeted outcomes. Identifying risk triggers involves recognizing the signs and signals that indicate the likelihood of a risk occurring. This information is essential in implementing the mitigation strategy properly.

Moreover, risk indicators are crucial in measuring the effectiveness of the mitigation strategy. The indicators could be quantitative, such as cost or schedule, or qualitative, such as stakeholder satisfaction or reputation.

Response plans are developed based on likelihood and severity scores of each risk, and they provide a step-by-step guide on what action must be taken when a particular risk happens.

The Risk Mitigation Plan Template, when used effectively, is a valuable tool in the overall Risk Management Plan process.

By providing project managers with a robust framework for identifying and managing risks, the template enables prompt action to be taken to prevent or mitigate the impact of unwanted events.

When utilized with the Risk Register Template and Risk Assessment Matrix, the Risk Mitigation Plan Template can result in a comprehensive and effective Risk Management Plan that ensures project success.

Appendix D: Risk Monitoring And Control Plan Template

The Risk Monitoring and Control Plan Template is a vital part of any comprehensive risk management plan. This template is used to identify potential risks, evaluate their likelihood and severity, and develop an appropriate plan to mitigate and control them.

The plan typically includes procedures for identifying and reporting risks, determining their potential impact, and assessing the effectiveness of mitigation measures.

Additionally, the template outlines the roles and responsibilities of various stakeholders in the risk management process, including risk managers, project managers, and subject matter experts.

The Risk Monitoring and Control Plan Template is an essential tool for ensuring that a project or business is prepared for potential risks and can respond effectively if they occur.

By systematically identifying and addressing potential risks, organizations can reduce the impact of these risks on their operations and their bottom line.

One of the key benefits of using this template is that it helps organizations create a structured framework for monitoring and controlling risks, which can save them time and money in the long run.

When creating a Risk Monitoring and Control Plan, it is important to closely follow the template and ensure that all relevant information is included. The template typically includes sections for identifying the risk, assessing its likelihood and impact, developing mitigation strategies, and monitoring and controlling the risk over time.

Additionally, it is important to regularly review and update the plan as new risks arise or existing risks change. By doing so, organizations can ensure that they are always prepared to respond to potential risks and can minimize their impact on their business operations.

Risk Management Plan: FAQs

What is a risk management plan.

A Risk Management Plan is a strategy document that identifies, assesses, and prioritizes potential risks and measures to mitigate or avoid them. This plan outlines how risks will be managed during a project or operation.

Why Is Having A Risk Management Plan Important?

A Risk Management Plan is important as it enables organizations to be proactive in identifying and managing potential risks. It assists in ensuring that risks are appropriately mitigated, reducing the likelihood of disruptions, and helps to avoid significant negative impacts that could negatively affect the organization.

What Are The Key Components Of A Risk Management Plan?

A Risk Management Plan typically comprises the following components: risk identification, risk assessment, risk mitigation, communication plan, monitoring, and review. Other components may include contingency planning, risk response planning, and risk reporting.

How Do You Conduct A Risk Assessment In A Risk Management Plan?

A risk assessment typically involves identification of potential risks, analysis of the likelihood of risks occurring, and determining potential impact. A risk matrix is often employed, which assigns a level of significance (high, medium, or low) to each risk, based on likelihood and impact.

How Does A Risk Management Plan differ From A Contingency Plan?

A Risk Management Plan and Contingency Plan are closely related; however, a Contingency Plan is a more specific version of the Risk Management Plan. A Contingency Plan outlines specific actions to take in the event of an identified risk occurring, while a Risk Management Plan identifies and assesses potential risks and outlines strategies to mitigate them.

When Should A Risk Management Plan Be Reviewed And updated?

A Risk Management Plan should be reviewed and updated regularly, especially when changes occur within the project or operation, such as changes in scope, resources, or the external environment. In general, Risk Management Plan reviews should occur as needed to ensure it is current and relevant.

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5 Consequences of Skipping a Business Plan

9 min. read

Updated May 10, 2024

You’ve got a great business idea, something that could be truly special. 

You’re ready to dive in, ditch the day job, and build it yourself.

But you keep being told you need to write a business plan .

It feels like an unnecessary roadblock when all you want to do is go, and you’re tempted to skip it entirely.

After all, what’s the worst that could happen? 

That’s the question we’re tackling in this article. 

I spoke with seasoned planning experts Tim Berry , Sabrina Parsons , and Noah Parsons to uncover the consequences of starting a business without a plan. 

1. An idea isn’t always a business

That initial rush of excitement when a business idea hits is intoxicating. You imagine the possibilities, the potential…but the journey from concept to reality is where things get tricky.

“Without a business plan, you won’t know if your idea can be turned into a business,” Sabrina cautions. “To transform an idea into an actual business, you need to test if it’s viable .”

The problem? Most people lack a framework for that testing. 

The idea remains trapped in your head. You lack answers to critical questions, like:

• Does it solve a real problem ? Who are your ideal customers, and what pain point are you addressing?
• Is there a market? Are enough people willing to pay for your solution?
• How will you make money? What’s your basic business model for turning a profit?

Creating a one-page plan gives you a structured way to answer these questions. It could save you from wasting time and resources chasing a dream that was never meant to be a business. 

Or it might just reveal that your idea has potential and deserves more research.

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2. If you build it, they don’t always come

Even a seemingly good idea may not actually work . 

It could be too expensive to execute, face overwhelming competition, or simply not appeal to enough customers. 

“If you build it, they will come” is one of the biggest myths in business,” says Sabrina. “You need to attract people who actually want to buy what you are selling.”

This means finding product-market fit—the sweet spot where your solution meets a real customer need.

“It’s the single most important factor in the early stages of a business,” explains Noah. “If your product doesn’t solve a problem for your customers, you don’t have a business.”

True product-market fit requires testing. It means getting out there, talking to potential customers, and getting honest feedback:

• Do they truly need what you offer?
• Is the price point appealing?
• Are you even targeting the right audience?

You can’t meaningfully ask these questions without first outlining the assumptions baked into your idea. Who are your customers? What problem do you solve? What’s your basic business model?

Again, creating a one-page plan forces you to address these assumptions from the start. It lays the groundwork for the kind of testing that separates successful startups from those that fizzle out because they misread the market.

3. You won’t know how much money you need

You hear about bootstrapping success stories—entrepreneurs building empires from scratch. But the reality is every business requires some investment, even if it’s your own .

“You need to know how much it will cost to start and keep the business running—and then what it will take to become profitable,” Noah stresses. 

If you lack a business plan, you’ll have no idea of your revenue and expense categories. These are the starting points for creating sales, expense, and cash flow forecasts that help you understand:

• Startup Expenses : How much cash do you need to make your business operational?
• Operating Costs: How much will it take to run your business for the first year?
• Hidden Fees: Have you considered every potential expense, from licenses to marketing?
• Cash Flow : How long will it take for enough money to come in to cover your ongoing expenses?

Trying to figure this out in real-time is a recipe for disaster. 

As Sabrina puts it, “It’s like playing high-stakes poker blindfolded. You’re risking everything without a clear picture of what you’re working with.”

A plan brings clarity. It helps you determine whether you have the funds to succeed, how quickly you might become profitable, and how to allocate your cash wisely. 

Without it, you risk running out of money before your business has a fighting chance.

4. You won’t know what is and isn’t working

“Tracking your business performance— reviewing how your actual results measure up to your plan—is the key to running a successful business,” Noah emphasizes. 

Without a business plan and financial forecasts, you’ll lack the foundation to build a business strategy. That ‘blindfold’ that Sabrina mentioned before will stick with you throughout the life of your business.

