Types of small business risk

There are several types of risk you will normally face as an entrepreneur. Let’s have a brief look at each one, and how you can handle them.

Supply Chain Risk

Your supply chain refers to the companies that provide you with raw materials, manufacturing and assembly activities, or inventory. When a supplier faces financial hardship and can’t provide supplies and the business owner has no back-up supplier, the risk to the business is great — lost sales, lost customers. Finding a contingency or back-up supplier is an important part of managing small business risk.

Intellectual Property Theft

Unfortunately, intellectual property theft and piracy can’t be stopped but the savvy business owner can investigate suppliers and manufacturers before they commit to doing business with them, and registering all trademarks in all countries in which the company is doing business.

Regulatory Changes

The risk of increased regulation, taxes, new laws and rules is very real and there is little a small business can do to prepare for them. Regulations and paperwork are frustrating for growing ventures and the cost of compliance — the time and resources required for a small business owner to comply with government rules and regs — is increasing every year.

Product or Service Liability

A growing small business, particularly one that manufactures a product, should plan for a potential product liability lawsuit (litigation) at some point in the company history. Mitigating the risk of product liability from the very beginning by running an efficient operation with clear safety and product quality standards will help prevent a legal minefield.

Cyber Security Risk

For those small businesses that conduct business online, one of the more recent risks faced is cyber security risk: hackers who attack computer networks, phishing attacks (gaining access to sensitive data such as user names and credit card information), and viruses. A study conducted by the FBI found that 29% of US companies had secured insurance policies to manage internet risks. Make sure your insurance policy covers you if you conduct any part of your business online.

Sales Decline

A decline in sales is usually met by an entrepreneur’s denial. In very small companies, the entrepreneur often is the sole employee responsible for all day to day operations of the business. Often, they lose sight of customer’s wants and needs and changing market conditions around them. Lowering prices is usually not the best response to a slowdown in sales. If customers understand the value of a product or service, lowering the price often confuses existing customers. When a growing business first notices a drop in sales, it’s time to find the root cause and make strategic changes.

Loss of Key People

No business can count on keeping key members of the team forever. People change, circumstances change. Succession planning — identifying people who can take over the company in an emergency, or take over the company permanently when the entrepreneur wants to exit — is an important part of managing business risk, particularly for the smaller business. Cross-training key people is one way to limit the risk of a business being left without someone to steer it.

Global Environment and Health Risk

Central banks and other authorities are now considering climate change as a risk to financial stability. According to the Global Sustainable Investment Alliance, investors, too, are making the climate more central to their activities. In recent years, more than US$30 trillion in funds were held in sustainable or green investments globally, a rise of 34 per cent in just two years. The COVID-19 global pandemic is an example of a global health risk that had significant impact on small businesses worldwide. Learn more about the challenges facing our environment and our global health – get educated! Create a climate action plan for your business and scan the business environment for potential threats to your small business livelihood. Create an action plan that can be implemented quickly. Forewarned is forearmed!

Financial Risk

Financial risk is the ultimate risk for most entrepreneurs — lose the business and you’ve lost your investment. Managing regulatory, operational and market risks will limit the financial risk of running a business. Whichever risks you face with your business, remain practical and realistic. Avoid overanalyzing the situation or getting stressed out over the significance of your decisions and actions. Risks should be identified, analyzed and prioritized to make decisions easier on management.

Want help making decisions about risk? Check out our recent blog post about tips for managing risk in your small business!

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