Introduction

It’s no wonder that risks are a top concern for small business owners. Running a small business is difficult, and anything that can stymie their progress, such as risk, is a major concern. But there’s no need to be overwhelmed by the task of managing risks. In this blog, we’ll discuss the basics of risk management and provide you with tips on how to approach the task systematically and effectively. By following our advice, you’ll be able to make informed decisions that will protect your business from potential harm.

One of the most useful practices for a small business to implement involves risk management. It is vital that even in good times, you prepare for tough times. If a small business doesn’t have a plan in place, employees become confused, and profit suffers dramatically. This article will discuss the basics of risk management so that you too can implement this process in your own small business or startup business.

By the end of this article, you should be able to answer a few of the most frequently asked Google questions:

• How do small businesses manage risk?

• What are the main risk types that face business?

• Why is risk management important for small businesses?

• What are the types of risk management?

Background

After starting a business, an entrepreneur quickly realizes that running the operations entails more than they bargained for. Simple revenue-generating activities will eventually take a back seat as the company faces significant pressing issues that may threaten the company’s very existence and must be resolved quickly. They understand that every action (or inaction) or decision made (or not made), whether within their control or not, has an impact on every aspect of the business.

Some people find clever ways to deal with issues/threats, while others ignore them until they pose a serious threat. The truth is that they never truly go away, and it is best to have a strategy in place to deal with issues as they arise. Some would agree that a smarter approach would be to find a way to address issues even before they arise, which brings us to risk management.

What is risk management in a small business?

Risk management is a strategy for assessing the potential outcomes of risk and determining how to manage that risk. The assessment assists in making sound business decisions and avoiding potentially complicated issues.

Theoretically, small businesses may face similar risks to their larger counterparts, but they are usually more vulnerable. It is critical that each business critically assesses and plans for the risks that are unique to it.

What are the potential risks that a small business may face?

(As well as some suggestions for mitigating them)

The following risks are more likely to affect a small business:

1. Financial risk

Financial risks continue to be the most serious threats to many small businesses. It represents the risk that a business may not have or not be able to sustain the financial resources needed to keep operating.

Entrepreneurs often have invested their savings or taken out significant loans to get the business up and running, so there is a lot of pressure to be financially successful.

Cash flow is one of the biggest concerns. Even when revenue is tight, a business must still have enough to maintain operations, pay employees, and invest in market penetration and growth.

Depending on the industry or type of business, some require a significant upfront investment and can take a long time to produce returns that are not guaranteed. Preparation, planning, and support can all help to reduce financial risk.

Economic conditions are also a principal factor to keep in mind. Even the wealthiest businesses can be harmed by a recession, which is more than capable of putting a small business out of business. This means that there should be a consideration of the current and future climate. This process is usually best carried out during prosperous times because it allows a company to save money, negotiate better purchasing terms, and so on.

Reputation risk

Small (and/or new) businesses struggle with reputation risk given that they are usually not well known. A company’s reputation is its single, most important asset. In finance, a company’s reputation can even be purchased in a Merger and Acquisition Transaction. It’s known as “Goodwill.” It is one of the primary reasons why large corporations invest so heavily in maintaining the good reputation of their businesses and brands, knowing full well that a reputation disaster will have an impact on profits and valuation. An example is “Snap chat v Rihanna (2018)”. Scandals can damage a company’s investor base and market base overnight.

Gaining a good reputation is particularly important for small businesses because they need to create a good reputation to grow. If no one has heard of a company or its product/service, or if they only know terrible things about it, the company’s reputation will suffer, affecting every other aspect of the business.

Even in a casual business setting, the foundation for establishing a good reputation is to treat each customer and employee with respect. Customers and employees continue to be the cheapest and most valuable sources of goodwill for small businesses.

Encourage customer feedback, both positive and negative, and always show gratitude and empathy in responding. While responding to negative comments can be difficult, it is critical to maintain the company’s reputation and correct its flaws.

In addition, every organization should have a social media policy, defining how employees should interact with customers and portray the company, both on organizational and personal pages. This ensures that your employees are aware of how their social media use can have both positive and negative impacts on the company.

Strategic risk

Small businesses tend to find it extremely hard to develop a strategy for the long term when they are focused on short term survival. Even if there is a plan in place to develop a strategy, it may be difficult to implement due to a lack of resources and expertise, as well as informal decision-making processes.

However, this risk does not go away as each stage of the business life cycle comes with its own challenges. Small businesses must still decide on the ideal structure, target market, sales and marketing strategy, production strategy, and more.

The shifting external environment also falls under this risk. Competition, technology, regulations, and other factors may force a business to change its operations or, if it is unable to adapt, to die.