Here’s what that means:

• Inefficiencies bleed profits: You won’t be able to identify the areas where you’re losing money.
• “Big decisions” are risky: You won’t know when it’s the right time to make critical decisions (like hiring team members or expanding).
• Profitability is a mystery: Without tracking towards specific business goals, “what it will take to be profitable” remains unknown.
• No data for decisions: When do you need to change course? Without the clarity a business plan provides, it’s impossible to say.

“Managing your business against your plan leads to better decisions,” says Sabrina. 

It doesn’t have to be complicated—again, with a simple one-page plan, you’ll have a tool “to better understand your financial drivers and revenue opportunities.” 

This plan becomes your roadmap. It lets you make data-driven decisions, minimize risk, and proactively steer your business toward success. With this knowledge, surprises become fewer, and your understanding of your business will grow deeper.

• 5. You will struggle to raise money

Investors and banks live in the world of business and financial plans . 

As Tim states, “Don’t get caught thinking investors just want pitches and summaries. They expect a plan and will want to go over every detail.” Without these documents, you’ll face serious hurdles in securing funding. Tim adds: “I’ve seen investors reject a startup from just summaries without reading a business plan document. But I’ve never seen them invest without having seen a plan.”  

Think of it this way: If you don’t have a plan, you either scramble to assemble one or walk into investor meetings unprepared. 

“I’ve seen it countless times in actual investor pitches,” Tim recounts. “Things seem promising until investors start digging into specifics like marketing spend or administrative costs. Those without a well-thought-out plan freeze up. Investors can smell that a mile away.”

The very process of creating a business plan primes you for the questions investors will undoubtedly ask. “The planning process forces you to answer questions about your business that you may not have thought to ask yourself,” explains Noah. 

This includes the critical question: How much funding do you truly need?

“Getting the right amount of financing for your business will save you heartache and money,” says Sabrina. “Do yourself a favor and create a full financial forecast to understand exactly how much funding you need.” Otherwise, you risk under or overestimating, damaging your credibility with investors.

TLDR: If you’re seeking outside funding, a formal business plan isn’t just helpful—it’s essential. While a more detailed plan is likely necessary, the one-page plan we’ve discussed will form the foundation.

• Failing to plan is planning to fail

Writing a business plan will make you a better business owner.

It’s not just about avoiding pitfalls; it’s about unlocking your business’s full potential. The planning process forces you to dig deep, examine your ideas, and refine them into a powerful strategy built for long-term success.

The best part? You don’t need a complex, time-consuming document to reap these rewards. 

“We’re talking about a lean one-page plan to run your business,” Tim emphasizes. It’s easy to develop, keep updated, and build on bullet points, lists, and tables. If you know your business, you can do it quickly.”

So, whether you’re a new or existing business—don’t face the consequences caused by skipping out on your business plan.

Download our free one-page business plan template and write it in as little as 30 minutes . You and your business will be glad you did.

What are the consequences of not having a business plan?

Skipping the business planning process can lead to several negative consequences:

• Your idea might not be viable: You risk wasting time and money on a product or service that nobody wants or isn’t profitable.
• You could miss your target market: A plan helps you understand your ideal customer and ensure you’re offering something they truly need.
• You’ll be financially unprepared: You won’t know your true startup and operational costs or how to reach profitability.
• You’ll lack a roadmap: Without a plan, it’s difficult to track progress, identify problems, or make strategic decisions.
• You’ll struggle to get funding: Investors and lenders rely on business plans and financial statements to assess the potential of your venture.

Remember, even a simple one-page plan can help you avoid these pitfalls and set your business up for success.

Can a business survive without a business plan?

Technically, yes, a business can survive without a plan. There are examples of businesses that found success without traditional planning—but they are the outliers.

The reality is that businesses without a plan face significantly greater obstacles. They’re more likely to:

• Make costly mistakes due to a lack of foresight.
• Miss out on opportunities due to a lack of direction.
• Struggle to obtain funding from investors and lenders.
• Fail to understand their full financial picture.

While survival is possible, a business plan dramatically increases the odds of not just surviving but thriving.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.

Table of Contents

• 1. An idea isn’t always a business
• 2. If you build it, they don’t always come
• 3. You won’t know how much money you need
• 4. You won’t know what is and isn’t working

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Business Plan Risks How to present your business risks without scaring away investors

By Stever Robbins Dec 11, 2004

Opinions expressed by Entrepreneur contributors are their own.

Q: I would like to include a risk analysis in my business plan. I don't know how to show risks without sending investors into an anxious frenzy.

A: Any start-up idea will have enough risk to fill a dozen business plans. No investor expects a risk-free plan. Angels and VCs know start-ups are incredibly risky. If they don't, don't take their money--they don't know what they're doing! Most projects fail for reasons that could have been (and sometimes were) predicted far in advance. Since entrepreneurs are optimistic folks by nature: They tend to brush off predictions of doom and charge ahead assuming they will find a way to overcome. You can often avoid the most dire scenarios with intelligent upfront risk planning.

The risk analysis in your plan is to show that you've thought through risks, that you know how to plan for probable risks, and that your plan can survive when things go wrong.

Your plan can address several kinds of risk. You don't need to address every kind of risk in the book, but pick the risk categories that are most relevant to your company and include a paragraph or two about each:

• Product risk is the risk that the product can't be created. Biotech firms often have a high degree of product risk. They never know for sure they can produce the drug they are hoping to produce.
• Market risk is the risk that the market will develop differently than expected. Sometimes markets take too long to develop, and cash runs out while a company is waiting for customers.
• People risk is big in companies that depend on having certain employees or certain kinds of employees. I was with a company that had hired one of the world experts in a certain type of 3-D modeling. It was possible that without this man on board and happy, the company wouldn't be able to create their product.
• Financial risk is the risk that a company will run out of money or mismanage their money in some way. Finance companies may have huge financial risk, since bad lending policies combined with poor investment policies can sink them.
• Competitive risk is the risk that a competing product or service will be able to win. Many Web-based businesses have high competitive risk since they can be started with little money and have no way of locking in customers.

What investors want is to know that you are prepared to respond to risks. To the extent possible, outline what your response is to the risk you anticipate. After all, assuming you get funding, those risks may really come to pass. And you will really have to do something about it. By showing investors some of the alternatives you've thought through, you raise their confidence that you'll be able to deal if things don't go according to plan.

For example, consider the risk to a restaurant that people won't come back. What are the reasons you believe that would happen? What can you do to keep that from happening in the first place? It amazes me how many restaurants have a lousy menu selection or bad food and go under without ever asking customers, "Did you enjoy your meal? What could we do to make it better?" An at-the-table survey may be how you propose to avoid having the wrong menu. If things go wrong, you may decide to proactively invite critics to the restaurant for specific feedback on how to make the experience better.

The key is acknowledging that things can go wrong and demonstrating some creativity in finding a solution. You certainly needn't respond to every risk imaginable. Your goal is to provide enough to help your investors feel secure that you have anticipated and dealt with major risks, and they can count on you to handle things that come up once the business is under way.

Stever Robbins is a consultant specializing in mastering overwhelm, power and influence. The author of It Takes a Lot More Than Attitude...to Lead a Stellar Organization , he has been a team member or co-founder of nine startups, an advisor and angel investor, and co-developer of Harvard's MBA program. You can find his other articles and information at SteverRobbins.com .

This article originally appeared on Entrepreneur.com in 2002.

Stever Robbins is a venture coach, helping entrepreneurs and early-stage companies develop the attitudes, skills and capabilities needed to succeed. He brings to bear skills as an entrepreneur, teacher and technologist in helping others create successful ventures.

