Starting a new business comes with various inherent risks. Unfortunately, most budding entrepreneurs overlook the importance of understanding entrepreneurial risks as they start their new enterprise. However, small business owners should consider and address various business risks proactively. This can be addressed better by creating a business risk management plan. Outlined below are some business risks your small business could face and reasons why you should institute a risk management plan from the start.
Common Risks Faced by Small Businesses
- Financial Risks
This is probably the most obvious business risk faced by all businesses. Cash flow challenges are common as you start, especially with bills piling up and the customer base remains scarce. However, taking debts is not a prudent way to manage financial risks. You can refinance if possible, reduce overhead costs, and market extensively.
- Liability Risks
Even though financial risks are the most obvious, most entrepreneurs often associate risk management with liability risks. Unlike financial risks, liability risks can be avoided by taking insurance cover. However, you should ensure that you take the right insurance with sufficient coverage to protect most of your business risks. This should include contractual disputes, employee lawsuits, property damage, and customer injuries, among others.
- Reputation Risks
As the name suggests, reputation risks are associated with poor public relations or negative media image due to unsatisfied customers. With the social media explosion, current reputation risks arise from social media platforms.
- Security Risks
Modern businesses face various security risks in their daily operations, including activities from malicious hackers that compromise customer and employee data. Fortunately, while established companies are constantly under threat, small businesses may fall under the racks. However, they are still susceptible and potentially vulnerable to cyber hacks. That said, you should observe strict cyber security measures in your business to mitigate these attacks.
Apart from cyber threats, security risks also include losses or theft, dangerous behavior by disgruntled employees, staff carelessness, and more. Unlike cyber attacks, you need a strong security audit to counter these physical security risks.
- Business Interruption
A harsh political climate, natural disasters, and terrorism are also significant business risks that can lead to the closure of your business. For instance, a labor strike by UPS workers some decades ago forced the enterprise out of business for some weeks. You should also consider how your business depends on vendors, service providers, and suppliers.
Fortunately, like liability risks, having a good insurance cover can help you overcome these risks. A disaster recovery contract or secondary offices in different locations can help in case of emergencies.
Importance of Business Risk Management
Business risk management should be part of your comprehensive business strategy. Identifying potential threats to your business allows you to assess your risk tolerance level and establish proper mitigation measures. Below are some benefits of proactive risk management;
- Saves Your Business Resources
Investing in a risk management system can save your business from spending a lot on legal and internal costs. An effective business risk management should address all areas in the organization, right from financial, safety, and environmental risks. Some cost benefits include;
- It reduces the probability of workplace accidents – regular inspections and safety audits help small businesses identify and improve unsafe work processes.
- It prevents fines, penalties, and lawsuits resulting from non-compliance. Note that every business should comply with WHS legislation applicable to their state.
- It shows your employees that you care about their safety. Employees are a valuable resource to any business.
2. Reduces Uncertainty
Any form of uncertainty is not good for businesses. However, risk management accounts for both internal and external elements of your business, making it easier to protect. While you cannot prevent some risks, identifying possible risks in your business can help you mitigate them.
3. Helps With Successful Planning
Succeeding in a business doesn’t happen by chance. It requires extensive planning and execution. Unforeseen occurrences can impede your business success, especially if you don’t have executable countermeasures. For instance, failure to identify workplace hazards can lead to accidents and injuries, leading to reduced productivity and possibly a costly lawsuit.
4. Improves Your Brand Reputation
An effective risk management plan builds a positive reputation for your business. Internally, it boosts morale and instills confidence in your employees. Externally, delivering products and services to your clients amidst a disaster or ongoing challenges positively impacts your brand reputation. It proves the reliability of your business.
Initially, risk management was a reserve for large companies with sufficient financial resources. However, while it is true that large businesses are exposed to more risks, small organizations should also be proactive with risk management. Small businesses also face risks, be it theft, workplace accidents, tough competition, lawsuits, natural disasters, and new regulations. Unlike large businesses, small companies cannot weather most of these events. For instance, a costly lawsuit may cripple your business operations.
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