Module 8: Risk Management
Types of risk
Risk management applies to many aspects of your business. Your business is subject to internal risks (weaknesses) and external risks (threats). Generally, you can control most if not all internal risks once you identify them. However, external risks may be entirely out of your control.
Not all risks come from negative sources. Risks may come from positive sources or opportunities such as expansion and growth, which carries a certain level of risk. The ultimate goal is to reduce risk wherever possible through sound risk management practices.
Let’s start with the internal risks, which you can control. If you want to manage risk more proactively, you may want to spend some time going through our crisis planning toolset.
The human component of your business is a natural source of risk. Here are just a few of the risks humans can pose:
- Illness or death. A business owner or a member of the leadership team may fall ill and not be able to work for months. Their death would pose an even greater risk to the organization. To deal with these possibilities – no matter how remote they may seem – requires you to develop a succession plan.
- Theft and fraud. Most businesses want to have an honest workforce, but employee theft and employee fraud are significant risks to your business. Timecard fraud is a risk, too, as is diverting funds to fictitious accounts that bleed off income a little at a time.
- Low employee morale. Unhappy employees can cost you money through negligence or willful acts. For example, an employee who forgets to place an order for inventory can pose a risk to your sales because backorders lead to cancellations.
Equipment & Information Technology Risks
Older equipment not only runs slower but may require more maintenance. Worse, older equipment, software and systems may put you at risk for hacking, ransomware, phishing and other incursions that can disrupt operations and damage files and equipment.
Downtime of computer systems, machinery or vehicles can cost you a substantial amount of money. Creating a replacement schedule for these assets can help you avoid downtime or costly repairs or support. The same can be said for parts in machinery that need to be replaced periodically due to wear and tear.
Fire, flood, power outages, storms, and other crises can profoundly affect your operations. As you consider risk, you want to inspect your facilities and offices for potential risks. Adding fire suppression systems, fire extinguishers, flood mitigation systems and generators can help you reduce the chance these disruptions occur and minimize the damage they can do to your business. You’ll also want to survey your business operations to reduce the possibility of work-related injuries. Workplace injuries can cause a loss of productivity and open your business to lawsuits.
Cash flow is the lifeblood of your business. Unexpected expenses or reduced revenue can put your business at risk, as can the loss of a credit line. A risk management plan should be developed to address these risks to your bottom line. Even new financing can create added risk in the form of additional debt, appraisal and closing costs and tying up business assets as loan collateral.
While you have almost total control over internal risks and can put measures and systems in place to reduce or eliminate their impact, there are a host of external risks that can impact your business, often without warning. This, of course, can include a major disaster or even a global pandemic, as we’ve learned all too well in recent years.
Market & Competition Risks
The market itself can expose a small business to risk. This can include a new competitor opening across the street, the wholesale cost of goods skyrocketing, pricing pressures, supply chain disruptions and vendor changes.
Key employees may leave you for your competitor, taking valuable and once-loyal customers with them. Worse, they can take some of your trade secrets with them if you haven’t properly protected them.
Rent increases can suddenly rise in a highly competitive market. The cost of utilities can also increase risk. Both may require you to increase prices, which can adversely affect sales.
Consumer patterns may shift unexpectedly. Even in the best of times, customers can be fickle, chasing the latest trends or fashions. Shifts in popular culture can add risk to your operations and your ability to operate profitably.
Business Environment Risks
What happens around your business can have a significant effect on your business. This can include changes in federal, state, county and city laws and ordinances or zoning. New health and safety protocols can be introduced, or the city can increase its inspection cycles.
Of course, weather can expose a business to undue risk. Recent storms and other weather events of historic proportions – flooding, atmospheric rivers of precipitation, high winds and even natural disasters such as wildfires – can require a business to shut down suddenly and perhaps even permanently.
Entire community downtowns can become ghost towns with a major change in thoroughfares, shopping patterns or population changes. Communities change over time, and not changing with the times exposes a small business to a certain amount of risk.
Balancing work and home life carries a certain amount of risk. Working 24/7 can ruin a relationship, but so can not working on your business enough, enjoying all the perks but not paying attention to the bottom line. Complacency is a huge risk. Your business may become successful, or it has been for a while. You find a sweet spot of working hard, but not too hard. In the process, you may miss opportunities for growth because you’re not spending the extra effort needed to increase revenue or reduce costs. Worse, your absence at work can affect morale, and your employees may become as complacent as you are. Before you know it, your business is on the rocks.