Extensive research and planning are required to mitigate this risk, and the owner may not have to do all the work alone. Involve employees, customers, advisors, and other stakeholders to understand what the strategy should be. Conduct research on industry trends, competitors, and previous experience.

Constantly work towards improvement by coming back to the list at least annually to ensure you are on track and that the list is current and accurate.

Liability risk

While all organizations are vulnerable to liability risk, a smaller business is more vulnerable, partly due to reputational risk, but primarily because it may lack the resources to effectively pay for damages without jeopardizing cash flow.

Employee or customer injuries, property damage, or failure to meet contractual obligations are all examples of liability risks that can result in expensive lawsuits and fines for small businesses, potentially forcing them out of business.

The major way to guard against this is to invest in reliable professional advice! Small businesses may not have the resources to hire a full-time professional, such as a lawyer, accountant, or tax advisor, but the average businessperson cannot keep up with all the changes in laws, standards, and regulations. With so many “Pay As You Go” services being offered for small businesses in recent times, top-class professionals like myCFOng have become cheaper and more accessible.

For example, when signing contracts and agreements, always consult with a legal professional, and when deciding how to structure your business for tax purposes, consult with a tax professional. An upfront investment can save a lot of resources down the line.

In addition, every organization needs to have appropriate insurance coverage. It is one of the most important things to have to protect a business from potential risk.

Business interruption risk

Business can be disrupted at any time and for any reason beyond the company’s control.

For example, COVID-19 had a significant impact on many businesses, making it impossible to enter the office. It could be a natural or fabricated disaster causing damage to inventory or equipment. Or, in the case of a small business with few employees, something as insignificant as one employee’s illness can significantly halt operations. Or a situation where your vendor does not supply the inputs for you to operate smoothly. There are countless examples where business must stop for a while, and it is a risk that affects all businesses.

Companies must be more concerned about what contingencies are in place if the business is disrupted as lean business models and automation become more prevalent.

Small businesses should prepare and practice business continuity plans. These plans, often in response to a crisis, assign roles to all members of the organization so that they can react quickly.

This will minimize the impact of the interruption, retain customers and reputation, and get the organization back on track as soon as possible.

Security risk

The threat of monetary loss, disruption, or reputational damage to an organization due to a failure of its security systems is referred to as security risk. Small businesses, wrongly, tend to believe that they are usually too small to be attacked. Recent evidence suggests that they are easier targets because they rarely have the security framework in place to keep criminals out.

In cyberspace, hackers, spammers, and scammers are becoming increasingly skilled and sophisticated. At the same time, organizations are collecting more personal data from their customers. This combination presents a potent security risk that must be actively mitigated through security protocols and monitoring.

The best advice for any new business owner is to prioritize the security of all assets and information from the start.

Small Business Risk Management Plan (Generic)

While there is no one way to manage risks in a business, the following steps are universal:

Step 1: Identify the risks

The first step in risk assessment is determining which situations pose a risk to business operations. Consider the damage a risk could have on your business. Then consider your objectives and the potential rewards of taking the risk. Depending on the business, location, and industry, among other things, the risks will vary.

Step 2: Assess risks

Once you have compiled a list of potential business risks, evaluate their likelihood (frequency) of occurrence and the resulting impact (impact) if they do occur. Develop a process to weigh the effect of each risk. Look at how much damage the risk could potentially cause and how hard it would be to recover. Set up a scoring system for the impact of the identified risks, from negligible impact to high impact.

Step 3: Manage Risks

After assessing the likelihood and impact of risks on your business, decide on how to manage them should they occur. A business may decide to avoid, reduce, transfer, or accept risks.

Step 4: Monitor and Review periodically

Your business risk assessment is not a one-time commitment. Examine your risk management processes on an annual basis to see how you handle risks. Also, look out for new risks that might not have been relevant in the previous assessment.

Conclusion

No one wants to talk about risk management in a small business, but it’s something that must be done if the business is to survive. The goal of risk management is to simply understand the risks associated with your business and devise a strategy to mitigate them. That way, even if a disaster does strike, you have a plan to get through it.

Many small businesses are unaware of the risks to which they are exposed, and risk management is especially important in ensuring the success of your business. Small businesses should seek to understand these risks and do what they can to manage them.

The word “risks” has a negative connotation, but the truth is that they always have a reward component to them, and high risks tend to come with high rewards. No matter your risk appetite, having a risk management plan in place will help guarantee sustainability.

Good risk management protects the reputation of the company and helps it plan for contingencies. This will make the business more profitable and ensure the longevity of the company.

CFOs can help with risk assessment and management. Talk to one today!