Whatever role you are taking on in your small business, it’s going to involve a certain level of risk. Small business risk takes on two elements – the likelihood that something might go wrong and the negative consequences of if it does.
Risk can be difficult to identify, making it even more stressful to create preparations. However, if your business is hit by the unexpected and you are not prepared, then it’s going to cost you a lot more time and money. Unexpected pitfalls are what lead to the failure of so many small businesses.
That means risk management is an essential tool that you must put into your arsenal. It helps you identify and understand the risks involved when doing business. This post is going to walk you through the process of risk management.
Identify Potential Threats
Risk Analysis is the process used by businesses to identify risks. Small businesses are vulnerable so it’s essential that these risks be identified before it’s too late. Some examples include:
- Human Risks: Loss of key personnel, unexpected injury, illnesses.
- Operational Risks: Limited access to essential supplies, operational cost increase, distribution failures.
- Reputation Risks: Unexpected backlash from new products/services, losing customer confidence.
- Procedural Risks: Internal system errors, fraud.
- Project Risks: Over budget, expending too much time.
- Financial Risks: Funding unexpectedly stops, low sales.
- Technical Risks: New technological advances leading to outdated systems.
- Natural Disasters: Earthquakes, power outages due to storms, hurricanes.
- Political Risks: Tax code changes, changes in government policy.
There are several different methods that can be used to identify these risks but most businesses will have at least one listed under each of the above categories. The best way for small businesses to identify their risks is to write down a list of their processes and then list potential issues that can cause those processes to be hampered.
List Risk Assessments
Identification of risks is only the first step so now you’ll want to calculate the likelihood of it actually happening. For example, a hurricane would only be a risk during specific times of the year. Government policy changes can usually be spotted in advance.
Alongside of the possibility, you need to also list the potential impact. If the tax code were to change so that you have to pay more taxes, how much impact would it have on your business? Are you prepared for that impact?
Businesses use a number known as Risk Value to calculate the level of risk:
Risk Value = Probability of Risk x Cost if it Happens
You can also use a risk probability chart to help plan ahead for your risks.
Do not rush this step. You will need to take the time to research every possible outcome and look closely at the worst-case scenario. Plan for the worst but expect the best.
Manage Each Risk
Now we come to the bottom line – risk management. There is a reason why 90% of small businesses fail and that’s because they do not put a risk management plan into action. When it comes to managing risks, there are a number of options available to you. Which one you choose depends on the risk value.
- Avoid the risk by making sure you avoid projects and processed that involve it.
- Share the risk with a third-party. One example might be adding additional insurance coverage of your office building and sharing the cost and benefits with other businesses in the same building.
- Accept the risk by remaining aware of it, but understanding that you are going to accept the consequences if it happens.
If you do choose to accept the risk, then you need to put in measures to control it so that you can reduce the impact.