Small businesses are prone to risk as fledgling brands in their respective marketplace niches.
5 Ways to Lower Risk for Small Businesses
In the US, close within the first year, and this percentage increases to around 45% by year 5.
And it makes sense, right? A small business has less financial power, higher overheads, limited access to skilled employees, and fewer clients, resulting in less turnover. This makes small businesses extremely vulnerable and high-risk ventures.
So – what can small businesses do to reduce their risks?
Let’s find out more below.
What Is ‘Business Risk’ in a Nutshell?
Before we dive into the specifics, let’s briefly clarify business risk.
Business risk is a broad term for factors that may have a negative influence on the business in the short and long term.
The risks that small businesses face may coincide with the risks that established businesses face. However, there are also unique risks a small business faces. Examples of possible risks to small businesses range from macroeconomic shifts to something targeted, such as the loss of a big client.
These factors all present risks for the business, but the ways in which they may impact the business vary widely, requiring different actions to be taken moving forward.
To understand business risk factors better and know which actions to take, owners and executives of small businesses will usually categorize risks based on their origin:
- Financial risk: general financial forecasts, operational budgets, financial objectives or KPIs, purchasing decisions & effective management of financial systems.
- External factors: global emergencies, economic shifts, political change, marketplace transformations, and/or a rise or reduction in competition.
- Internal risk factors: operations, workforce, turnover, customer acquisition and loss rates, legislation, lawsuits, and more.
5 Ways to Reduce the Risk for Small Businesses
1. Be Financially Conscious & Well-Managed
Being financially conscious is imperative to ensure a small business sticks around for the short and long term.
Here are some examples of areas where small businesses may incur key financial risks:
- Supply and manufacturing – fluctuations in the costs of production and raw materials can have huge impacts on small business profit margins.
- Recruitment & employee remuneration – while employees are vital to growing a business, having too many employees or employees that are too expensive can be risky.
- Management of key clients and debtors – healthy cash flow is key, but having too many debtors or unfavorable payment terms from clients can endanger this.
- Unnecessary loan agreements & selecting ill-advised investments – while debt may be necessary to start or grow your business, unfavorable interest rates and poor investment decisions can be detrimental.
- Relying on a single revenue channel – putting all your eggs in one basket can be risky if that revenue channel fails.
- Budget allocations for projects & operations – successful budgeting and cost management is crucial to financial health and is a risk small businesses face with shallow cash reserves.
It’s almost impossible to reduce financial risk completely, but making informed financial decisions in relation to the day-to-day operations and goals of the business is the best place to start.
By putting specific systems and policies in place, and making smarter purchasing decisions – small businesses can reduce the number of financial risks they face.
2. Plan for Fluctuations in the Local Economy, Political Landscape or Fierce Competition.
While a small business can’t predict the future, it can create emergency plans that kick in when certain types of issues arise in the external environment that are out of the business’s control.
Take into account the COVID-19 pandemic as an example of external business risk.
Before COVID-19 took over the world, the majority of businesses would never have had a plan in place with systems to guide them through a time of emergency filled with serious financial risk, upheaval in how business is done, and in the demands of consumers.
Fast forward to the present day – there are now very few businesses that would disregard a pandemic plan.
Similarly, it is a good idea to assess the political and economic risks faced by a small business and to create plans for these situations. Predictions and plans can be made based on a thorough analysis of previous data and events, taking into account the present landscape of countries where the business operates.
Diversify Business Offerings & Take On Projects That Are Easy Wins
It’s great for small businesses to specialize and become experts within their industry niche for specific projects where they provide tailored solutions and unique value.
However, when a small business is getting started, especially during tough periods, it is often best to accept all available work and take the easy money to boost revenue and cash reserves. Staying diverse until there is sufficient specialized work to turn down more general projects helps reduce risk and helps the business stay diverse and agile.
In fact, in the short term, it can be prudent for businesses to diversify their offerings by adapting their skills to accomplish varying projects. This can provide a business with captivating case studies and necessary streams of revenue to drive it forward.
It is still of utmost importance that the business specializes in skills it feels are most valuable in the market so that the business can differentiate itself from competitors, however, looking for projects that are “easy wins” in the short term is a great idea.
4. Build a Streamlined Skilled Team & Effective Systems for Less Strain on the Business.
There are inherent risks associated with building a successful and dedicated workforce and systems that help you manage the business systems effectively.
For starters, recruiting the right kind of people is immensely important but also a very difficult task for small businesses. The issue is usually that small businesses require skilled and dynamic employees, but the salaries they can offer might not be enough to attract and retain talent. As a result, some small businesses make the mistake of hiring too many experts that carry hefty salaries that can bury the business in the short term. Or small businesses do not hire enough skilled employees and are unable to fulfill work and grow a successful team.
Instead, it might be better to start a team with a few experts followed by enthusiastic juniors that have the potential to grow into highly skilled professionals over time with the right tutelage from executives.
Similarly, the systems and tools a business uses to manage its operations may speak to the effectiveness of the business’ operations as a whole.
Having the right technology partners in place to help you automate some of the business’ operations (even if it’s just communication) can give you more time to focus on elements of the business that can add value and generate revenue. This can, however, be another trade-off as some of these tools can be rather pricey and wasteful if they are not true value adds.
That being said, ensuring that the business makes smart purchasing decisions that add value when it comes to selecting technology partners and employees is imperative to reducing overheads and financial risk.
5. Reduce Legal Liabilities & Keep up to Date with Relevant Business Regulations.
It’s important for small businesses to meet legal responsibilities and adhere to industry regulations. Failing to do so can result in hefty consequences ranging from warnings and fines, all the way to severe financial penalties and even jail time.
The best way to reduce legal liabilities is to be proactive. Ask questions when you are unsure and request support when something important needs further clarification.
Make sure you are staying up to date with local business regulations and rules and make sure you keep all important documents well organized. A small business can also consider getting legal help to set up terms and conditions as well as any contracts that will be regularly utilized to ensure they are protecting themselves.
Requesting help also allows the business to keep a record of support requests between them and authority or third parties. These records may be useful if the business does face legal challenges in the future.
How Does a Small Business Start Assessing Risk Factors?
In order for small business owners and executives to start assessing risk factors, they need to have the ability to conduct a strategic and financial analysis of their operations.
Typically, a well-orchestrated SWOT analysis will uncover risks at different levels of the business.
It is also important to align these analyses with the business’ defined vision and the key objectives that the business needs to meet to ensure short and long-term business goals are being accomplished.
A great way to build a well-rounded skill set that can help you manage business risks is by studying a business risk management course. Business risk management is an incredibly interesting career path for entrepreneurs and managers looking to expand their skill set and their approach to business management.