Operational Risk Management – What it is and why it is important


I have discovered many small businesses, medical/dental practices, and nonprofit owners are not aware of what operational risk management is or how it helps protect their operations and ultimately their bottom line.  In this first such column, we are going to explain what operational risk management is and why it is important to small businesses, medical/dental practices, and nonprofits.  In following columns, we will cover each of the six most common operational risks that affect owners’ operations.

What is Operational Risk Management?

Those owners who are familiar with risk management think of operational risk management as relating to insurance, banking, or project management. But the operational risk management we are discussing here is different because we are managing all potential risks that could affect the operations and the bottom line.  So I usually say that our operational risk management manages potential risks that could occur unexpectedly that may adversely affect the operations of your business, medical/dental, or nonprofit. Some of these risks could damage or destroy your business dreams completely.  Operational risk management uses one of the most effective tools to identify potential operational risks, an operational risk assessment. The easiest way to explain an operational risk assessment is to look at it as a house inspection for your business, practice, or nonprofit.  The goal of a house inspection is to examine the whole house and identify those items that are not functioning properly, not working at all and need to be replaced, or items that potentially will cost you time and money.  An operational risk assessment does the same type of inspection for your facility and operations. The operational risk assessment will examine the facility and operations to identify potential risks to you that may cost you time and money.  You wouldn’t buy a home without a house inspection and you shouldn’t run a business without an operational risk assessment.

You can contract out a risk assessment or you can do a self-risk assessment but the point here is to get a risk assessment done so that you can identify potential risks.  Performing a self-risk assessment is important and can be done without spending money.  First, you look at all aspects of your operations from the front door to the back door and floor to ceiling.  Look at items such as security, safety, operations internal controls, policies/procedures, employees, cash handling, shrinkage, inventory, invoices, and liability coverages.  Once you have identified the potential risks, determine how each of those risks would affect your bottom line and which ones you can mitigate or address.  You may need additional outside assistance with some of these items, but free help may be available online, through networking, or professional relationships.

Why is Operational Risk Management Important?

You will find that most all large companies, practices, and nonprofits have a risk management department, in addition, to a Security Director, General Counsel, HR Director, and a Safety Director.  They have all of this because they realize the importance of risk management in protecting the company from losses, liabilities, and negative brand recognition.  However, small companies, practices, and nonprofits need this type of protection the most but are the ones who can’t afford to staff such positions.  That leaves them exposed to the most six common operational risks.  Many owners have suffered losses that forced them to close down but had they taken the initiative to get an operational risk assessment done and prepared a risk management plan that may not have been the case.  Don’t be that owner who has the mindset that risks happen to others, or that they can handle any risks that should happen.  Also, don’t wait until an unexpected risk event happens to examine your operations.  You need to know what your risks are so that you can mitigate them and/or prepare for them.