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FACT SHEET: President   Biden Takes Action to Protect American Workers and Businesses from China’s Unfair Trade   Practices

President Biden’s economic plan is supporting investments and creating good jobs in key sectors that are vital for America’s economic future and national security. China’s unfair trade practices concerning technology transfer, intellectual property, and innovation are threatening American businesses and workers. China is also flooding global markets with artificially low-priced exports. In response to China’s unfair trade practices and to counteract the resulting harms, today, President Biden is directing his Trade Representative to increase tariffs under Section 301 of the Trade Act of 1974 on $18 billion of imports from China to protect American workers and businesses.   The Biden-Harris Administration’s Investing in America agenda has already catalyzed more than $860 billion in business investments through smart, public incentives in industries of the future like electric vehicles (EVs), clean energy, and semiconductors. With support from the Bipartisan Infrastructure Law, CHIPS and Science Act, and Inflation Reduction Act, these investments are creating new American jobs in manufacturing and clean energy and helping communities that have been left behind make a comeback.   As President Biden says, American workers and businesses can outcompete anyone—as long as they have fair competition. But for too long, China’s government has used unfair, non-market practices. China’s forced technology transfers and intellectual property theft have contributed to its control of 70, 80, and even 90 percent of global production for the critical inputs necessary for our technologies, infrastructure, energy, and health care—creating unacceptable risks to America’s supply chains and economic security. Furthermore, these same non-market policies and practices contribute to China’s growing overcapacity and export surges that threaten to significantly harm American workers, businesses, and communities.   Today’s actions to counter China’s unfair trade practices are carefully targeted at strategic sectors—the same sectors where the United States is making historic investments under President Biden to create and sustain good-paying jobs—unlike recent proposals by Congressional Republicans that would threaten jobs and raise costs across the board. The previous administration’s trade deal with China  failed  to increase American exports or boost American manufacturing as it had promised. Under President Biden’s Investing in America agenda, nearly 800,000 manufacturing jobs have been created and new factory construction has doubled after both fell under the previous administration, and the trade deficit with China is the lowest in a decade—lower than any year under the last administration.   We will continue to work with our partners around the world to strengthen cooperation to address shared concerns about China’s unfair practices—rather than undermining our alliances or applying indiscriminate 10 percent tariffs that raise prices on all imports from all countries, regardless whether they are engaged in unfair trade. The Biden-Harris Administration recognizes the benefits for our workers and businesses from strong alliances and a rules-based international trade system based on fair competition.   Following an in-depth review by the United States Trade Representative, President Biden is taking action to protect American workers and American companies from China’s unfair trade practices. To encourage China to eliminate its unfair trade practices regarding technology transfer, intellectual property, and innovation, the President is directing increases in tariffs across strategic sectors such as steel and aluminum, semiconductors, electric vehicles, batteries, critical minerals, solar cells, ship-to-shore cranes, and medical products.   Steel and Aluminum   The tariff rate on certain steel and aluminum products under Section 301 will increase from 0–7.5% to 25% in 2024.   Steel is a vital sector for the American economy, and American companies are leading the future of clean steel. Recently, the Biden-Harris Administration announced $6 billion for 33 clean manufacturing projects including for steel and aluminum, including the first new primary aluminum smelter in four decades, made possible by the Bipartisan Infrastructure Law and the Inflation Reduction Act. These investments will make the United States one of the first nations in the world to convert clean hydrogen into clean steel, bolstering the U.S. steel industry’s competitiveness as the world’s cleanest major steel producer.   American workers continue to face unfair competition from China’s non-market overcapacity in steel and aluminum, which are among the world’s most carbon intensive. China’s policies and subsidies for their domestic steel and aluminum industries mean high-quality, low-emissions U.S. products are undercut by artificially low-priced Chinese alternatives produced with higher emissions. Today’s actions will shield the U.S. steel and aluminum industries from China’s unfair trade practices.   Semiconductors   The tariff rate on semiconductors will increase from 25% to 50% by 2025.   China’s policies in the legacy semiconductor sector have led to growing market share and rapid capacity expansion that risks driving out investment by market-driven firms. Over the next three to five years, China is expected to account for almost half of all new capacity coming online to manufacture certain legacy semiconductor wafers. During the pandemic, disruptions to the supply chain, including legacy chips, led to price spikes in a wide variety of products, including automobiles, consumer appliances, and medical devices, underscoring the risks of overreliance on a few markets.   Through the CHIPS and Science Act, President Biden is making a nearly $53 billion investment in American semiconductor manufacturing capacity, research, innovation, and workforce. This will help counteract decades of disinvestment and offshoring that has reduced the United States’ capacity to manufacture semiconductors domestically. The CHIPS and Science Act includes $39 billion in direct incentives to build, modernize, and expand semiconductor manufacturing fabrication facilities as well as a 25% investment tax credit for semiconductor companies. Raising the tariff rate on semiconductors is an important initial step to promote the sustainability of these investments.   Electric Vehicles (EVs)   The tariff rate on electric vehicles under Section 301 will increase from 25% to 100% in 2024.   With extensive subsidies and non-market practices leading to substantial risks of overcapacity, China’s exports of EVs grew by 70% from 2022 to 2023—jeopardizing productive investments elsewhere. A 100% tariff rate on EVs will protect American manufacturers from China’s unfair trade practices.   This action advances President Biden’s vision of ensuring the future of the auto industry will be made in America by American workers. As part of the President’s Investing in America agenda, the Administration is incentivizing the development of a robust EV market through business tax credits for manufacturing of batteries and production of critical minerals, consumer tax credits for EV adoption, smart standards, federal investments in EV charging infrastructure, and grants to supply EV and battery manufacturing. The increase in the tariff rate on electric vehicles will protect these investments and jobs from unfairly priced Chinese imports.   Batteries, Battery Components and Parts, and Critical Minerals   The tariff rate on lithium-ion EV batteries will increase from 7.5%% to 25% in 2024, while the tariff rate on lithium-ion non-EV batteries will increase from 7.5% to 25% in 2026. The tariff rate on battery parts will increase from 7.5% to 25% in 2024.   The tariff rate on natural graphite and permanent magnets will increase from zero to 25% in 2026. The tariff rate for certain other critical minerals will increase from zero to 25% in 2024.   Despite rapid and recent progress in U.S. onshoring, China currently controls over 80 percent of certain segments of the EV battery supply chain, particularly upstream nodes such as critical minerals mining, processing, and refining. Concentration of critical minerals mining and refining capacity in China leaves our supply chains vulnerable and our national security and clean energy goals at risk. In order to improve U.S. and global resiliency in these supply chains, President Biden has invested across the U.S. battery supply chain to build a sufficient domestic industrial base. Through the Bipartisan Infrastructure Law, the Defense Production Act, and the Inflation Reduction Act, the Biden-Harris Administration has invested nearly $20 billion in grants and loans to expand domestic production capacity of advanced batteries and battery materials. The Inflation Reduction Act also contains manufacturing tax credits to incentivize investment in battery and battery material production in the United States. The President has also established the American Battery Materials Initiative, which will mobilize an all-of-government approach to secure a dependable, robust supply chain for batteries and their inputs.   Solar Cells   The tariff rate on solar cells (whether or not assembled into modules) will increase from 25% to 50% in 2024.   The tariff increase will protect against China’s policy-driven overcapacity that depresses prices and inhibits the development of solar capacity outside of China. China has used unfair practices to dominate upwards of 80 to 90% of certain parts of the global solar supply chain, and is trying to maintain that status quo. Chinese policies and nonmarket practices are flooding global markets with artificially cheap solar modules and panels, undermining investment in solar manufacturing outside of China.   The Biden-Harris Administration has made historic investments in the U.S. solar supply chain, building on early U.S. government-enabled research and development that helped create solar cell technologies. The Inflation Reduction Act provides supply-side tax incentives for solar components, including polysilicon, wafers, cells, modules, and backsheet material, as well as tax credits and grant and loan programs supporting deployment of utility-scale and residential solar energy projects. As a result of President Biden’s Investing in America agenda, solar manufacturers have already announced nearly $17 billion in planned investment under his Administration—an 8-fold increase in U.S. manufacturing capacity, enough to supply panels for millions of homes each year by 2030.   Ship-to-Shore Cranes   The tariff rate on ship-to-shore cranes will increase from 0% to 25% in 2024.   The Administration continues to deliver for the American people by rebuilding the United States’ industrial capacity to produce port cranes with trusted partners. A 25% tariff rate on ship-to-shore cranes will help protect U.S. manufacturers from China’s unfair trade practices that have led to excessive concentration in the market. Port cranes are essential pieces of infrastructure that enable the continuous movement and flow of critical goods to, from, and within the United States, and the Administration is taking action to mitigate risks that could disrupt American supply chains. This action also builds off of ongoing work to invest in U.S. port infrastructure through the President’s Investing in America Agenda. This port security initiative includes bringing port crane manufacturing capabilities back to the United States to support U.S. supply chain security and encourages ports across the country and around the world to use trusted vendors when sourcing cranes or other heavy equipment.   Medical Products   The tariff rates on syringes and needles will increase from 0% to 50% in 2024. For certain personal protective equipment (PPE), including certain respirators and face masks, the tariff rates will increase from 0–7.5% to 25% in 2024. Tariffs on rubber medical and surgical gloves will increase from 7.5% to 25% in 2026.   These tariff rate increases will help support and sustain a strong domestic industrial base for medical supplies that were essential to the COVID-19 pandemic response, and continue to be used daily in every hospital across the country to deliver essential care. The federal government and the private sector have made substantial investments to build domestic manufacturing for these and other medical products to ensure American health care workers and patients have access to critical medical products when they need them. American businesses are now struggling to compete with underpriced Chinese-made supplies dumped on the market, sometimes of such poor quality that they may raise safety concerns for health care workers and patients.   Today’s announcement reflects President Biden’s commitment to always have the back of American workers. When faced with anticompetitive, unfair practices from abroad, the President will deploy any and all tools necessary to protect American workers and industry.  

