All businesses, large or small, face dozens or even hundreds of different types of risks. Risk, by definition is the chance of harm or loss. Risks can take many forms, including business-specific risks, economic risks, market risks, geopolitical risks, and others. Below are a handful of different risks that every small business faces and strategies to help minimize or eliminate each risk.
Compliance risk is the risk that a small business is not meeting all the required laws and regulations. By its nature, this law can change frequently and most business owners are not interested in focusing on the latest updates to compliance requirements. Fortunately, there are lawyers who specialize in this type of work. Depending on the size of the business, a simple review will likely be inexpensive. Regardless of the cost, it is worth it because failure to comply can lead to sizeable monetary fines that may shut down the entire business.
Some Strategic Risks
Sometimes the best thought-out business plans can become outdated or useless quickly. This is the main theme behind strategic risk. This type of risk takes many forms, including:
*Innovation risk: the risk that competitors will out innovate you*Competitive risk: the risk that your business will lose out to competitors*Intellectual property risk: risk that intellectual property is leaked, copied, or not protected well*Technology risk: the risk that company technology assets become outdated, leading to a negative competitive edge*Reputation risk: the risk that damage to the business image can destroy it
Awareness of these risks is often enough to take action to minimize them. For example, a small business can implement a plan to review each of these risks every two weeks against relevant key performance indicators and then take necessary actions to improve.
Interest Rate Risk and Currency Risk
Interest rate risk is the risk that overall economic interest rates will change, causing inflation or deflation. If rates go up, purchasing power goes down and fewer goods are purchased. The exact opposite is true with deflation. Mitigating inflation may mean using excess business capital to purchase inflation-linked investments or even lowering product prices. While this may affect revenue and net income over the short-term, it may sustain cash-flow during crucial periods. Deflationary risk may be met with potential price increases implemented carefully.
Currency risk is the risk that exchange rates move for or against your business’s favour, which is linked to interest rate risk. When currency rates move, the amount of internationally-based purchases tends to move, as well. When the exchange rate goes down, more international purchases can be expected. So operational planning in this situation is important.
Liquidity describes how easily an asset can be bought or sold, quickly, without majorly affecting its price. This is an important risk to consider for businesses that have a large amount of equipment. If this equipment needs to be sold, a business owner needs to understand how liquid it is, so that unexpected losses don’t have to be taken. The same holds true for inventory that needs to be sold off.