Most business owners don’t often think about risk, but facts show that the smaller the business; the less room there is for error. Small business owners seldom have vast resources available to weather a risk incident.
Unidentified risk can destroy a business of any size, so it’s especially critical for small business owners to be aware. Understanding as many business risks as possible will keep you prepared and able to anticipate and adjust.
What is a business risk?
A business risk is defined as the possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit. There are many factors that can influence this but they fall into two categories – external and internal.
A good example of an external risk would be any political factor that affects your business, like new government regulations and policies. These risks are less avoidable and rarely controllable.
Internal risks are more manageable and can often be averted. An internal risk is something like equipment failure, fire, or the damage that disgruntled employees could cause.
Planning for the future is as important as planning the business itself. Make sure you consider external possibilities like:
- Demographics – Will your target demographic only be baby boomers? How can you create a wider audience for your products and services to ensure longevity?
- Competition – Business competition changes every day. Are you prepared in the event that competition starts to change your business? Prepare in case you need to change marketing strategies or develop new advertising.
- Inflation and deflation – Times change. If the cost of materials rises, you will have to raise the cost of your goods. Will your target demographic be able to afford it?
- Economy – If the economy suffers from higher unemployment, higher taxes, or other serious economic issues, you should know how they could affect your business.
Business risks don’t stop at things like economic factors and inflation. You need to be aware of the internal risks as well. Here are a few things to consider:
- Physical – These risks are things like a fire, an explosion, or other safety hazard. Make sure that you have a safety plan in place and that ALL employees are aware of safety procedures.
- Insurance - The purpose of insurance is to transfer risks from someone who doesn’t want them (you) to someone who does (the insurer). Insurance should cover worst-case scenarios. Get advice. It is especially important to have cover for legal costs and fines that could be levied against key employees personally.
- Equipment – If your business relies on technology, you should be aware of the status and availability of every system and machine so as not cause an unnecessary business interruption.
- Utilities – Power outages are not common in Australia but they can be expensive. Should you have a backup generator if there is an outage?
Set up a list of risks and order them by priority
Awareness is the first step. Make a list of the risks and order them based on likelihood. Risk implies probability; this means they are not set in stone. Badly managed risks can cripple a business, but only if you are not prepared.