Ritka Puri 11/20/2019
Risk management is a challenge faced by most small businesses.
No matter how many years your company has been operating, there’s always a chance that something could go wrong. What happens if your customers don’t make a payment on time, or if a key piece of equipment fails and you’re unable to find a replacement? What do you do if a critical hire leaves your company in the middle of an extensive customer engagement? What is the next step if your business experiences a lawsuit?
You may be prepared for one setback, but several could shut down your company. No matter how deep a risk assessment or risk analysis you conduct, your small business will never be immune from the unexpected.
One strategy is to establish risk identification by developing a keen awareness of the types of risks that business owners are likely to face. That way, if you encounter a challenge, you’ll be able to exercise risk mitigation, where you have the situational awareness to react and respond. An example would be if you’re experiencing unpredictable natural disasters or cybersecurity breaches. Once you’ve experienced a few roadblocks, you’ll notice that the decision-making process is your best asset.
What fuels the “right” decision-making
It’s learning from people who have learned lessons the hard way in risk management scenarios. It’s also people who have experienced and persevered through situations of business failure or near-failure. Perhaps, these people have a risk manager to refer your way. Consider hiring one to combat and safeguard risk.
Here are 3 valuable tips for managing risk, when you’re navigating an unexpected business challenge:
Know the types of risks that your business faces
Understand what has the potential to come your way in the future. Don’t let a business risk catch you off-guard. According to Neha Karthik, marketing associate at Savincom, an IT and telecommunications consultancy, business risk for small business owners tends to fall into one of the following categories:
Financial: Founders often put their livelihoods on the line when building out their businesses.
Reputation: Small business owners need to demonstrate that they are trustworthy. Without trust and a strong reputation, growth has the potential to hit a wall.
Liability: Legal risks are a normal part of doing business. If you’re running a small entity, however, you may not have the resources to thwart a potential problem.
Business Interruption: Natural disasters, illnesses and emergencies could halt operations in an instant, without warning. The unpredictable is often the most predictable.
Security: Security breaches and cyber attacks are becoming increasingly commonplace. These risks often have legal consequences, sparking a domino effect that could shut down your company.
On the one hand, it’s easier than ever for anyone in the world to start a company. With the rise of digital media, people have become more connected than ever. But, the same open doors to opportunities could easily take down a company—for good, and without warning.
By knowing what risks to expect, you can take steps to deflect them from impacting your business. This is a key part of the role that a risk manager plays. Karthik elaborates that risk management teams can prepare by taking the following steps:
1. Prioritizing risks and threats to evaluate their likelihood of occurring.
2. Purchasing insurance to cover the areas of liability that impact your business.
3. Creating the right corporate structure for your business.
4. Controlling growth by ensuring rigorous levels of employee training and product testing.
With forethought, awareness and basic planning, you can ensure that your business stays resilient when facing potential challenges.
Maintain strict credit control
One of the toughest parts about running a small business is cash flow. Even with well-defined payment terms and risk management processes, companies still run the risk of running out of money.
Running a small business comes with the financial risks of ups and downs that are often impossible to predict or avoid explains Ben Taylor, founder of Homeworking Club, a resource for people who work at home. “There was a time in which my business earned a considerable sum of money from various clients,” he explains. “All the way through December, the business was into overdraft, and I was unsure of how I’d pay for the festive season. As it turned out, almost all the money hit the bank on Christmas Eve, leaving me with a frantic rush to buy presents and food.”
When a business is running out of money, in the short-term, the risks can seem high. But, investment decisions and risk management plans still need to happen over long-term horizons, in order to keep companies stable and running smoothly.
One strategy for businesses to prepare for a short-term crunch is to build systems for credit. During periods of growth, when potential risks are low, work with your bank or financial services partners to open—and pay down—credit cards. Over time, as with your personal credit, you’ll be able to increase the amount that you borrow. You’ll also have more options in terms of loans and lines of credit for financing your needs.
Having a line of credit can help you navigate financial risks because you’ll always have a backup plan for untapped sources of funds. Use a line of credit or loan from the Small Business Administration (SBA), for instance. A variety of loan programs are available to help businesses remain stable during cash flow variability.
During times of stress or business unpredictability, lines of credit can help alleviate stress. Debt can be a short-term solution for a long-term risk management process.
“For access to capital, we advise our clients to seek capital before potential risks come to life,” explains Brian Cairns, CEO of ProStrategix Consulting, a consulting company.
“This risk management strategy puts businesses in the best negotiating position, since they are not desperate for cash and not in a rush. We also advise them to fix their personal credit before seeking a loan, since it has a huge impact on the types of financing available.”
Another important factor to keep in mind is that credit, itself, requires its own risk assessment. Not all business owners are in a position to pay down debt, and it’s common to end up in a perpetual cycle of borrowing. Small business owners should take every step possible to avoid relying on credit, in the first place.
“From a risk assessment standpoint, it’s important to have solid forecasting and monthly reconciliations so you know where you stand at any moment,” explains Cairns.
A common challenge that businesses often ignore is market risk—unforeseen customer behavior patterns that influence your revenue, without you potentially realizing it. It’s common for founders—who develop domain expertise in their industry or area of focus—to run into this challenge more often than they may realize. "When founders birth an idea and invest their attention and resources to bringing it to fruition, they neglect to look at the world around them and study their target audiences for unmet needs,” explains Maria Vorovich, co-founder at GoodQues, a company that specializes in risk analysis, decision making and risk management plan development.
“Interestingly, this is the exact same mistake that big companies make—and struggle to overlook—when developing enterprise risk management programs,” she elaborates. “The business world is filled with anecdotal failures, smoke and mirror programs based on intuition, and ephemeral strategy that is not actionable.”
She shares a story of one of her clients, a startup, that anticipated demand for a product that people did not want.
“It seemed like a good idea, but at launch, the company realized that audiences needed to be educated on why they needed this product,” elaborates Vorovich. “For a small business owner, educating your audience is an expensive strategy—often a luxury for bigger companies. We are now evaluating the initial product to determine how the company can move forward, successfully.”
Believe it or not, trusting your own judgment or expertise—too much—can result in risky decision making. Risk management means cross-comparing notes between your team’s assumptions and what the market is actually thinking about.
Research and insights are crucial to the risk management process, especially for small business owners with limited resources.
Actionable advice to better manage risk and grow your business
As Stoic philosophy emphasizes, the only actions that you can control are your own responses.
It’s impossible to have a risk management plan for every scenario that could impact your business. Prepare for unknown unknowns. Be ready to take decisive action, recognizing that there is no insurance company that will bail you out.
Business risk is a natural part of life for founders. Your company’s longevity and growth potential depends on your team’s ability to remain resilient and deflect opportunities for downturn.