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The Future of Manufacturing: A Search for Stability, Next-Gen Skills

Supply chain snarls, talent churn, risk management, and skills gaps are among the manufacturing industry’s challenges. Read on to learn how industry leaders are reacting to current conditions—and how they can best position themselves for future success.

Companies that derive their revenue from the manufacturing of products and goods are understandably weary of supply-chain snarls and the talent-churn roller coaster ride. At the same time, manufacturers have shown impressive resiliency in the past few years—with 84% saying they’re very confident or confident in their growth prospects through 2025, a KPMG survey found.

Meanwhile, the major forces transforming the manufacturing industry are only heating up. In particular, these are the technological drivers of “Industry 4.0”—the so-called Fourth Industrial Revolution—such as artificial intelligence (AI), machine learning (ML), cloud technology, and automation. These innovations are evolving every day and driving key discussions across the business world, such as which roles will be automated and which skills gaps need to be filled to prepare for the jobs of tomorrow. 

As manufacturing executives look to the future—and ways to mitigate operational and strategic risks—they’ll need to drive bold changes across their businesses, according to industry experts and leaders. Among the most critical: shortening supply chains, prioritizing the worker experience, making smart technology investments, and prioritizing employee upskilling.

And the ability to drive these changes largely depends on a company’s appetite for digital transformation. “Any company that moves faster than its peers will have an edge, so they fear missing out on the opportunities if they don’t accelerate their technology investments,” says Vinod Ramachandran , global head of industry 4.0 at KPMG International.

Let’s take a closer look at four changes driving the manufacturing industry.

1. Supply Chain Snarls and Macro Trends Prompt Rethinking of Global Footprints

Manufacturers won’t soon forget a major lesson from the last few years: Globalized supply chains can be perilously fragile. Old assumptions about the value of lowest-cost options and just-in-time inventory have been rethought as material and labor shortages cropped up. These production approaches revealed their vulnerability to shutdowns and other disruptions stemming from the pandemic, the war in Ukraine, and global economic instability. Geopolitical risks such as trade tensions and rising energy and shipping costs are prompting many manufacturers to revisit their global footprint strategy. 

A huge swath (84%) of manufacturing CEOs say they are nearshoring or onshoring operations or bringing them in-house, according to KPMG’s “Global Manufacturing Prospects 2023” report. And more than one-fourth (28%) of manufacturers report that they plan to move business out of China over the next 12 to 18 months, according to PwC’s 2022 Pulse Survey .

The nearshoring shift now underway in the manufacturing industry, however, isn’t about deglobalization. Think of it as a new stage of globalization more focused on regional networks and diversified supply chains. 

Specific to Europe, a supply chain study among executives, conducted by ABB in 2022, found that 74% of European companies plan to re- or nearshore their business to make their supply chain more resilient in the face of labor shortages, increased focus on sustainability, and global uncertainties. To achieve this, they’re planning to increase investment in robotics and automation. 

And in the U.S., manufacturers procured chemicals, construction materials, and other goods from six times as many suppliers in Mexico as they did in 2020. The number of Chinese suppliers receiving procurement bids that year dropped by 9%.

Here’s where the right tech investments can make a big difference. Consider that evolving supply chains (and production facilities and footprints) in optimal ways is tough without expansive data visibility across the entire enterprise, something many manufacturers lack. Many also heavily rely on manual—and time-consuming—processes to gather supply chain data. Even more problematic? That data is then often kept trapped in static spreadsheets.

To have true visibility into their supply chains and other operations, manufacturers must digitize their data-gathering and planning processes. Automating more of these tasks can shorten planning and reporting cycles by as much as 50% to 70%, a Workday study found, allowing manufacturers to react more nimbly to disruptive events.

Fortunately, many leaders recognize the importance of digital transformation, and two-thirds feel confident that their aggressive digital transformation strategy will allow them to reach first-mover or fast-follower status, per KPMG .

74% of European companies plan to re- or nearshore their business to make their supply chain more resilient in the face of labor shortages, increased focus on sustainability, and global uncertainties.

2. Taking Aim at Talent Churn, Manufacturers Prioritize the Worker Experience

It’s no secret that the manufacturing industry has a people problem. Deloitte predicts that by 2030, 2.1 million manufacturing jobs could go unfilled, and a Workday survey found that nearly half of manufacturing leaders today are reporting worker turnover that’s higher than the historical average.

Adding pressure to this talent crunch is that factories hit a 14-year production high point in September 2022, according to the Federal Reserve . Chances for business growth exist, but 45% of manufacturers say they’ve had to turn down business opportunities due to a lack of workers, per Deloitte .

What’s going on here? For one, manufacturing companies are facing more heated competition for skilled workers from sectors such as energy, healthcare, and technology, Deloitte notes . Manufacturing workers are also the most likely to leave for higher pay or a career change, making them ripe for being wooed away by competitors or other industries. And while the message around pay has been received—the manufacturing industry is among the most likely to have bumped up pay in the last two years—compensation isn’t the only sticking point for workers. 

Workers across all sectors, and all ages, want more flexibility in their work lives. In manufacturing—an industry that often has a reputation for long, inconvenient work hours—that’s especially critical. Digital tools such as employee-first scheduling and optimization leverage AI to match workers’ qualifications, availability, and work preferences to fill scheduling needs. These tools can help give employers more flexibility and convenience. Employers who use employee-first scheduling tools with their frontline workforce are less likely to report higher-than-historical-average turnover, a boon for helping to keep soaring overtime costs under control.

The manufacturing industry is also facing a career perception problem. Fifty-eight percent of respondents in a Deloitte survey feel manufacturing jobs have limited career prospects. In response, human resources (HR) leaders at Swiss-based medical supply company Alcon are exploring how AI- and ML-backed automation tools can help them identify their workers’ skills and capabilities to help them “build their career journey,” said Dina Protomastro, Alcon’s vice president and head of global HR operations, at Workday Rising in 2022.

