Entrepreneurs are no strangers to risk. After all, they take risks every day. That’s what setting up and running a business is all about. But ask many entrepreneurs about risk management and you’ll get a blank stare. What exactly is risk management anyway?
The fact of the matter is that risk management is critical to the long-term viability of businesses. Companies need to know the risks that are in the pipeline to implement the best strategy. Without knowing the risks, companies have no idea what course of action to take. Of course, many companies don’t quantify risks. And as a result, they get themselves into big trouble. Just look at what happened to BHS.
But is risk management just a fancy tool for big companies? Certainly not. Small companies face big risks to their operations too. After all, they’re just as much a part of the market as anybody else. The following are several risks your company faces that could devastate your business.
In the modern marketplace, reputation is important. In fact, with tools like the internet, it’s becoming even more important. Online reviews and company ratings are becoming commonplace. And it’s on the back of these reviews and customer feedback that a lot of companies do business.
Feedback loops like this are what drive companies to improve their reputation. The ability of a company to meet the needs of its stakeholders is dependent, to a large extent on its reputation. But, of course, things can go wrong. Customers can leave bad reviews and firms can make mistakes.
Sometimes, the risk to your reputation can be catastrophic. Often this happens when, say, a child dies because of exposure to your product. So it’s important that they consider how your processes might affect your reputation.
Holding an event might be a great marketing idea, for example. But what happens to the company’s reputation if that event doesn’t pan out as expected? Clearly there are upsides and downside to every company decision.
Company law is famously complicated. Small businesses have to abide by hundreds, if not thousands of regulations, depending on the industry. And this represents a severe risk for most businesses, mainly on the downside.
One problem companies are facing right now are increasing litigation and insurance claims. Big companies can often soak up these risks as just another cost. Small companies, on the other hand, can be wiped out. That’s why it’s so important to consider legal risks when making decisions. Most businesses use some for of claims management software to minimise their exposure to risk. This software helps companies stay compliant while also reducing the cost of insurance payouts.
Most small businesses depend on credit lines from lenders. These credit lines allow them to take on new staff, open new stores and buy new stock. But have you ever considered what might happen if those lines dried up? It would probably spell disaster. In fact, this sort of thing nearly happened in our recent past in the recession of 2009. Banks weren’t lending in general. And it was only because of central banks injecting money into the economy that we avoided a credit crunch.
But there’s another type of credit risk that small businesses face. This is when a company is owed money, but not paid on time. In big businesses, this sort of risk can quite easily be smoothed over by payments from other customers. But in small businesses, late payment by clients can spell disaster. So what can companies do? Well, first of all, they can reduce their exposure with credit insurance. But they can also diversify their customer base as much as possible to spread the risk.
Small companies are usually dependent on a few people.That’s just a fact. But being so dependent on so few people comes with some big risks. Sometimes, all it takes is just a couple of people to fall ill for the whole company to be thrown into disarray. Without certain people with certain skills, the company’s operations break down. There simply aren’t the people required to do the work. This is a big risk for small businesses. Far bigger, in fact, than for their bigger counterparts.
So what can be done about this sort of risk? Most companies will deal with it in a couple of ways. The first is to take out some form of “key person” insurance. The other is to train multiple people in the key roles required to keep the business moving if somebody falls sick.