Running a small business can be rewarding, but also challenging. You have to deal with various risks that can affect your operations, finances, reputation, and growth. Some of these risks are common to any business, while others are specific to your industry, market, or location. Explore some of the most significant small business risks and learn how you can manage them effectively.
Legal risk is the possibility of facing lawsuits, fines, penalties, or other legal actions due to your business activities. This can result from breaches of contracts, negligence, intellectual property infringement, compliance issues, or disputes with customers, suppliers, employees, or competitors. Legal risk can have serious consequences for your business, such as losing money, reputation, or market share. Always review your contracts and policies, obtain adequate insurance, and follow the laws and regulations that apply to your business.
Using an Attorney/Lawyer can be expensive but not using one proactively can be more costly. You are good at your craft but do you know everything about starting and running a business? Do you have several hours available to Google answers... assuming you even knew the right questions to ask? You don't know what you don't know and legal missteps can cost you time, money, and possibly your business. You need a good Business Attorney/Lawyer, or legal service, sooner versus later. Trust me, no matter what it costs (and there are affordable options), the peace of mind that comes with having an Attorney/ Lawyer in your back pocket is priceless!
Financial risk is the possibility of losing money or facing cash flow problems due to your business decisions, actions, or external factors. This can result from poor budgeting, inaccurate forecasting, fraud, theft, market fluctuations, currency exchange rates, interest rates, or taxes. Financial risk can jeopardize your business viability, solvency, and profitability. It's important to monitor your income and expenses and seek professional advice as needed.
Sarah, a young entrepreneur, was enticed by an unproven business model. Ignoring warnings, she invested her savings, fueled by enthusiasm and ambition. When initial challenges arose, she acted hastily, driven by desperation rather than understanding. Her friends' advice for patience and caution fell on deaf ears, as she continued making impulsive decisions. Eventually, her business failed, and Sarah was left burdened with debt. The town saw her venture as a lesson in the importance of strategy, patience, and careful investment. Sarah's failure underscored that excitement must be balanced with wisdom and that strategic thinking often prevails over haste. Her story became a cautionary tale.
By far and away the biggest risk to a small business is managing cashflow. "Cash IS king" and I can't bang on enough about it... I see too many people try to manage their business by just looking at their bank balance. A good financial software package (e.g., Xero - others are available etc) gives you a rudimentary cashflow function. But, there's no substitute to looking at least 3-6 months ahead on what's coming in and what's expected to go out...
Operational risk is the possibility of experiencing disruptions, errors, or failures in your business processes, systems, or resources. This can result from human mistakes, technical glitches, natural disasters, accidents, vandalism, or sabotage. Operational risk can affect your business efficiency, quality, customer satisfaction, and reputation. To reduce operational risk, you should implement standard procedures, train your staff, backup your data, test your systems, and have a contingency plan.
One of the biggest risks for small businesses is lack of documentation of internal processes early on. Typically, the founder handles everything and may not anticipate when they will need assistance. As the workload increases, it becomes challenging to delegate tasks without proper documentation or training. This can make it difficult for new hires to understand their roles and responsibilities.
As an experienced emergency manager and entrepreneur operational risk is a real concern for small businesses - bricks and mortar and digital alike. What I have found is most people think that insurance will cover everything and if your business is all online all you need is a laptop. All businesses should do at minimal, annually a risk assessment and business impact analysis. Review your insurance policy, does it include business disruption? In addition to natural hazards, evacuations, there is cybersecurity, health emergencies, and many other factors. Know your risks, evaluate the likelihood of occurrence, make a plan, test it and adjust as needed. If an unforeseen event occurs the impact to your business and finances will be protected.
Strategic risk is the possibility of losing your competitive edge or failing to achieve your business goals due to your business strategy, planning, or execution. This can result from changes in customer preferences, market trends, industry dynamics, technology, or regulations. Strategic risk can limit your business growth, innovation, and differentiation. Conduct regular market research, analyze your strengths and weaknesses, adapt to changing conditions, and evaluate your performance to reduce you strategic risk.
A decent strategic plan should be lived and breathed (is that a word?) every day. Don't confuse a strategy plan with a business plan, they're completely different animals. You're strategy plan should describe what (you want to achieve), when (you want it by) and how (you're going do it). A business plan just does what and when - it's the "how" that's generally missing.
Reputational risk is the possibility of damaging your business image or credibility due to your business actions, communications, or associations. This can result from negative publicity, customer complaints, social media backlash, ethical issues, or scandals. Reputational risk can affect your business trust, loyalty, and referrals. To reduce reputational risk, uphold your values and standards, deliver on your promises, respond to feedback, and manage your online presence.
Before a decision to take on a new project is made you should consider completing a risk matrix. Rank the risks for severity and create a mitigation plan to lessen impact. Reputational risk is a real concern and can destroy a business if mitigation efforts are not in place. Having a crisis communication plan ready in advance of anything occurring will allow you to focus on the crisis and respond in a timely manner. Silence is not golden when something goes wrong. Don’t avoid a problem or try to delete it (social media). Honest, transparency, and accepting responsibility (if warranted) will silence rumours. There are many great examples of businesses who had the potential to be ruined but took the right action. e.g. The Tylenol Crisis
Environmental risk is the possibility of harming the natural environment or being affected by environmental issues due to your business activities or location. This can result from pollution, waste, emissions, resource depletion, or climate change. Environmental risk can have legal, financial, operational, and reputational implications for your business, as well as ethical and social responsibilities. To reduce environmental risk, adopt green practices, minimize your environmental impact, comply with environmental regulations, and support sustainability initiatives.