What is... Risk Management?
Risk and uncertainty are two key components that every human, let alone small business owner must face every day. Risk Management for small business owners plays into every decision that is made with both internal (weaknesses) and external (threats). Internal weaknesses can be controlled and eliminated upon identification while external threats are beyond the entrepreneur’s control. With proper planning and structure in place, these risks can be significantly reduced.
It is important to not view risk as coming from negative outlets. Many times, risk comes from moving forward and opportunities which present themselves. Sabre believes that awareness of the varying types of risk and where they spring from can greatly their detrimental effects. The overarching question is… How will my business continue to run when faced with internal and external adversity?
Internal Risks: Internal risks are easier to spot, easier to plan for, and easier to control… making them just as dangerous as external risks because they can often be overlooked. Taking the time to monitor and plan rather than react to internal risks will set up your business for an easier transition into success.
People: A small business’s employees are the lifeblood of the operation and success of the business. For small businesses with few employees, maintaining a continuity plan for staffing is important in the case of illness or turnover. Maintaining safe practices for inventory and cash is vital as well to ensure honesty, cutting down on theft and fraud within the workplace. Many of these issues can be mitigated through strong employee engagement which is proven to strengthen morale.
Equipment and Technology: The focal point for risk associated with equipment is whether the small business is purchasing items used or new. Majority of the time a company will choose the most cost effective route by purchasing a used item and this can be a risky choice. Although we do want to save money, sometimes it is better to pay for the new equipment to prevent problems in the near future. Choosing to purchase a used part can also disrupt current equipment, and that would put you in a even stickier situation.
IT Issues: The risk associated with technology can affect continued operations during any down time, preventing the small business from being able to accept payment for the goods/service. Depending on the length of the down time and the frequency of reoccurrence this can have a major affect on the business. Making sure there are back up plans in place to help the business adjust when downtime occurs can save you a lot of time and money in the long run.
Operations: The risk associated with operations are related to building repairs, work related injuries, or cash flow management with unexpected costs. In order to continuously attract customers your business should remain in its best condition at all times, so keeping the building up to date is very important. Structuring a contingency plan for issues that occur over time will lower the risk of losing business during the construction period. Sometimes there are injuries caused by work do to selling a faulty product and just like everything stated above this too comes with an unexpected cost. With proper planning operations can retain a proper flow and unexpected cost will not force a negative impact onto the business.
External Risks: The risks although unpredictable and uncontrollable can be prepared for through diligent planning from the initial business plan. Some of these risks include competition, market, and environmental risks. These risks include the ebbs and flow of the economy, new technology, government regulations, natural disasters, and the opening/closing of business and industry around you. Contingency plans including firm policies and procedures in the event of such risks evolving can provide a safeguard.
Competition and Market Risks: Competition and market risks include changes in the price of materials needed for manufacturing, oil, and gas prices. The ways that competitors operate such as adding a new product/service lines or reducing prices can have a major effective on the life of a small business.
Environmental Risks: These are related to items such as federal, state, and local policies, ordinances, and laws affecting business operations, neighborhoods, and infrastructure. A great example, is the major roadworks currently in operation through downtown Birmingham. A large amount of travel is diverted out of the city’s center to alternate routes, affecting the number of potential consumers flowing through the area. Natural disasters and severe weather, especially in the southeast can potentially wipe businesses out without proper contingency plans in place. Gentrification and other social changes within communities can directly affect the influx and out-flux of potential customers. It is vital to take these risks into consideration when determining the location, price, and operations policies of the business.
How to guard yourself and prepare through Risk Management:
Performing regular internal evaluations and reports for employees, equipment, and the flow of day-to-day operations is just as important as preparing the monthly budget. SWOT (Strength, Weakness, Opportunity, and Threat) Analysis is a great way to begin an honest conversation about the current and future status of the business’s operations. Effective risk management begins with the creation of the business plan with specific goals, budgets, short and long-term goals. These items will need to be continuously refined and adjusted for the ever-changing growth plan. The continued management of a small business’s handbook outlining company policies relating to contingency plans, employment practices, financial processes, and growth strategies will help keep the ship on course and flexible to the changing winds of life as an entrepreneur.