Indeed, 80% of manufacturing workers said they might be interested in roles with enhanced training and clear career paths. Unfortunately, just 18% of manufacturers have introduced formal learning and development programs to frontline workers in the past two years, Workday found . Those that have, though, are already seeing results in warding off high attrition and bolstering business prospects.

“We’re really focused on the philosophy that if we treat our employees well, if we give them a great employee experience, they, in turn, will give our customers a great experience, which is just naturally great for business,” says General Electric’s head of people operations.

3. Plan B Isn’t Enough—Manufacturers Devise a Multitude of Data-Driven Plans to Proactively Mitigate Risks

Risk management has always been a key ingredient in successful businesses. But in the years ahead, manufacturers’ ability to proactively mitigate risks will increasingly track digital transformation efforts. 

“It’s no longer about planning for the unpredictable and having a Plan B,” said Peter Van Manen, former managing director at McLaren Electronics, at Workday Rising EMEA last year. “You need to have a Plan D and the data to spot challenges, but also the opportunities.”

Creating accessible and usable data from many disparate sources is the key to driving a more efficient supply chain, identifying risk, and planning for what’s next. Making decisions becomes easier when manufacturers can see the big picture with a single source of data. Sharper insights into manufacturing supply and production chains can help manufacturers adapt to changing markets, product needs, customer demand, and sales channels by SKU, region, and channel—helping build local capacity and increasing redundancies in supply chains. 

The fastest route to this crucial capability is clear: investing in advanced digital technologies. For example, nearly three-quarters of manufacturing executives say critical material shortages and supply chain disruptions will present the biggest uncertainty for their industry in 2023, Deloitte reports . 

The efficiency benefits of going digital are becoming clearer and clearer—84% of manufacturing executives expect digital transformation to accelerate through 2030, a Manufacturing Leadership Council survey found. At the same time, there’s clearly room for improvement—more than 80% of respondents in a recent Gartner study say their organizations have insufficient supply chain visibility. 

For some in the industry, mergers and acquisition (M&A) activity will serve as a workaround for shoring up supply chain weaknesses. More than half of manufacturing chief executives report a healthy appetite for M&A that will significantly impact their companies, KPMG reports . Along with strengthening supply chains, M&A remains an important way for manufacturers to reinforce core operations, divest of higher-risk assets, and accelerate growth. 

“The economic environment is a bit less predictable than before because of rising interest rates and the possibility of an economic slowdown, but M&A is an important way to rationalize the portfolio and shift toward higher growth opportunities,” says Claudia Saran , national sector leader for industrial manufacturing at KPMG U.S.

Simply making M&A moves, however, isn’t enough. Manufacturing leaders with a true leg-up on the competition will be those who ensure a smooth integration through the use of cloud-based systems that offer full visibility into combined workforces. A report by Workday and MGI Research found that organizations with the most successful M&A stories are those that improve cross-functional alignment.

Regardless of whether M&A activity is on the table, manufacturers will need to prioritize integrated cloud-based systems that support continuous planning . Disruptive economic and societal changes are simply happening too quickly to maintain static planning processes. Access to real-time data helps produce rolling forecasts, gets everyone in the organization involved in planning, and enables the use of multiple scenario planning to view the impacts of different models across your business.

84% of manufacturing executives expect digital transformation to accelerate through 2030, a Manufacturing Leadership Council survey found.

4. Advanced Manufacturing Technologies Transform the Industry—and Make Upskilling an Absolute Imperative

The business impact of the pandemic, in particular its effect on supply chains and labor, stressed the need for further innovation and digitalization in the manufacturing industry. 

While the digitalization of how enterprises design and produce products, and manage both operations and workforces, offers exciting opportunities, it also risks exacerbating skills gaps. Manufacturers need workers who have experience with the industry and physical tools, such as welding and machining, but also who understand transformational digital technology—AI, automation, analytics, and robotics.

Already, 74% of manufacturing leaders say the skills needed for manufacturing jobs are changing rapidly, an EY survey found. And two-thirds (65%) say their organizations struggle to fill job vacancies because of quickly changing must-have skills.

Waiting for the right people to apply to a role, however, is not a winning talent strategy. Not when new skills and job descriptions are emerging all the time. That’s why manufacturers will be increasingly focused on upskilling—a solution to both turning the high turnover tide and evolving enterprises for the new advanced manufacturing age. 

Schneider Electric, for one, embraced a completely new upskilling approach, mindful that nearly half of its workforce attrition involved workers who struggled to see growth opportunities for themselves in the company. Executives ditched traditional career maps, and instead created an internal opportunity marketplace that guides workers to upskilling and reskilling projects aligned with their purpose and goals. The results have been massive, said Pascal Occean, national leader of human capital at Deloitte Canada, referring to client Schneider Electric at Workday Rising in 2022. Workers say they now see opportunities at the company they couldn’t have imagined a decade ago.

74% of manufacturing leaders say the skills needed for manufacturing jobs are changing rapidly, according to an EY survey.

Democratizing HR data will be critical to helping organizational leaders—and workers—ensure they have the skills to succeed in an evolving workplace. At global company Topcon, with functions in the healthcare, agriculture, and infrastructure spaces, that means giving workers more HR functionality.

“Employees themselves can update their information, adding training they’ve completed and new qualifications they’ve earned, showcasing their uplifted capabilities—and managers can see those updates immediately,” says Kazuto Yamada , an HR senior manager at Topcon. “HR can also check on where skills are insufficient or where they are more than adequate and assign people accordingly—not only in Japan but overseas. This has helped us to boost sales and profits. It’s a big step forward.”

As the digital manufacturing age marches forward, the urgency of upskilling will soar. Workers will need to embrace a growth mindset—and employers will need to help them cultivate it. In this sense, retraining efforts are about more than just acquiring skills—workers must feel assured they are being set up for success.

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Execution risk to Anglo’s restructure plan substantial – WoodMac

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15th May 2024

By: Darren Parker

Creamer Media Contributing Editor Online

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Mining major Anglo American has accelerated its portfolio planning in the wake of rejecting fellow mining major BHP’s second bid proposal of $42.2-billion (£34-billion), or £27.70 a share, in a move that new research by consulting firm Wood Mackenzie (WoodMac) shows will take it from being the most diversified to the most concentrated major miner in the world.

The report titled ‘Anglo American to rationalise all but copper and iron-ore production’ states that the company’s decision to take a strategic focus on the highest return commodities of copper and iron-ore mirrors similar moves by BHP and diversified miner Rio Tinto in looking to future-proof the business.  

According to CreditSights, a Fitch Solutions company, Anglo’s management intends to divest or spin off its coking coal, diamond and platinum group metal (PGM) businesses and to cease operations in its nickel division.

After this strategic portfolio reduction, Anglo will focus primarily on its copper and iron-ore assets in South America and South Africa. The company's operating cost and capital spending budgets will also be reduced.

Despite the downsizing, Anglo will retain its Woodsmith fertiliser project in the UK, although the specifics of the project’s future are uncertain, given the significant reductions in capital expenditure (capex), including a cut to $200-million in 2025 and zero in 2026. The goal is to achieve a robust balance sheet with a target net leverage of 1.5x at the bottom of the cycle.

“We believe a major reshuffling of Anglo's portfolio was inevitable. But opting to divest or demerge whole segments of its portfolio does align with the company’s new strategic priorities,” says WoodMac metals and mining corporate research director James Whiteside .

The WoodMac report notes that Anglo’s iron-ore and copper segments have been outsized cash generators, delivering 58% of the company’s underlying earnings before interest, taxes, depreciation and amortisation (Ebitda) over the last five years.

