The risks of owning a business are unavoidable. As a small business owner, you’ll likely lack the resources (human and monetary) or the “links” multimillion-dollar companies have at their disposal. Risk management becomes more significant as small businesses become more vulnerable.
So, what risks do you need to consider as a current or potential small business owner? Let’s explore the common types.
I | 8 Risk Types Small Businesses Face
1. Strategic Risk
Each stage of the business life cycle comes with its unique challenges. Business owners can’t always predict the exact risk factors they’ll face. Still, some are common enough to list beforehand so you can estimate how they may affect your business and devise potential solutions.
From the start, you would have determined your organizational structure and target market and defined your sales, marketing, and production tactics, among others. Your business plan should cover all these details and plans for strategically placing your services and products. Noting, too, the potential risks involved.
But no matter the amount of planning you do beforehand, markets change. These shifts put the success of your business at risk. New competitors will emerge offering similar products and services. Technology is ever-changing, presenting new opportunities and more effective procedures that may render your current business processes obsolete. New government policies and regulations may also compel you to change your business operations.
Stay flexible.
A flexible company can ride the waves of change, thriving and growing with each strategic risk it overcomes. However, doing so requires pre-emptive research and planning and a deliberate effort toward constant improvements.
Review your plans annually. Remove or include additional risks you’ll encounter as your venture grows.
2. Business Interruption Risk
Disruptions occur at any time. Sometimes they’ll crop up from internal problems, while other times, external disasters pose a threat.
Anything is possible when faced with the unexpected, like a natural disaster. Your employees may not make it into the office, or roadblocks and floods may prevent customers from visiting your business.
Property damage may also occur, rendering the building unsafe. You may lose valuable equipment central to your business operations or suffer damage to inventory during a flood.
A snag in the supply chain can trigger massive financial damage. Since the onset of COVID-19, many companies that relied heavily on domestic or overseas materials have shut down or downsized because of business disruption.
If you’re a company of one or run a small operation, illnesses will affect operations. Losing a day or two of sales may seem inconsequential for some, but for others, it may mean not being able to pay that month’s rent or bills.
Business Continuity Plan
Creating a business continuity plan is your foresight. Plan out as many possible contingencies for incidents that may lead to delays or losses. Researching other businesses in your industry and geographical location can help you determine the most immediate threats you face.
If you’re working with a team, assign roles to your key members and notify them of their responsibilities if a disaster strikes. Everything laid out in advance lends to quicker response times and ensures critical measures are covered. In the middle of a panic, things may get overlooked in the rush and panic.
A speedy recovery minimizes business losses, retains customers, and minimizes reputational damage. Contractual obligations pose additional pressure in speeding up your recovery time.
3. Operational Risk
A server outage or people-related error may also occur outside of losing essential documents in a natural disaster or fire. It’s more common than you think, employees losing their work because they forgot to save changes or the computer malfunctions.
Human error creates many of the operational risks you’ll face. Mistakes can:
- Increase operating expenses;
- Sully the reputation of your business;
- Lead to business property damage (structural and equipment) and bodily injury;
- Cause a cyber risk.
Process failure may also cause problems. Perhaps the business process blueprint you created isn’t working as expected, or your business outgrew your previous setup. Your processes should always reflect your company’s present state.
4. Security (Cyber + Data) Risk
Cyber threats and data breaches are growing increasingly common. Online security solutions are paramount as more companies and entrepreneurs conduct business online, receive credit payments, collect personal data from customers, etc.
A breach can cost a business thousands, if not millions, of damages.
The reputational damage from customers labeling your business “unsafe” will compound the matter.
Some big-name companies that experience significant cyberattacks still get the side-eye from potential customers years later. Your larger counterparts have a higher chance of recovery through their robust contingency planning and hefty marketing budget. And a higher chance of wooing back the customers they lost later down the line.
You’ll require strict security protocols to combat increasingly skilled hackers who equip themselves to tackle safeguards created by IT companies. Plus, vigilance in monitoring for suspicious activities.
5. Liability + Legal Risk
Liability risks can range on the pricey side. Adverse effects fall heavily on small businesses because of the reputation risk, legal fees if there’s a lawsuit involved, monetary compensation, and possible fines.
Customer or employees injuries, failure to fulfill contractual obligations, third-party property damage are all examples of legal liability risks.
