Risk Management Guide for Small Businesses

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Risk Management Guide for Small Businesses

Aug 01, 2022
King Chess Piece

Running a small business is an adventure. Certain situations will challenge your decision-making skills as the owner. Some decisions can be beneficial to the company. On the other hand, others can damage the business performance.

Risk in a company is natural; big or small, they are all prone to threats. Some can be financial; others can be operational or something else.

However, effective risk management can lessen or avoid the negative impact.

Your goal is to make your company successful, so risk management is essential to run your business and achieve long-term success.

Types of Risks

To understand risk management, you need to be familiar with the types of risks businesses could face. There are many risks, but they generally are categorized into five.

Financial Risk

All types of risks affect the financial situation of a company. However, financial risk focuses more on the cash flow of the business. For example, a significant amount of your income comes from just one customer.

Strategic Risk

Strategic risks are the decisions you make that could harm the business and stop it from achieving its goals. The risk can have severe consequences that can negatively affect the company's long-term performance.

Reputation Risk

Your reputation in the industry is critical to your company's success. When it's damaged, there's a high possibility that you would lose your customers, including the loyal ones. Small businesses are more prone to this risk regarding online reviews.

Hazard Risk

Hazard risk is one of the first things that comes to entrepreneurs' minds when thinking about risks generally. The common threats for companies are related to property risks and employees' compensation. For instance, when there is storm damage or an employee got a severe injury.

Operational Risk

As the name implies, anything could affect the entire operation, from the equipment to the workforce. Lack of staffing and mechanical failure are some of the issues your business could face, leading to product shortages or poor quality services.

Small Business Risk Management

When it comes to running a business, threats are inevitable. Sometimes, owners make critical mistakes that lead to bankruptcy. Even if they don't want it to happen, these risks can be very damaging if not managed properly.

However, you can manage the consequences and, in some cases, avoid the risks of becoming a large-scale threat to your organization.

Here are three risk management tips for small businesses.

Identify Risks

An excellent risk management strategy involves regular risk assessments.

You can start by taking notes of potential risks your company might face. You need to include how they could occur during moderate business activity. By understanding your organization's risks, you can identify which ones you should prioritize.

For instance, your business can suffer from internal risks in the organization. Sickness in your employees, losing key persons, and equipment malfunction are some things you need to assess regularly to avoid huge impacts on your business.

To keep your company running, you should also monitor the cash flow because small businesses are susceptible to financial risks, such as cash flow insufficiency.

Checking online reviews is critical as negative feedback negatively affects your business's reputation. If there are any negative reviews, you must acknowledge them and create ways to turn the situation positive.

Measure the Risks

Not all risks can have the same effect on your business. Others could occur but would not leave significant damage, allowing your business to recover immediately.

The probability isn't the same with all the threats. Some could happen instantly, the other possible risk might take time, and the other potential threats won't occur.

When measuring risks, you should create a probability scale, rank the risks, and forecast financial damages or losses.

Under the probability scale, you need to determine which risks are likely to happen and which ones are not. After you create the scale, rank them according to their probability.

In each risk you are expecting, estimate how much it would cost or how much the damage is. This is a perfect opportunity to research the industry and the economy. You can use the data you gather to be as accurate as possible.

Create a Risk Management Plan

Now that you've identified the potential risks and measured their probability, you need to create a risk management plan.

Risk management strategies for small businesses usually have three categories: avoid, control, accept, and share the risks.

Avoiding the risk is what business owners want. You'll change something in the company to prevent the threat from happening.

For example, if you are a small construction firm, and employees' safety is one of the main threats, you'll need to provide them with quality safety gear. You can also give them insurance coverage to assist you in accidents during business operations.

Controlling the risk means minimizing the damage. If your business is overly dependent on a single client for your revenue, there is a massive chance of sudden loss. You probably can't stop the person from limiting his purchase from your company, but you can find more customers to increase your sales and minimize financial loss.

Accepting the risk means preparing a budget for it or creating contingency plans. For example, supermarkets suffer from shoplifting and lose profit. However, they have allotted a budget for it so that the effects wouldn't be substantial.

Risk sharing is a management strategy that transfers the threat to a third party. It is practical to cover inevitable losses from particular events. For instance, you can outsource some work to continue the operation.

Sum Up

Any risk can damage the business, but with effective risk management, you'd be able to avoid, minimize, accept, and share the threats. This means your business will continue and establish longevity and better stability.

Remember to review and update your risk management regularly as the needs and circumstances can change instantly. Some of your contingency plans may no longer work if it was created years ago.

Unmanaged risks could lead to severe damage to your company, such as bankruptcy. Follow the tips above to establish efficient risk management for your business.

The opinions expressed in our published works are those of the author(s) and do not necessarily reflect the opinions of the National Association for the Self-Employed or its members.

Courtesy of NASE.org