“Looking forward, even without fresh investment, copper will overtake iron-ore in cash generation and this would allow Anglo to use the proceeds to focus on brownfield growth at these core assets,” Whiteside says.   

The WoodMac research indicates that Anglo could seek to realise up to $25-billion in asset value through divestment or demerger, gross of exit costs, of its other commodities assets such as platinum, steelmaking coal and nickel over the next few years. This represents a potential uplift of $9.1-billion over WoodMac's base net asset value (NAV).

However, the report also warns that executing the plan will not be easy and added that, by showing a willingness to deconstruct the company, Anglo has given credibility to BHP’s proposed takeover, potentially making it more palatable to regulators in key markets such as South Africa.    

“Anglo's strategic plan is undoubtedly bold and shedding the equivalent of 39% of 2024 earnings would be transformational. However, execution risk is substantial and borne entirely by Anglo shareholders so if an increased offer from BHP did materialise, it could be seen as a more straightforward option for shareholders,” Whiteside says.

CreditSights says the restructuring plans proposed by Anglo appear to be a viable alternative to being acquired by BHP, at first glance.

“Nevertheless, the strategy is fraught with execution risks and potential regulatory hurdles. Key questions include whether Anglo can sell its assets at fair valuations and whether South Africa will permit the spin-off of the PGM business.

“The future of the Woodsmith project is also in question with the planned capex reduction,” CreditSights says.

Based on a sum-of-parts valuation analysis put forward by CreditSights, the met coal divestment could generate about $4.6-billion, assuming a 3.5x Ebitda multiple.

Meanwhile, post-restructuring net leverage could reach as high as 1.5x if Anglo opts to allocate all proceeds from the asset sale to shareholder rewards, potentially leading to a one-notch downgrade to BBB-.

Conversely, if the proceeds are retained, CreditSights thinks pro forma net leverage could be about 0.9x, allowing the company to maintain its mid-BBB credit rating.

The firm says Anglo is likely to be cautious with any asset sale proceeds, given its desire to maintain a strong balance sheet, which suggests it will likely keep its mid-BBB rating.

“While a smaller and more streamlined Anglo is not necessarily a bad outcome, bondholders should still be rooting for an acquisition by A-rated BHP,” CreditSights says.

The firm adds that, if Anglo remains a standalone entity, it is likely that its credit spreads will widen and revert to trading wider relative to diversified miner Glencore.

“Currently, Anglo's 2034 bonds are trading about ten basis points tighter than Glencore's 2034 bonds, buoyed by the takeover bid from BHP. Before the bid from the A-rated large-cap miner, Anglo's bonds were trading about 10 to 15 basis points wider than those of Glencore,” CreditSights suggests.

Ultimately, CreditSights says it does not believe Anglo's restructuring proposal is better than BHP's proposal.

“In these desperate times, Anglo hastily assembled a breakup plan to fend off BHP's merger and acquisition (M&A) bid, but management has provided scant details about the proposal. Anglo's restructuring proposal seems more radical than BHP's, with intentions to divest four assets compared to BHP's plan to shed just two.

“Both proposals carry significant execution and regulatory risks. However, if Anglo remains independent, its shareholders will shoulder these risks. In contrast, if sold to BHP, a larger and more robust company would absorb the risks,” the firm says.

CreditSights notes that the market has shown a lukewarm response to Anglo’s restructuring proposal.

“If we were Anglo shareholders, we would advocate for a higher bid from BHP and encourage competition by inviting other bidders to participate, versus settling for management's proposal. As such, we still believe that a BHP M&A deal is the more likely outcome,” the firm says.

Edited by Chanel de Bruyn Creamer Media Senior Deputy Editor Online

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The Possible Collapse of the U.S. Home Insurance System

A times investigation found climate change may now be a concern for every homeowner in the country..

This transcript was created using speech recognition software. While it has been reviewed by human transcribers, it may contain errors. Please review the episode audio before quoting from this transcript and email [email protected] with any questions.

From “The New York Times,” I’m Sabrina Tavernise. And this is “The Daily.”

[MUSIC PLAYING]

Today, my colleague, Christopher Flavelle, on a “Times” investigation into one of the least known and most consequential effects of climate change — insurance — and why it may now be a concern for every homeowner in the country.

It’s Wednesday, May 15.

So, Chris, you and I talked a while ago about how climate change was really wreaking havoc in the insurance market in Florida. You’ve just done an investigation that takes a look into the insurance markets more broadly and more deeply. Tell us about it.

Yeah, so I cover climate change, in particular the way climate shocks affect different parts of American life. And insurance has become a really big part of that coverage. And Florida is a great example. As hurricanes have gotten worse and more frequent, insurers are paying out more and more money to rebuild people’s homes. And that’s driving up insurance costs and ultimately driving up the cost of owning a home in Florida.

So we’re already seeing that climate impact on the housing market in Florida. My colleagues and I started to think, well, could it be that that kind of disruption is also happening in other states, not just in the obvious coastal states but maybe even through the middle of the US? So we set out to find out just how much it is happening, how much that Florida turmoil has, in fact, become really a contagion that is spreading across the country.

So how did you go about reporting this? I mean, where did you start?

All we knew at the start of this was that there was reason to think this might be a problem. If you just look at how the federal government tracks disasters around the country, there’s been a big increase almost every year in the number and severity of all kinds of disasters around the country. So we thought, OK, it’s worth trying to find out, what does that mean for insurers?

The problem is getting data on the insurance industry is actually really hard. There’s no federal regulation. There’s no government agency you can go to that holds this data. If you talk to the insurers directly, they tend to be a little reluctant to share information about what they’re going through. So we weren’t sure where to go until, finally, we realized the best people to ask are the people whose job it is to gauge the financial health of insurance companies.

Those are rating agencies. In particular, there’s one rating company called AM Best, whose whole purpose is to tell investors how healthy an insurance company is.

Whoa. So this is way down in the nuts and bolts of the US insurance industry.

Right. This is a part of the broader economy that most people would never experience. But we asked them to do something special for us. We said, hey, can you help us find the one number that would tell us reporters just how healthy or unhealthy this insurance market is state by state over time? And it turns out, there is just such a number. It’s called a combined ratio.

OK, plain English?

Plain English, it is the ratio of revenue to costs, how much money these guys take in for homeowner’s insurance and how much they pay out in costs and losses. You want your revenue to be higher than your costs. If not, you’re in trouble.

So what did you find out?

Well, we got that number for every state, going back more than a decade. And what it showed us was our suspicions were right. This market turmoil that we were seeing in Florida and California has indeed been spreading across the country. And in fact, it turns out that in 18 states, last year, the homeowner’s insurance market lost money. And that’s a big jump from 5 or 10 years ago and spells real trouble for insurance and for homeowners and for almost every part of the economy.

So the contagion was real.

Right. This is our first window showing us just how far that contagion had spread. And one of the really striking things about this data was it showed the contagion had spread to places that I wouldn’t have thought of as especially prone to climate shocks — for example, a lot of the Midwest, a lot of the Southeast. In fact, if you think of a map of the country, there was no state between Pennsylvania and the Dakotas that didn’t lose money on homeowner’s insurance last year.

So just huge parts of the middle of the US have become unprofitable for homeowner’s insurance. This market is starting to buckle under the cost of climate change.

And this is all happening really fast. When we did the Florida episode two years ago, it was a completely new phenomenon and really only in Florida. And now it’s everywhere.

Yeah. And that’s exactly what’s so striking here. The rate at which this is becoming, again, a contagion and spreading across the country is just demolishing the expectations of anyone I’ve spoken to. No one thought that this problem would affect so much of the US so quickly.

So in these states, these new places that the contagion has spread to, what exactly is happening that’s causing the insurance companies to fold up shop?

