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Risks are an inevitable part of building and growing a business. A risk management framework can help you measure business risks.
There are many obstacles that might arise over the lifetime of a company. Businesses can face financial risks if they accrue too much debt or make questionable investments. They can face security risks if their databases aren’t protected. And they can face operational risks due to errors in the workplace or even attempts at fraud.
Robust risk management frameworks can help businesses navigate and prepare for these risks —before they make a major impact.
This article provides a comprehensive guide to understanding risk management, balancing calculated risks and creating effective mitigation strategies.
Risk management is the process of identifying, analyzing, and mitigating risks that pose a threat to a business. There are two main ways to approach risk management: proactively and reactively.
Here’s a closer look at what each approach entails.
Proactive risk management involves taking preventative measures to spot potential risks before they occur. Businesses can be proactive by analyzing previous risks for key patterns and trends and using predictive analytics to forecast risks. This includes using statistics and data to analysis and make predictions about what could happen in the future. With this proactive approach, businesses can estimate the impact of risks ahead of time and calculate the probability of any financial losses. This way, they can prepare their mitigation strategies and budgets.
Reactive risk management involves responding immediately to risk events and threats in real time. Instead of focusing on risk prevention, this approach uses resources to reduce the impact of incidents once they occur. Even with a reactive risk management strategy, businesses should take the time to analyze each risk event, identify the cause, and optimize their strategies to avoid future incidents.
Risk management can help businesses anticipate and prepare for potential risks, which can help reduce the likelihood of financial losses, reputational damage, or operational disruptions. Consider the costs of data breaches alone. The average cost of a data breach in 2024 was $4.9 million—a 10% increase from 2023.1 Beyond just the financial setback, data breaches may also weaken consumer trust and disrupt business operations.
Implementing adaptive risk management solutions and data-driven protocols can help protect your business and buyers, and create a positive, trustworthy customer experience from search to checkout. Organizations save an average of $2.2 million by using AI and automation to enhance security and prevent risk.1
Before we discuss how to mitigate small business risks, let’s unpack common risk types to watch out for, including phishing, chargebacks, and reversals.
Credit card fraud involves using an unauthorized credit card or credit card information to make a purchase. This can occur when a fraudster steals a physical credit card or simply obtains the card information via phishing or data breach. On a positive note, there are proven ways you can help reduce the chances of credit card fraud, including using signature, billing, and photo ID verification.
As the name suggests, a chargeback is a transaction that is reversed. It occurs when a customer contacts their debit or credit issuer and requests a refund after a completed transaction.
On a basic level, phishing or spoofing is when a scammer impersonates or disguises themselves as a reputable organization. Think of it as an attempt to gain access to your sensitive data via fake emails, websites, text messages, or voicemails.
Similar to a chargeback, a payment reversal (sometimes called an ACH return or bank reversal) occurs when a request is made for a merchant to reverse a transaction and return the funds to the method of payment. This request may come from the customer or the bank and is usually filed because of suspected unauthorized use of a bank account.
Learn more about bank reversals and how to prevent them.
Having a well-established risk management system in place can provide a structured framework for risk responses.
To that end, an effective risk management process typically contains four steps:
First, businesses need to identify and categorize any current or potential risks. For example, if you have an e-commerce site, some red flags to watch out for might include unusual or large orders, mismatched billing and shipping addresses, and suspicious email addresses.
Here are some other common signs of unusual activity that may suggest fraud or financial risk:
Once you’ve identified the risk, it’s time to assess those risks and evaluate potential consequences. One approach is risk quantification, where you assign a numerical value to the risk based on probability, severity, or financial impact. By having a specific number on hand, you can prioritize the risks that require your attention and allocate the appropriate resources to the most critical ones. Using this data, you can also begin to identify any emerging patterns or trends related to the overall risk picture.
The next step is to develop and implement strategies that address the risks you’ve identified and prioritized. This can help mitigate and prevent the impact of future risks.
When it comes to payment fraud, for example, businesses can treat risk by:
Business risks are constantly evolving, especially as new tools and strategies for fraud emerge. The good news is that risk management processes are also advancing thanks to AI and automation. That’s why, to stay ahead of threats and fraudsters, it’s important to continuously monitor potential risks and suspicious behaviors over time. You should also consider frequently auditing and optimizing your risk framework to improve efficiency.
Here are a couple of risk management examples to illustrate how the techniques above can be put into practice. Harry’s Hats is a small e-commerce business that sells bespoke hats straight off the runway. Unfortunately, the company has recently noticed an uptick in fraudulent credit card transactions.
To address this risk, Harry's Hats implements several risk management strategies. First, rather than handling the payment infrastructure in-house, they decide to transfer the risk by hiring a third-party IT firm that will now be responsible for ensuring the security of customer data and payments.
Next, Harry's Hats invests in a comprehensive fraud prevention and detection system that analyzes transaction data and customer behavior to identify and alert team members of suspicious orders. By leveraging these risk management strategies, Harry's Hats successfully reduces the financial impact of fraudulent transactions, protecting the business’s bottom line and reputation.
For another risk management example, consider Healthy Eats, a small business that sells meal prep kits. Over the past few months, Healthy Eats has noticed an increase in chargebacks with customers reporting unauthorized transactions or “item not received” complaints. Healthy Eats collaborates with their payment processor to help address these issues and mitigate the risk of future chargebacks.
Instead of manually investigating each complaint, Healthy Eats relies on their payment processor to authenticate each transaction and resolve each dispute. Their payment processor will even flag questionable transactions once they occur so Healthy Eats can avoid potential chargeback fees and revenue loss.
With all their payment data securely stored and managed in one place, Healthy Eats can also gather valuable insights about customer payments and uncover purchase patterns to help mitigate future risk.
There are many benefits of risk management frameworks, especially for small businesses that may not have the resources to recover from data breaches or fraud attempts.
The most notable risk management benefits include:
Risk management isn’t just for enterprises and legacy businesses. Small businesses can also build risk management strategies that meet their specific needs and fit their budgets.
To customize your risk management strategy, first consider your:
Fortunately, there are a wealth of risk management tools that small businesses can use to streamline their processes and protect their assets. Some of these risk management solutions include:
For the greatest chance of success, adopt proven best practices for small business risk management. These are tried and tested actions that will aid in keeping a business as safe as possible:
Risk management is important for long-term success. With an established risk management framework, small business owners can have the peace of mind to continue innovating and growing their companies. Whether you’re trying to reduce chargebacks or prevent phishing scams, there are key steps you can take to mitigate risks.
Implement risk management tools like fraud detection and tokenization to keep data protected. Work with your payment processor to monitor and flag any suspicious transactions. And update employees with relevant training on how to spot and respond to certain business risks. These solutions can help small businesses build out their own risk management frameworks for growth and stability.
Learn more about best practices for online fraud prevention.