Seeking legal advice in advance when drafting contracts and developing HR practices and safety protocols is one way of limiting the chances of liability and legal risks. Despite your limited budget as a small organization, invest in legal advice and keep on top of changing laws and legal precedents.
Also, use a lawyer to review contracts. Contracts are confusing by nature, and you may overlook a vital clause (i.e., the consequences of not meeting a deadline) by mistake. Oversights undermine your legal defense should a dispute arise.
Purchasing quality business and liability insurance is another worthwhile investment for unexpected events.
6. Reputational Risk
Reputational risks are no minor concerns. The creation of social media and its rapid expansion and social influence assures even a single bad review can hurt your business. News of any problems with your business will spread further than it would ten years ago.
Details get blown out of proportion with each sharing, the information drifting away from the truth and into ‘sensational’ territory. Internet trolls are always waiting for a bit of scandal to chew on, spitting out lies most of your customers won’t take the time to verify.
Social media is an ally and a foe in equal measure.
With so many businesses offering online services, we are no longer landlocked to a specific location. This expanded reach, in turn, means your customer base isn’t either. You’ll find how well you contain a situation depends on best practices for social media interactions.
Good customer service skills are a must. Difficult and unhappy clients are also business risks.
7. Economic Risk
An economic downturn is one of those iffy situations skewed toward the demise of small businesses over their larger counterparts. The little guy, in most cases, gets the boot first when markets decline.
Be as adept as possible in gauging the trends and changes and create an agile business that can pivot when necessary.
Preparing for such instances is where your business continuity plan comes in handy as you set up a cushion before an economic crisis hits.
8. Financial Risk
All of the above risks funnel into the greater pool of your finances. It’s the most considerable risk all small businesses face, as all risks come with a dollar sign.
Then there is the fact that many entrepreneurs, like yourself, took out substantial loans or invested their life savings into starting a business.
There is a lot of pressure for success because the loan needs to be repaid and savings replenished.
The type of business and your industry determines the flexibility of your income stream in times of crisis. For instance, during the height of the pandemic, online companies, those who delivered intangible products and services, weren’t as hard hit as brick-and-mortar stores. Online portals aren’t susceptible to curfew hours and lockdowns.
Securing your business against financial risks requires careful planning and reliable financial support from your bank and insurance companies.
Conclusion
Considering the “what-ifs” and how you can fix or alleviate the fallout saves you time, money, and panic. Craft preventative measures before they’re needed, considering the most prominent risks your company may face.
- Strategic Risk: Each business sector faces unique challenges and risks. From new competition entering the market or new technology rendering already established systems obsolete. Review your strategies for continued efficacy.
- Business Interruption Risk: Temporary closures pose a severe problem for small businesses. Even a slight dip in cash flow may have lasting effects. Setting backup measures, like stocking surplus supplies (if applicable), can help lessen the fallout.
- Operational Risks: Internal and external circumstances (natural disasters, fires, failed tech, etc.) may lead to operational risks. These problems can negatively impact business income and reputation and open the doors for liability and legal risks. Include remedial actions in your business continuity plan.
- Security (Cyber + Data) Risk: Cyber threats put your business and your customer’s personal information at risk. Combating these events requires a proactive approach to online protection and best practices.
- Liability + Legal Risk: Liability and legal risks arise from your responsibility as an employer and provider of goods and services and how well you carry out your obligations. Always try to be ahead of the problem with sound legal advice.
- Reputational Risk: Bad news spreads fast, and things get blown out of proportion more often on social media. How you head off these negative reviews and information instances will determine if the damage to your business‘s reputation is permanent.
- Economic Risk: We are too familiar with the frequent shifts across all industry markets and how they can set up a company for success or failure. Some of these events take time to build, and you can weather the storm with a watchful eye and proactive countermeasures.
- Financial Risk: All risks present a monetary value. Either for creating measures to safeguard against the threat, compensation costs after the event, or recovery costs. Money sits at the heart of all for-profit ventures. How wise you are in the good times, reinvesting, and operating with low overhead, will set the foundations of your crisis management.
The more your business expands, the more risks you’re taking on your plate. Update your risk management plans at least once or twice a year to ensure all the information remains relevant. Take into account your industry’s current landscape and your business’s state. Prepare for the unforeseeable worse as best as possible.
Read more about how to protect your small business from common risks.
