Risk is any event or circumstance that can negatively affect or impact your business. Every business faces risk, and risks can vary from one business to another. Which is why risk management for small business is vital to success.
For example, a shoe store might incur the risk of theft, while a barber shop can incur the risk of a fire outbreak. Some risks can affect your business adversely and even lead to the closing of the business. Risks are categorised into financial, strategic, operational, reputitional, and compliance.
Risk management is, therefore, the strategy or process of handling the risk. Small businesses face a lot of risks as they try to grow into big businesses. The best way to manage risks is by internalizing the type of risks your small business is likely to get affected with and then strategies for managing those risks. In this article, we will look at risk management for small businesses.
What Risks are Facing Small Businesses?
Small businesses, like big businesses, face risks that can affect them in one way or another. Some of these risks can be huge, while others can be easily solved. Some of the most common risks facing small businesses are:
1. Financial Risk
The most significant risk facing small businesses worldwide is financial risk. When small businesses are starting, they tend to face substantial financial risk because most of the time, they will have taken out huge loans and invested their savings into the business.Hence the pressure of making profits is usually very high.
The biggest worry is that new businesses can take a while to generate good returns. Therefore, a lot of planning has to be put into place as to how they will pay the employees and other bills during the first few months of starting.
2. Strategic Risk
One of the most significant risks facing small businesses today is strategic risk.
Small businesses face strategic risk mainly because of a lack of proper or adequate business planning. A lack of proper business planning in areas like marketing, production, and sales can lead to strategic risks.
Most of the time, strategic risks are influenced by poor decision-making. Decisions by any small business at any stage in its production or marketing stage can lead to the fall of the business.
3. Operational Risk
With the high increase in crimes like hacking and stolen identity through advancement in technology, many small businesses face operational risks.
Operational risks can occur in areas where the system, like software that the business uses in its daily operations, needs to be adequately backed up and freely available to all persons in the organisation. It is very worrying that small businesses incur operational risks like financial loss or data loss to hackers due to a lack of adequately secured software.
Operational risk management for small business is mostly regarded as infrastructure implementation, to avoid meltdowns, breaches and bumps in the processes it creates.
4. Reputation Risk
This is one of the most overlooked risks for small and surprisingly big businesses too, which can adversely affect the whole business.
Your reputation is significant to your small business because it reflects positively or negatively on your brand. A good reputation is essential for small businesses because they need it for successful business growth. Clients will want to work with businesses with a good reputation because it also affects the consumer and customers’ perspectives about the brand and their overall decision on whether to purchase from the business.
5. Liability Risk
Employees, creditors, customers, and investors are some of the people that you are likely to face liability risk due to failure to follow contract requirements.
Liability risk can have adverse effects on the finances of the business. Liability risk can lead to costly legal battles for small businesses, which can sometimes lead to loss of the business.
Many small businesses need to take up insurance covers that can protect them from liabilities that might have financial implications. Businesses are expected to take up insurance covers that protect their employees from any injury during their course of work.
6. Business Interruption Risk
The Covid-19 pandemic impacted small businesses greatly across the world. Small businesses were forced to shut down due to the enormous losses incurred.
This is just one of the business interruption risks businesses will likely face. Natural disasters like earthquakes and cyclones are sometimes inevitable because they are seasonal. Another type of risk that can interrupt the business is an over-reliance on one manufacturer to supply goods or focusing too much on one target market, such as men, to purchase their products.
Risk Management for Small Businesses
Risk management is a business preparing to prevent and control potential risks that the business is likely to face. Managing risks for small businesses is essential because it protects them from financial and reputational losses. Some of the risk management for small businesses are:
1. Insurance Covers
Insurance coverage plays a massive role in risk management for small businesses. A good insurance cover will cover employees’ liabilities, business equipment, business premises, and vehicle losses due to accidents.
Insurance covers are not meant to reduce the absolute risk but to help reduce the financial burden arising from accidents and losses. In many countries, the government requires all small and big businesses to have insurance before setting up a business.
Businesses are required to pay premiums to the insurance companies in order to cover the company for it’s operations. If an employee is injured while working, they will be compensated for the losses incurred in terms of money for hospital bills or any other loss.
The insurance premium you are paying is your investment that risks such as injury, accident, damage and death don’t bankrupt your business, and that the insurance cover will deal with all costs relating to the risk. But be careful to check your coverage, as insurers will not deal with everything unless you prompt them to add it when you sign up to the policy.
