Small Business Risk Management

Starting a business venture is risky. You may make costly mistakes throughout your entrepreneurial journey. And, there are many things outside of your control that can affect your enterprise. Although you can’t always prevent threats, you can defend yourself through small business risk management.

Small business risk management requires significant prep work. You can’t make educated guesses about potential risks and call it a day. Put in the legwork to prepare for business risks.  

Small business risk management

Do you claim that you own a no-risk business? If so, you may want to think again. Although some businesses may be less risky than others, business risk is widespread. After all, risk is an occupational hazard of launching a business.

When it comes to business, you can’t escape threats. But, you can manage the consequences of risks. Get started with the four business risk management tips below.

1. Identify potential risks

The first step in small business risk management is knowing what kinds of things can affect your company.

Although you can’t predict and defend your business against every threat in the book, you can identify common risks.

Risks are divided into two main categories:

  • Internal risks: Threats within your business that you can generally control
  • External risks: Threats that are outside of your business and control

Learn about common types of internal and external business risks to help identify potential threats.

Internal risks

Many internal risks can plague your business. Some of them revolve around people and others around tangible assets.

Common internal risks include:

  1. Payroll fraud (wait, who’s Josie, and why is she on your payroll?)
  2. Employee turnover (picture your star employee leaving you for your top competitor)
  3. High absenteeism rate (missed work days, especially during busy seasons, can add up)
  4. Equipment repairs (how much time and money are you spending on old equipment?)
  5. Time theft (how long are your employees really gone for lunch?)
  6. Technology malfunctions (the computer crashed … and you didn’t backup records)

Internal risks can lead to wasted time and a drop in your business bottom line. Keep an eye on the types of internal risks that impact your business.

External risks

Sometimes, life happens. There are many factors outside of your business that you have no control over. But, you still need to identify external risks if you want to prepare your business.

Here are some common external risks:

  1. Economic downturns (that sudden drop in customers may have nothing to do with you)
  2. Changes in laws (penalties for non-compliance, higher interest or tax rates, etc.)
  3. Natural disasters (fires, floods, tornadoes, hurricanes, earthquakes, and droughts)
  4. Personal conflict (sick family member or problems with your house)

Dismissing external risks by saying That’ll never happen to me could end up costing you. Stay ahead of external threats by recognizing that even the unimaginable may happen.

2. Measure risks

The next step of company risk management is measuring risks. Some risks are more probable than others. You should determine the likelihood of each risk actually happening.

When measuring risks, consider doing the following three things:

  1. Create a probability scale
  2. Predict financial damages
  3. Rank risks

Probability scale

Create a probability scale to determine which risks are the most likely to hit your business.

You might use something like:

  1. Very likely
  2. Somewhat likely
  3. Somewhat unlikely
  4. Unlikely

Financial damages

Assign an estimated value of how much the risk would cost you. If possible, use historical data.

Let’s say you make the following estimates:

  1. Economic downturns: $2,500
  2. Employee turnover: $1,500
  3. Outdated equipment repairs: $400
  4. Payroll fraud: $10,000

Risk ranking

Using the probability scale, rank risks in order from most likely to occur to least likely. Doing this helps you predict which risks you should plan the most for. But, you shouldn’t neglect planning for less-probable risks.

For example, you might rank risks like:

  1. Employee turnover
  2. Technology malfunctions
  3. Equipment repairs
  4. Natural disasters
  5. Payroll fraud

3. Plan for risks

When it comes to our personal lives, we map out potential risks and plan out strategies to safeguard ourselves all the time.

For example, we:

  • Get vaccinated to defend ourselves against diseases
  • Build savings accounts to fall back on in emergencies
  • Insure our homes in case of flood damage or theft

Sure, we may never come face to face with potential threats. But isn’t it better to be safe than sorry? And if that is the case …

… Shouldn’t your small business be prepared, too?

After identifying and measuring risks, start planning your defense.

Determine what you can do to prevent or handle identified small business risks. And, decide what you will do if the unexpected happens.

Some things you can do to prevent or plan for risks include:

  1. Purchasing different types of business insurance (e.g., general liability insurance)
  2. Creating an employee confidentiality agreement
  3. Thoroughly training employees
  4. Building a small business cash reserve
  5. Conducting background checks before hiring
  6. Drafting an employee handbook
  7. Inspecting your business for safety hazards
  8. Setting up a natural disaster recovery plan

4. Revisit risks

The final step of small business risk management is ongoing. After identifying and planning for threats, revisit your business risk management plan.

As your business grows, new risks might pop up. And, some of your older risks might fade away. Look over your risk management plan regularly and adapt it as needed.

How to create your business risk management plan

A business risk management plan is separate from your small business plan. After collecting the above information, put pen to paper and create your small business risk management plan.

List out:

  • Risks that can impact your small business
  • Steps you need to take to prevent or limit risks before they happen
  • What you’ll do to deal with threats after they happen

Keep an eye on financial risks by tracking your incoming and outgoing money. Patriot’s online accounting software makes it easy to spot threats with features like bank reconciliation, invoice payment reminders, and more. Get your free trial today!

This article has been updated from its original publication date of April 23, 2019.

This is not intended as legal advice; for more information, please click here.

Stay up to date on the latest accounting tips and training