Yeah. Something really particular is happening in a lot of these states. And it’s worth noting how it’s surprised everyone. And what that is, is formally unimportant weather events, like hailstorms or windstorms, those didn’t used to be the kind of thing that would scare insurance companies. Obviously, a big problem if it destroys your home or damages your home. But for insurers, it wasn’t going to wipe them out financially.

Right. It wasn’t just a complete and utter wipeout that the company would then have to pony up a lot of money for.

Exactly. And insurers call them secondary perils, sort of a belittling term, something other than a big deal, like a hurricane.

These minor league weather events.

Right. But those are becoming so frequent and so much more intense that they can cause existential threats for insurance companies. And insurers are now fleeing states not because of hurricanes but because those former things that were small are now big. Hailstorms, wildfires in some places, previous annoyances are becoming real threats to insurers.

Chris, what’s the big picture on what insurers are actually facing? What’s happening out there numbers-wise?

This is a huge threat. In terms of the number of states where this industry is losing money, it’s more than doubled from 10 years ago to basically a third of the country. The amount they’re losing is enormous. In some states, insurers are paying out $1.25 or even $1.50 for every dollar they bring in, in revenue, which is totally unsustainable.

And the result is insurers are making changes. They are pulling back from these markets. They’re hiking premiums. And often, they’re just dropping customers. And that’s where this becomes real, not just for people who surf balance sheets and trade in the stock market. This is becoming real for homeowners around the country, who all of a sudden increasingly can’t get insurance.

So, Chris, what’s the actual implication? I mean, what happens when people in a state can’t get insurance for their homes?

Getting insurance for a home is crucial if you want to sell or buy a home. Most people can’t buy a home without a mortgage. And banks won’t issue a mortgage without home insurance. So if you’ve got a home that insurance company doesn’t want to cover, you got a real problem. You need to find insurance, or that home becomes very close to unsellable.

And as you get fewer buyers, the price goes down. So this doesn’t just hurt people who are paying for these insurance premiums. It hurts people who want to sell their homes. It even could hurt, at some point, whole local economies. If home values fall, governments take in less tax revenue. That means less money for schools and police. It also means people who get hit by disasters and have to rebuild their homes all of a sudden can’t, because their insurance isn’t available anymore. It’s hard to overstate just how big a deal this is.

And is that actually happening, Chris? I mean, are housing markets being dragged down because of this problem with the insurance markets right now?

Anecdotally, we’ve got reports that in places like Florida and Louisiana and maybe in parts of California, the difficulty of getting insurance, the crazy high cost of insurance is starting to depress demand because not everyone can afford to pay these really high costs, even if they have insurance. But what we wanted to focus on with this story was also, OK, we know where this goes eventually. But where is it beginning? What are the places that are just starting to feel these shocks from the insurance market?

And so I called around and asked insurance agents, who are the front lines of this. They’re the ones who are struggling to find insurance for homeowners. And I said, hey, is there one place that I should go if I want to understand what it looks like to homeowners when all of a sudden insurance becomes really expensive or you can’t even find it? And those insurance agents told me, if you want to see what this looks like in real life, go to a little town called Marshalltown in the middle of Iowa.

We’ll be right back.

So, Chris, you went to Marshalltown, Iowa. What did you find?

Even before I got to Marshalltown, I had some idea I was in the right spot. When I landed in Des Moines and went to rent a car, the nice woman at the desk who rented me a car, she said, what are you doing here? I said, I’m here to write a story about people in Iowa who can’t get insurance because of storms. She said, oh, yeah, I know all about that. That’s a big problem here.

Even the rental car lady.

Even the rental car lady knew something was going on. And so I got into my rental car and drove about an hour northeast of Des Moines, through some rolling hills, to this lovely little town of Marshalltown. Marshalltown is a really cute, little Midwestern town with old homes and a beautiful courthouse in the town square. And when I drove through, I couldn’t help noticing all the roofs looked new.

What does that tell you?

Turns out Marshalltown, despite being a pastoral image of Midwestern easy living, was hit by two really bad disasters in recent years — first, a devastating tornado in 2018 and then, in 2020, what’s called a derecho, a straight-line wind event that’s also just enormously damaging. And the result was lots of homes in this small town got severely damaged in a short period of time. And so when you drive down, you see all these new roofs that give you the sense that something’s going on.

So climate had come to Marshalltown?

Exactly. A place that had previously seemed maybe safe from climate change, if there is such a thing, all of a sudden was not. So I found an insurance agent in Marshalltown —

We talked to other agents but haven’t talked to many homeowners.

— named Bobby Shomo. And he invited me to his office early one morning and said, come meet some people. And so I parked on a quiet street outside of his office, across the street from the courthouse, which also had a new roof, and went into his conference room and met a procession of clients who all had versions of the same horror story.

It was more — well more of double.

A huge reduction in coverage with a huge price increase.

Some people had faced big premium hikes.

I’m just a little, small business owner. So every little bit I do feel.

They had so much trouble with their insurance company.

I was with IMT Insurance forever. And then when I moved in 2020, Bobby said they won’t insure a pool.

Some people had gotten dropped.

Where we used to see carriers canceling someone for frequency of three or four or five claims, it’s one or two now.

Some people couldn’t get the coverage they needed. But it was versions of the same tale, which is all of a sudden, having homeowner’s insurance in Marshalltown was really difficult. But I wanted to see if it was bigger than just Marshalltown. So the next day, I got back in my car and drove east to Cedar Rapids, where I met another person having a version of the same problem, a guy named Dave Langston.

Tell me about Dave.

Dave lives in a handsome, modest, little townhouse on a quiet cul-de-sac on a hill at the edge of Cedar Rapids. He’s the president of his homeowners association. There’s 17 homes on this little street. And this is just as far as you could get from a danger zone. It looks as safe as could be. But in January, they got a letter from the company that insures him and his neighbors, saying his policy was being canceled, even though it wasn’t as though they’d just been hit by some giant storm.

So then what was the reason they gave?

They didn’t give a reason. And I think people might not realize, insurers don’t have to give a reason. Insurance policies are year to year. And if your insurance company decides that you’re too much of a risk or your neighborhood is too much of a risk or your state is too much of a risk, they can just leave. They can send you a letter saying, forget it. We’re canceling your insurance. There’s almost no protection people have.

And in this case, the reason was that this insurance company was losing too much money in Iowa and didn’t want to keep on writing homeowner’s insurance in the state. That was the situation that Dave shared with tens of thousands of people across the state that were all getting similar letters.

What made Dave’s situation a little more challenging was that he couldn’t get new insurance. He tried for months through agent after agent after agent. And every company told him the same thing. We won’t cover you. Even though these homes are perfectly safe in a safe part of the state, nobody would say yes. And it took them until basically two days before their insurance policy was going to run out until they finally found new coverage that was far more expensive and far more bare-bones than what they’d had.

But at least it was something.

It was something. But the problem was it wasn’t that good. Under this new policy, if Dave’s street got hit by another big windstorm, the damage from that storm and fixing that damage would wipe out all the savings set aside by these homeowners. The deductible would be crushingly high — $120,000 — to replace those roofs if the worst happened because the insurance money just wouldn’t cover anywhere close to the cost of rebuilding.

He said to me, we didn’t do anything wrong. This is just what insurance looks like today. And today, it’s us in Cedar Rapids. Everyone, though, is going to face a situation like this eventually. And Dave is right. I talked to insurance agents around the country. And they confirmed for me that this kind of a shift towards a new type of insurance, insurance that’s more expensive and doesn’t cover as much and makes it harder to rebuild after a big disaster, it’s becoming more and more common around the country.

So, Chris, if Dave and the people you spoke to in Iowa were really evidence that your hunch was right, that the problem is spreading and rapidly, what are the possible fixes here?

