What are the different types of small business risk?

Being an entrepreneur can be exciting and infinitely rewarding – but it’s also quite risky. Let’s review the types of risk you’ll most likely face as an entrepreneur, and how you can handle them.

IP Theft

Unfortunately, intellectual property theft and piracy can’t be stopped. However, you can lessen your risk by investigating suppliers and manufacturers before you commit to doing business with them, and registering all trademarks in all countries where your company is doing business.

Cyber Security Risk

We all know that cyber security risks are a way of life now. There are hackers who attack computer networks, phishing attacks (gaining access to sensitive data such as user names and credit card information), and viruses. Insurance exists to help you manage your internet risk. Make sure your insurance policy covers you if you conduct any part of your business online.

Supply Chain Risk

Your supply chain comprises 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, you can lose sales and customers. Mitigate supply chain risk by finding a contingency or back-up supplier.

Regulatory Changes

The risk of increased regulation, taxes, new laws and rules is very real. Unfortunately, it’s nearly impossible to predict 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.

Decline in Sales

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.

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.

Global Environment and Health Risk

Central banks and other authorities now consider climate change as a risk to financial stability. Additionally, we all remember the impact that COVID-19 had on small businesses all over the world. Create a climate action plan for your business and scan the business environment for potential threats to your business’ livelihood. Ensure your plan can be implemented quickly. Forewarned is forearmed!

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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