How to identify your small business risks
Every type of business, from a large corporation to a small sole proprietorship, carries with it a series of risks. The inherent risks continue to grow along with global competition and the impact of digitalization. As a small business owner and leader, it’s important that you understand the risks your business could face.
From operational to reputational risk , being aware of your risks will protect your businesses financial well-being. To do so, you must learn to identify and classify each business risk depending on its origin and characteristics.
Types of Risks
1. Business Risk
A leader assumes business risk─-the possibility actual returns will be more or less than expected returns─-the moment a company's lights are turned on and its doors are open for business.
The types and scale of the risks that affect the long-term success of a business will depend on the company's operations and industry. For example, new market entrants, shifts in consumer demand, and economic downturns are risks to a wide range of companies that are facing shortages of skilled labor and access to infrastructure.
2. Financial Risk
Financial risk usually relates to financing small business operations. This risk involves the possibility of business owners losing large amounts of capital when using debt financing for starting or operating their company.
Other financial risks include changing interest rates and cash flow. You should consider a loan’s interest rate as the cost of doing business. Disruptions in business operations or economic downturns do not absolve the business owner of the obligation to make loan payments. Businesses with sluggish sales and high cash outflows may also endanger their owners’ personal financial assets.
3. Strategic Risk
Your company's strategic risk is determined by its business functions, any investors, and operating environment. A company's operating environment risk is affected by the markets in which it buys and sells goods and services.
Environmental risk also depends on the government regulations and compliance requirements that govern your company's operations and markets. In turn, unfavorable changes in the supply or demand of products or services also affect a company's strategic risk, as do the competitors that vie for sales and supplies in your chosen markets.
4. Operational Risk
Operational risk (process risk and innovation risk) concerns your company's internal activities. Process risk relates to resources, such as employees, equipment, and materials. As well as any business process that supports production or continued operations.
5. Reputational Risk
Reputational risk is a threat to the brand of your business, typically due to an event that causes negative public perception or bad publicity. In recent years, one of the biggest reputational risks that businesses have faced is the risk of fraud or a data breach.
If something does go wrong, you need to be prepared to respond quickly. Having a crisis communication plan specifically for your business is essential. It could be as simple as having a list of all potential risks with your planned response to address them listed. Your reputation is one of your most important assets, so take steps now to protect it.
Pinpointing and assessing top business risks is something that will require time and should be revisited often. That process will give you the opportunity to create and execute your risk management plan.