The fix that people seem most hopeful about is this idea that, what if you could reduce the risk and cause there to be less damage in the first place? So what some states are doing is they’re trying to encourage homeowners to spend more money on hardening their home or adding a new roof or, if it’s a wildfire zone, cut back the vegetation, things that can reduce your risk of having really serious losses. And to help pay for that, they’re telling insurers, you’ve got to offer a discount to people who do that.

And everyone who works in this field says, in theory, that’s the right approach. The problem is, number one, hardening a home costs a fantastic amount of money. So doing this at scale is hugely expensive. Number two, it takes a long time to actually get enough homes hardened in this way that you can make a real dent for insurance companies. We’re talking about years or probably decades before that has a real effect, if it ever works.

OK. So that sounds not particularly realistic, given the urgency and the timeline we’re on here. So what else are people looking at?

Option number two is the government gets involved. And instead of most Americans buying home insurance from a private company, they start buying it from government programs that are designed to make sure that people, even in risky places, can still buy insurance. That would be just a gargantuan undertaking. The idea of the government providing homeowner’s insurance because private companies can’t or won’t would lead to one of the biggest government programs that exists, if we could even do it.

So huge change, like the federal government actually trying to write these markets by itself by providing homeowner’s insurance. But is that really feasible?

Well, in some areas, we’re actually already doing it. The government already provides flood insurance because for decades, most private insurers have not wanted to cover flood. It’s too risky. It’s too expensive. But that change, with governments taking over that role, creates a new problem of its own because the government providing flood insurance that you otherwise couldn’t get means people have been building and building in flood-prone areas because they know they can get that guaranteed flood insurance.

Interesting. So that’s a huge new downside. The government would be incentivizing people to move to places that they shouldn’t be.

That’s right. But there’s even one more problem with that approach of using the government to try to solve this problem, which is these costs keep growing. The number of billion-dollar disasters the US experiences every year keeps going up. And at some point, even if the government pays the cost through some sort of subsidized insurance, what happens when that cost is so great that we can no longer afford to pay it? That’s the really hard question that no official can answer.

So that’s pretty doomsday, Chris. Are we looking at the end of insurance?

I think it’s fair to say that we’re looking at the end of insurance as we know it, the end of insurance that means most Americans can rest assured that if they get hit by a disaster, their insurance company will provide enough money they can rebuild. That idea might be going away. And what it shows is maybe the threat of climate change isn’t quite what we thought.

Maybe instead of climate change wrecking communities in the form of a big storm or a wildfire or a flood, maybe even before those things happen, climate change can wreck communities by something as seemingly mundane and even boring as insurance. Maybe the harbinger of doom is not a giant storm but an anodyne letter from your insurance company, saying, we’re sorry to inform you we can no longer cover your home.

Maybe the future of climate change is best seen not by poring over weather data from NOAA but by poring over spreadsheets from rating firms, showing the profitability from insurance companies, and how bit by bit, that money that they’re losing around the country tells its own story. And the story is these shocks are actually already here.

Chris, as always, terrifying to talk to you.

Always a pleasure, Sabrina.

Here’s what else you should know today. On Tuesday, the United Nations has reclassified the number of women and children killed in Gaza, saying that it does not have enough identifying information to know exactly how many of the total dead are women and children. The UN now estimates that about 5,000 women and about 8,000 children have been killed, figures that are about half of what it was previously citing. The UN says the numbers dropped because it is using a more conservative estimate while waiting for information on about 10,000 other dead Gazans who have not yet been identified.

And Mike Johnson, the Speaker of the House, gave a press conference outside the court in Lower Manhattan, where Michael Cohen, the former fixer for Donald Trump, was testifying for a second day, answering questions from Trump’s lawyers. Trump is bound by a gag order. So Johnson joined other stand-ins for the former president to discredit the proceedings. Johnson, one of the most important Republicans in the country, attacked Cohen but also the trial itself, calling it a sham and political theater.

Today’s episode was produced by Nina Feldman, Shannon Lin, and Jessica Cheung. It was edited by MJ Davis Lin, with help from Michael Benoist, contains original music by Dan Powell, Marion Lozano, and Rowan Niemisto, and was engineered by Alyssa Moxley. Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly.

That’s it for “The Daily.” I’m Sabrina Tavernise. See you tomorrow.

• May 17, 2024   •   51:10 The Campus Protesters Explain Themselves
• May 16, 2024   •   30:47 The Make-or-Break Testimony of Michael Cohen
• May 15, 2024   •   27:03 The Possible Collapse of the U.S. Home Insurance System
• May 14, 2024   •   35:20 Voters Want Change. In Our Poll, They See It in Trump.
• May 13, 2024   •   27:46 How Biden Adopted Trump’s Trade War With China
• May 10, 2024   •   27:42 Stormy Daniels Takes the Stand
• May 9, 2024   •   34:42 One Strongman, One Billion Voters, and the Future of India
• May 8, 2024   •   28:28 A Plan to Remake the Middle East
• May 7, 2024   •   27:43 How Changing Ocean Temperatures Could Upend Life on Earth
• May 6, 2024   •   29:23 R.F.K. Jr.’s Battle to Get on the Ballot
• May 3, 2024   •   25:33 The Protesters and the President
• May 2, 2024   •   29:13 Biden Loosens Up on Weed

Hosted by Sabrina Tavernise

Featuring Christopher Flavelle

Produced by Nina Feldman ,  Shannon M. Lin and Jessica Cheung

Edited by MJ Davis Lin

With Michael Benoist

Original music by Dan Powell ,  Marion Lozano and Rowan Niemisto

Engineered by Alyssa Moxley

Listen and follow The Daily Apple Podcasts | Spotify | Amazon Music | YouTube

Across the United States, more frequent extreme weather is starting to cause the home insurance market to buckle, even for those who have paid their premiums dutifully year after year.

Christopher Flavelle, a climate reporter, discusses a Times investigation into one of the most consequential effects of the changes.

On today’s episode

Christopher Flavelle , a climate change reporter for The New York Times.

Background reading

As American insurers bleed cash from climate shocks , homeowners lose.

See how the home insurance crunch affects the market in each state .

Here are four takeaways from The Times’s investigation.

There are a lot of ways to listen to The Daily. Here’s how.

We aim to make transcripts available the next workday after an episode’s publication. You can find them at the top of the page.

Christopher Flavelle contributed reporting.

The Daily is made by Rachel Quester, Lynsea Garrison, Clare Toeniskoetter, Paige Cowett, Michael Simon Johnson, Brad Fisher, Chris Wood, Jessica Cheung, Stella Tan, Alexandra Leigh Young, Lisa Chow, Eric Krupke, Marc Georges, Luke Vander Ploeg, M.J. Davis Lin, Dan Powell, Sydney Harper, Mike Benoist, Liz O. Baylen, Asthaa Chaturvedi, Rachelle Bonja, Diana Nguyen, Marion Lozano, Corey Schreppel, Rob Szypko, Elisheba Ittoop, Mooj Zadie, Patricia Willens, Rowan Niemisto, Jody Becker, Rikki Novetsky, John Ketchum, Nina Feldman, Will Reid, Carlos Prieto, Ben Calhoun, Susan Lee, Lexie Diao, Mary Wilson, Alex Stern, Dan Farrell, Sophia Lanman, Shannon Lin, Diane Wong, Devon Taylor, Alyssa Moxley, Summer Thomad, Olivia Natt, Daniel Ramirez and Brendan Klinkenberg.

Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly. Special thanks to Sam Dolnick, Paula Szuchman, Lisa Tobin, Larissa Anderson, Julia Simon, Sofia Milan, Mahima Chablani, Elizabeth Davis-Moorer, Jeffrey Miranda, Renan Borelli, Maddy Masiello, Isabella Anderson and Nina Lassam.

Christopher Flavelle is a Times reporter who writes about how the United States is trying to adapt to the effects of climate change. More about Christopher Flavelle

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