Owning a business is inherently risky, but if you can identify the risks that come along with owning a small business before they arise, then you’ll be able to manage them better. Risk management is an important part of any organization, especially when there is a dip in the economy. If you don’t have the proper strategies or tools in place to deal with business risks, it can mean the end of your venture.

Here’s how small businesses can identify, deal with, and mitigate the various types of businesses risks that could negatively impact them.

What is a Risk in Business?

Business risk can be defined as anything that impacts the company’s profits negatively. Risks like economic downturns, market changes, customer perception, security breaches, and more, can all have a negative impact on the small business’ bottom line.

Types of Business Risks

Identifying risks and determining what is at stake is essential to understanding how to alleviate those risks. There are multiple types of risks that can affect any organization, so it’s important to understand what each one entails and how it can affect you should you need to complete a risk assessment.

Market risks

Market risks in business include recessions, political turmoil, and changes in interest rates. These risks tend to influence the entire market at the same time. Market risks occur because of downturns in the economy which are caused by changes in the prices of stocks, currencies, or commodities.

How to measure market risks

To measure market risks, analysts use the value-at-risk (VaR) method. VaR is a statistical risk management technique that quantifies the potential loss and the probability of a loss occurring. While this form of measurement is widely used among economic analysts, there are some shortcomings when it comes to predicting long-term effects.

There are multiple ways to use this measurement, including:

Historical Method: This method uses historical data to compare to present events. It reorganizes historical returns into order from worst to best and then assumes that history will repeat itself.

Variance-Covariance Method: The Variance-Covariance method plots a normal distribution curve by estimating the expected average of a return and a standard deviation. This curve is then compared to actual returns and then predictions are made about any future market risks.

Monte Carlo Simulation: This method uses a logarithmic equation to model movements of asset prices. The building blocks of this simulation are determining the drift, standard deviation, variance, and average price movements. The Monte Carlo Simulation equation is as follows:

Periodic Daily Return = ln (Day’s Price / Previous Day’s Price)

Strategic risks

Strategic risks are not as precarious as market risks. These risks include creating a new strategy for running or business, this could be applied to marketing or sales departments. Strategic risks are inherent in any company’s objectives and, if done efficiently, can actually lead to profit.

Small business owners can create an infrastructure so that they can come out on top after implementing a strategy that could be considered risky. Whether they leverage it against a profitable segment of their business or a comprehensive process to review potential ventures based on future return on investment.

Compliance risks

When it comes to compliance risks, small businesses need to stay on top of laws and regulations to ensure they’re not violating any of them. Even if small business owners are aware of all the compliance laws associated with their company, they are still not out of the woods.

Small businesses must also be aware of any future compliance laws that may come into effect. They need to make the appropriate changes to ensure they will be compliant when the new regulations or laws come into place. If small businesses do not do this, they could face fines or possible closures.

Learn how to deal with non-compliance here.

Financial risks

Financial risks come with running a small business, not only with what small businesses owe and the risks of defaulting on those loans but also businesses that offer consumer credit.

Consumer credit risk is measured by the five C’s:

• Credit history
• Capacity to repay
• Capital
• Conditions of the loan
• Collateral 

If small businesses offer credit to their customers and they fail to make payments, this can impact the company’s bottom line. To reduce this risk, companies have specific teams who are responsible for assessing the credit risks of their current and future customers.

The other side of the financial risk factors is small business debt. Building a business from scratch is a costly venture, and most small business owners have to get help from investors or banks to grow their capital. If demand for the products or services is low and cash flow stalls, this is when credit risk, or default risk, comes into view.

If small business owners are unable to make loan payments, interest payments will increase and they could risk going to collections or even going bankrupt. It is important to have a plan in place to ensure they will be able to make payments even when there is a slight lag in cash flow.

Reputation risks

Customer perception is a big part of how profitable a business is. Reputation risk is the risk of bad publicity harming a business’ public image and impacting its profits. A negative reputation can deter suppliers or suppliers’ collaboration or securing financing, and attracting new customers.

Events that could damage a small business’ reputation include:

• Negative employee experiences or workplace accidents
• Product recalls
• Negative social media posts
• Security issues

Physical risks

Physical risks to a small business are more common than you think and pose a threat to physical assets like buildings, equipment, and employees. These risks include fire, flooding, vandalism, natural disasters, burglary, equipment failure, and workplace accidents. 

These can pose a threat through time lost and repair costs, lawsuits from employees, and reputational harm. It is important for small business owners to have protocols in place to check the safety and security of their place of business, as well as train their employees to ensure they are aware of the proper safety procedures.

Technology and security risks

Technology and security risks are relatively new business risks to be concerned about. This risk comes with the rise of doing business in a digital environment. Cyber-attacks or data breaches can have an impact on a company’s bottom line. It dissolves the trust between small businesses and customers and can cause serious reputation damage. 

To safeguard against security risks, install antivirus software on company computers, mandate cyber-security training for all employees, and ensure all your website security is up to date, including a secure payment system for your e-store.

Managing Business Risk Factors

To help mitigate these risks, it is important to plan ahead, implement protocols to help prevent risks, consult a third party and use the right tools to see the small business to the other side. Consider following these tips below when managing risk factors to your business.

1. Plan ahead

It is impossible to predict all the risks that come with running a small business. Planning ahead for risks can help reduce their impact on the financials of the business. A contingency plan is a great way to prepare for any risks that may impact the business. Having a plan in place before a significant event will help keep employees calm, minimize loss, and will improve loyalty and trustworthiness.

2. Avoid the risk factor

When possible, it is always best to avoid risk factors, especially physical and cyberattacks. By providing proper training for staff and making sound financial decisions, small business owners can avoid risks associated with running a company. If there is consumer credit involved, be sure to not allow customers with poor credit to sign up for a store credit card or make payment installments.

3. Prevent risks with protocol

Effective training and protocols can help reduce the impact of these risks. If there is a public health risk, it is important to follow healthcare recommendations to ensure the safety of staff. Establishing protocols will help teams understand what is expected of them and how to avoid risks themselves.

4. Contain the risk

If a risk does arise, it is important to contain the risk as soon as possible. If an employee gets hurt it is imperative that the employee seeks medical attention and WSIB or other government safety boards are notified. And if protocols or training aren’t in place, this is the time to ensure that all employees are up to speed on safety procedures and that all regulations are enforced.

5. Consult an expert

To contain financial and reputation risks, a popular route to take is to consult a third party. This will allow for an outside opinion and can lead to new problem-solving solutions. Be sure to add a scenario to the contingency plan where a third-party expert is needed. Consulting an expert is usually necessary when there are reputational or financial risks to manage.

6. Use the right tools to improve your risk management

Having the right tools is imperative to handling all the different types of risks associated with running a small business. Using software to track your finances is the first step to ensure you stay on top of all the risks that come with leading a team. Time tracking is also an important part of mitigating any physical or reputation risks. 

Mitigate financial risks and keep your business prepared with accounting software like QuickBooks Online.