Risks That May Emanate From the Growth Of a Small Business and How To Manage Them

Recall when we were starting our business one of the elements was a risk assessment that we may not necessarily have dwelt on it at length, but, is a critical exercise that every business must take continuously.

Risk assessment in a small business is a strategic process that evaluates the potential outcomes of risks, helping business owners make informed decisions to avoid financial issues. It involves identifying, analyzing, and controlling both internal and external risks that could impact the business’s financial health.

In Identifying risks, we establish what situations could pose a risk to your finances, and we consider the potential damage they could cause and the potential rewards.

To be systematic it is necessary to document risks, that is, define the identified risks in a document, develop a process to weigh their impact, and set up a scoring system from mild to severe. This step is necessary for monitoring your risks.

It is advisable to appoint monitors i.e. individuals within your business to monitor and manage these risks.

All this is necessary because as business owners we are usually optimistic people. We plan for growth rather than dwell upon the possibility of disaster. However, as the COVID-19 pandemic demonstrated, even the most successful businesses face risks. So, even the slim chance of something outside of a business owner’s control damaging their company cannot be ignored.

The effects of COVID-19 on businesses have been dramatic and could not have been foreseen. However, other risks could be equally devastating for a small business and should be planned for and managed.

Internal risks are those that occur within your operations and are generally easier to control, such as financial, marketing, operational, and workforce risks. External risks, on the other hand, arise from outside the business and are often harder to manage, including changes in the economy, competition, natural disasters, government regulations, and shifts in consumer demand.

Conducting a risk assessment is crucial for small businesses as it helps prevent and reduce risks, ensuring the safety and sustainability of the business.

The smart business owner will always be looking for growth opportunities. Even so, they will also be asking themselves, “What if?” The well-prepared business owner will be looking for ways to mitigate the common risks that small businesses face. Here are some of the typical small business risks and some tips on how to manage them.

1. Competition

You can never afford to take your eye off the competition. If you let your guard down, you will soon find that competitors have dropped their prices, released new products, or overtaken you in the search engine rankings. The only way to stay ahead of the competition is to monitor the market in which you operate. It would also help keep on top of developments in your industry and keep a close eye on new entrants into your space.

2. Economic Risks or cash flow risks. 

These are related to the financial stability of a business, including the risk of not having adequate funding, which can affect the business’s ability to sustain operations. Cash flow represents one of the most significant risks to small businesses. So, keep your cash flow forecast up to date and monitor your aged receivables have a policy that you will not allow debtors to stay longer than a month to pay. If cash flow is persistently negative i.e. there is more money outside the business than cash on hand, you will fall into debt, or you may have to close the business. Small enterprises do not generally have sufficient reserves to cushion the blow of a cash flow crisis. So, cash flow and receivables management should be one of the top priorities for a small business.

3. Business Liability

Whenever you deal with third parties, however careful you are, you may be at risk of becoming involved in a costly legal dispute. The possible risks will vary depending on the type of company. They could include anything from a visitor to your premises slipping on a wet floor to a product liability compensation claim. If you do get embroiled in a legal dispute of this nature, you will need to pay the legal costs of mounting your defense, and you may need to pay damages. You can help avoid liability claims by undertaking a thorough risk assessment and taking appropriate steps to minimize the risks. However, it would also be wise to ensure that you have adequate business liability insurance, including general, professional, and product liability insurance if relevant.

4. Fraud

There are many ways that fraud could be committed against a small business. An employee might be stealing from you. Scammers could target your business. That new customer that you recently granted credit to might not be genuine. The best way to protect yourself against fraud is to implement robust security procedures and take nothing for granted. It would be best to complete background checks on all new employees, for example. It would also be wise to carry out thorough credit checks before you offer any customer credit and if need be do not allow any credit to first-time customers nor allow credit in the first six months of starting your business. If you hold physical stocks, implement appropriate security precautions, such as installing security alarms and cameras. You can further protect your business against the effects of fraud by adding crime cover to your business insurance.

5. Property Damage and Theft

A small business’s most significant assets are likely to be buildings, vehicles, equipment, and inventory. All these valuable assets are at risk from fire, flood, and theft. It would be advisable, therefore, for businesses to take precautions to protect these items, and insurance cover should be taken out against the loss or damage of assets. The steps needed to safeguard assets include adequate security at business premises and the installation of fire safety equipment, such as smoke detectors and fire extinguishers. It is not only the loss or damage of assets that needs to be considered, though. There is also the impact on business operations that would be caused if assets were destroyed or stolen. So, it would be a good idea to consider business interruption insurance, which would cover the loss of income due to the loss of crucial assets.

6. Strategic Risk

Strategic risk is the risk of potential failures in strategic planning, or failing to follow a strategic plan that is not flawed but was simply not followed this may lead to a company not achieving its core objectives.

7. Workers Compensation Insurance

Workers compensation insurance and general liability insurance are important coverage types for a small business. Together, they pay for a wide range of problems, including injuries and illnesses to your employees, accidental injuries property damage to others, and other types of claims, such as reputational harm.

8. Cyber Attacks

Data security breaches are more common at large corporations. Still, small businesses are also at risk from cyber-attacks, and small enterprises often do not have adequate protection built into their computer systems. The first step to protect your business against cyber-attacks is to complete a full cyber security audit. This will ensure that the proper security controls, policies, and procedures are in place and working effectively. It would also be wise to get cyber security insurance to cover you against any losses incurred from such crimes.

9. Supply Chain Disruption

Small businesses can sometimes be dependent on only one or a few critical suppliers. Small enterprises also have less purchasing power than large corporations, so they may find it more difficult to negotiate favorable terms with new vendors. Over-reliance on one supplier could be catastrophic if that supplier fails to deliver. The best way to mitigate this risk is to avoid over-reliance on one vendor wherever possible. Instead, build relationships with multiple suppliers so that you spread the risk of supply chain disruption to your business.

10. Loss of a Key Person

Small businesses are also often reliant on one or two key people. These crucial team members might be employees, or they could be business partners. One of these critical people leaving your company or becoming incapacitated could significantly impact the company’s profitability, and it may be some time before you find a replacement. It would be best not to allow a business to become too reliant on one individual. However, this is not always possible. If the loss of a crucial individual could lead to a business crisis, it would be wise to invest in key person insurance.

11. Regulatory Risks

Form-filling may not be a business owner’s favorite task. However, if a business fails to meet its legal obligations, it could lead to hefty fines and penalties. In some cases, failure to abide by statutory regulations can lead to criminal prosecution. There are many different federal, state, and taxation regulations that small businesses must follow, and the rules often change. The best way to avoid regulatory risk is to hire an accountant and a business lawyer and listen to these professionals’ advice.

12. Damage to Business Reputation

The reputation of a business is an asset that needs protection. In the age of social media, rumors can spread fast and can be extremely damaging to a business.  A company’s reputation is fragile; negative publicity or social media presence can have significant impacts.

13. Market Risks

As a business grows, its costs may increase, and it may become less agile, which can impact profitability and the ability to adapt to market changes.

Misjudging market demand or failing to differentiate from competitors can lead to a lack of sales and growth.

Conclusion

These risks highlight the importance of having a robust risk management strategy in place to navigate the complexities of business growth. The risks indicated above cannot be eliminated in business. However, small businesses can minimize their risk exposure, and having adequate business insurance will provide a safety net should any of the above events occur.

Janet Mbene, Senior Associate Consultant, Modesta Mahiga LLC.

Book a Discovery Call to work with Janet.