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Smart Business Essentials

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Practical Business Skills

Risk Management

Some level of risk is a natural part of running a company and can apply to many aspects of your business. In terms of the success of your business, risk means the probability of something negative happening and the consequences that would result. Natural disasters or a pandemics, such as the coronavirus (COVID-19), can significantly increase the level of risk you may face.

Risk management is evaluating what could go wrong with different parts of your business and implementing plans to lessen the possibility of a negative outcome. Your ultimate goal as a business owner is to reduce potential risks by knowing those most likely to happen and planning ahead to prevent or prepare for them. There may be risks that are difficult to predict, such as natural disasters or pandemics and their effects on small businesses, but there steps you can take to increase your business’ chance of survival.

When you are prepared to identify potential risks, you can deal with them in the most time- and cost-effective way possible. Having a risk management plan in place improves your chances of success and reduces the possibility of mistakes and failure.

To identify the various risks that may be associated with your business, you can conduct a strengths, weakness, opportunities and threats (SWOT) analysis. By focusing on your weaknesses (internal risks) and threats (external risks), you can evaluate those that are most likely to affect your business.

Internal risks

Your business’s weaknesses, or internal risks, can make it more difficult for you to achieve your goals. Internal risks include those associated with human error, equipment, debt and cash flow.

People-related risks
Some risks are associated with the people who help run your business. Consider these possible human risks to your business and tactics for managing them:

  • Illness. A business owner or employee may become ill, putting pressure on your daily business operations. Likewise, if you become ill and are not able to work, you should have a plan in place for who will take over your responsibilities. If most or all employees are unable to work due to illness or pandemic-related government orders, make a plan for how to continue operations if possible. Connect with suppliers, landlords, your bank and employees to determine a plan for re-opening.
  • Theft. These are risks associated with theft and fraud, such as when employees change their hours on their timecard, or steal money or merchandise or when business partners divert funds to their personal accounts. Doing thorough interviews and asking for personal references could help prevent theft. Using digital time-tracking software and installing security cameras in your offices or stores could also help.
  • Low productivity. Having employees who are not dedicated to their work and have low productivity can put the growth of your business at risk. Make sure to hire reliable employees and set processes in place to address employees who aren’t performing well.

Equipment and software
If your business relies on equipment, you probably know that breakdowns can occur and repairs can be expensive. Older equipment may need more maintenance or run more slowly, and learning how to run new equipment can take time. This also applies to information technologies, like digital tools you may rely on to run your business.

To minimize potential issues, back up your digital information online or with an external hard drive. If you can afford it, investing in a backup device may be worthwhile. Also, consider the benefits of leasing versus buying equipment, securing warranties for equipment and purchasing insurance.

Lack of money
Some businesses face great opportunities they can’t act on because they don’t have enough money. For example, they may have to turn down a big order or pass on an opportunity to buy a discounted piece of machinery because they lack funds. To ensure this doesn’t happen to you, keep a savings fund on hand for unplanned expenses, learn about the different ways you can borrow money and know how to get a low rate on a loan.

Debt-to-income ratio
Borrowing money can help you grow your business, but having too much debt can put your business at risk. To determine whether your debt load is more than you can afford, calculate your debt-to-income ratio by comparing your monthly revenue to your monthly debt payments. Learn more about how to calculate your debt-to-income ratio and manage your debt load in the Debt section.

Cash flow issues
Financial issues can cause major problems in your business. If you can’t predict your business’s cash flow (the timing of when you get paid and when you have to pay bills) and keep up with bills, your success will be at risk. To prevent this from happening, learn more about cash flow and how to effectively manage your finances.

External risks

External risks can be difficult to prepare for, such as natural disasters or a pandemic, but it’s important to know about negative scenarios most often associated with your industry. External risks may include threats to your business based on competitors, environmental changes or changes in the economy.

Risks can arise when customers prefer to shop at a competitor’s business. To protect yourself against this possibility, evaluate why customers may prefer the competition and how you can attract them to your business instead. Risks from the competition can take many forms:

  • Price differences. If competitors offer similar products for a lower price, your customers may be saving money by going to the other business. You might not be able to afford to match the lower prices, but perhaps you can attract the customers with another perk, such as better customer service.
  • Products and services. The competition may sell products or services that your customers prefer over the ones you sell. In this case, keep an eye on what your competitors are offering and how you can make your business stand apart.
  • Location. Imagine a competitor moves into a location that’s more convenient for shoppers. You’ll need to find a way to make the extra journey to your business worth customers’ time and effort. You could consider lowering your prices, offering higher-quality products or trying to find another creative solution to build customer loyalty.
  • Employees quitting. If competitors offer employees better benefits or a better working environment, it may be hard to hire and keep good employees. It’s always wise to evaluate what other businesses are offering employees in comparison to yours, and to focus on creating a welcoming, positive work environment where employees’ contributions are valued.

Changes to the business environment or local market can impact your business. Environmental risks include:

  • Rent increases. If you’re leasing space in a high-demand neighborhood, the owner may increase rent. To protect your business, consider securing a long-term lease, moving to a less expensive space or saving up money to buy property of your own. However, there are risks to these options as well. A long-term contract means you’re locked into paying rent for years, a less expensive space might not be as attractive to customers and purchasing property means you’ll also have to pay for upkeep.
  • Neighborhood changes. If you are doing business in a community that is going through a major demographic transition, you may find that the needs of your customers are changing. If shifts in your neighborhood are causing you to lose business, consider changing your location to a neighborhood that aligns with your offerings, or to rethink the products or services you sell.
  • Natural disasters. Natural disasters like floods, fires, tornadoes, hurricanes, earthquakes and pandemics can occur without warning, yet there are ways you can prepare for them and limit their impact on your business. Consider getting a backup generator, keeping emergency kits on hand, having an emergency fund and insurance to protect your business.
  • Laws and ordinances. It’s wise to keep up to date with federal, state, county and city laws and ordinances that may affect your business operations. Some laws may change frequently and you’ll want to stay compliant to avoid possible fees, or even having to close your business.

Changes in the economy are natural, but can put a strain on your business. Here are a couple of possible economic risks to prepare for:

  • Recession. Keep an eye on the economy and the possibility of an upcoming recession. Many businesses can be hit hard by recession, and it’s important to be financially prepared with savings and plans to weather hard times.
  • Changes in interest rates. A change in interest rates may seem minor, but it can impact your business if you frequently borrow money to fund your business, or your customers rely on credit to purchase your product. Having an emergency fund and fixed-rate loans are two important ways to protect your business.

How to prepare

Evaluating all the risks to your business may seem overwhelming, but taking the time to think through these situations and take precautionary measures will help you limit the negative impact they could have on your business. It’s a smart idea to conduct a risk assessment so you can determine which risks are most likely to impact your business.

To assess your risk, follow these steps.

  1. Identify risks. Brainstorm and list all worst-case scenarios.
  2. Document and monitor them. Keep a record of all your identified risks and decide how you will monitor them.
  3. Create a plan to reduce risks. Once you know which scenarios are most likely to happen, decide how you will reduce, and prepare for, these risks.
  4. Review often. It’s wise to revisit your risk assessment annually or any time there are significant changes to your business or business environment.

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