2. Detective Control Systems
Many small businesses face operational risks regarding theft from the small business by employees and outsiders. To prevent the risk of loss of money or property during its operations, businesses should consider installing detective control systems like CCTV cameras and burglar alarms to detect any intruder or thief in the business.
Detective control systems have been known to be very effective in protecting the business from outsiders. It also acts as evidence in case of employee theft. There are various types of surveillance cameras that you can install in your small business that are affordable. Some of these surveillance cameras are undetectable. Therefore, if you place them in hidden places around your business premises, it is tough that other people will notice where they are. (You will need to advertise the fact you are recording using CCTV).
3. Inventory Software
Inventory management software is essential in managing inventory levels, reducing costs, and improving customer satisfaction.
It also acts as a detective control in preventing loss of inventory and payroll fraud by accountants and employees. One of the best inventory software that small businesses should consider installing in their business is Xero. It helps you know when there is a downstream in stock; hence you can purchase more, and when there is high stock, you can avoid buying more. This helps prevent strategic risk due to poor decision-making in the sales area of the business.
Xero tends to give real-time data on inventory levels and reports on turnover rates and the number of orders versus the amount of revenue gained by the business in terms of orders. This helps the business to avoid financial losses due to employee theft. Contact RGE & Co to implement Xero.
4. Hire IT Personnel
Today many customers do online transactions. Hence online money transactions are unavoidable.
Hiring experienced IT personnel will ensure your software is in place and protected from hackers and system failure. The IT personnel will advise you on better back up for your business data and preventing financial losses due to cybercrimes. They will also work with you to prevent bugs that slow down customers’ orders and prevent customer loss due to system failures.
Every small business requires IT personnel to check your system to ensure everything runs smoothly. Investing in IT experts can help reduce operational risks due to cybersecurity and system failure.
5. Build a Website
Having a business website can improve your reputation and reduce the reputation risk of your business. Most customers trust brands with a website more than those without. Most customers prefer searching for a particular business’s website before purchasing to check customers’ reviews about the business and their other products before deciding whether to purchase.
Choosing to host your website with Ionos can give you the benefits of checking the number of customers who click on your website to purchase anything, and it also shows you at what point customers convert or do not convert. This helps you to strategise better ways of marketing your products, thus reducing strategic risks.
6. Risk Consultant
Sometimes you need a risk consultant’s advice to help you properly manage risks for your small business. Many audit and law firms have risk consultants who are highly qualified and experienced in risk management.
These consultants will provide you with the advice you need to manage your business’s risks. Other than that, the risk consultant will help you with coming up with the possible risks that will likely impact your small business and advise you on the various solutions available to solve that particular risk.
Creating a risk management plan
A risk management plan is essential since it gives you a detailed strategy for handling some particular risks. Building a good risk management plan is very important for the success of your small business. The steps in creating a risk management plan are as follows:
- Identify the risk. This is the first stage in a risk management plan. In this stage, you identify the risks your business will likely face. You can sit down with a risk consultant to brainstorm and identify the risk your business will likely face.
- Analyse. The next step is to analyse the risks you have identified in the first stage in terms of the likelihood of them occurring and the impact they might have on the business if they happen.
- Manage. The next stage is to manage the risks analysed by transferring, accepting, mitigating, or avoiding the risks entirely. For example, installing CCTV cameras.
- Monitor and review. You will need to monitor the rise of new risks, as well as keeping processes up to date.
Small Businesses Need Help Solving Risks
Hiring employees, this remains to be the biggest challenge facing small businesses in their risk management. Hiring an honest employee who will not steal for you or who is competent enough to avoid increasing risks like fire and liability risks can be really hard for small businesses because they want to maximize their profits and still spend less since they have just started the business.
Finances every small business faces financial challenges in its risk management because most risk management strategies require finances for you to successfully manage the risk. Things like hiring a risk consultant, installing CCTV, and getting inventory software requires huge finances, which can be very difficult for small businesses to afford.
Planning as a small and new business, it can be hard to plan for the future because your market is mostly small, and the finances are not enough to plan for future risks. This leaves them with no option but to plan for only the current risks.
Implementation of software can be the most important thing to do when trying to manage strategic and operational risks.
Risk management for small businesses is essential since it helps the business prevent financial losses due to operational and strategic risks. Hiring an IT expert can help protect the system from hackers and backup your system to prevent data loss. The use of inventory software to prevent fraud by employees as well as creating a good risk management plan, can be very effective in risk management for small businesses.