Risk Management and your Small Business

Enterprise involves taking risks. The time and money you spend developing a new product or service could prove to be a wise investment as the finished item makes your company a lot of money, or it could be an expensive flop. Every decision you make carries a risk, and only time will tell whether you made the correct choice.

It’s not helpful to spend all your time worrying about problems – worrying doesn’t help, and sometimes a quick decision now can be better than a good decision later. But at the same time, you cannot afford to be too bullish – ignoring risks completely is very dangerous.

Instead, you need to take a balanced approach between these two extremes. You need to think carefully about every potential problem your enterprise faces and determine whether you can take any action to mitigate it. This calm appraisal and considered strategy is known as risk management.

Common Threats Faced By Small Businesses

Here are some common issues. How many of them apply to your own company?

• new competition
• increased cost of raw materials
• changes to the economic landscape: taxes and inflation
• catastrophic events (so-called acts of God): fire, flood
• theft (shoplifting, burglary, embezzlement by employees)

In addition to these things, you probably have unique and more specific threats that you can identify.

Assessment

You need to look systematically at all the risks. These would typically be recorded in a risk register, which could be included as part of your business plan. This is a document that lists the threats that have been identified, categorising them.

You should prioritise your register’s action plan to tackle first the most significant items: those that would be most damaging if they occurred and those with the highest probability of occurring. A simple way to do this is to record against each one its probability (say as a percentage or on a fixed scale such as 1–5) and its estimated impact (either financially in pounds or on another fixes scale). Multiplying these two numbers together gives a simple ranking.

Management

Once you have identified a problem, there are three broad approaches you can take to managing it:

• you can reduce it by taking some defensive action, possibly reducing its impact to zero (this includes deciding to avoid an action that you have determined to be too risky)
• you can transfer it to another party, for example by outsourcing the work or by obtaining insurance
• you can retain it, accepting it and budgeting for it

Of course, each of these categories encompasses a range of techniques. The specific action you need to take will depend on the risk you are dealing with, but a useful first step is to decide whether you intend to reduce, transfer or retain it.

The Management Process

Management isn’t a one-off exercise, it is a continual process. You should keep your register up to date by adding new risks to it as they are identified, including the steps you intend to take to mitigate them.

If you have never before done a risk assessment, you should consider this a high priority and add one to your business plan. Time spent thinking about the threats you face, and working out how to minimise them, will surely pay for itself. When one of these potential problems turns into reality, you will be glad you took steps back in the good times. It might just save your business!