Mitigating small business risks essentially entails making judgments founded on the best information. Because guaranteed security is never possible for an entrepreneur, effective management of risk is the overriding goal. Hence, a paramount process for any small company is adopting a system that delivers information to drive sound action that minimizes risk.
Since informed decisions are required at small basic enterprises as well as large organizations, even one-person operations should mold reasonably simple risk assessment systems. Some risks are intangible, such as degradation of reputation or brand. But many risks are quantitatively measurable. Risk management planning focuses on avoidance of tangible risks that imperil ongoing business function.
Types of Business Risk
Determining whether your financial house is built on sand or granite begins with considering the types of risks in which your business is immersed. Topping the list of risk variables to consider is your company’s current financial situation. Have a system for maintaining contemporaneous financial data that you compare to targeted projections. Lift a semblance of knowledge from beneath the seemingly chaotic array of numbers. Know your trends for sales and profit margins. Identify the causes of fluctuations to determine if any red flags of danger could potentially trigger a future white flag of surrender.
When embarking on a vision of expansion or new opportunity, always determine the expected risks relative to the rewards. Growth requires capital, which often means taking on debt. Borrowing costs in addition to rising expenditures for growth initiatives must be compared to the anticipated future benefits.
On the uncontrollable side of analysis are market conditions and industry trends. If a quantitative financial assessment reveals adverse results, the culprits could be these external risks. Although they are beyond your control, you can position your business for new conditions by getting ahead of trouble with revised cash flow projections.
Questions to Consider
The complexity of risk assessment planning is reduced for a small business by simply considering some basic questions. Begin by determining the direct as well as indirect risk imposed by a new project, new customer, new product, or new strategy. Next, consider the severity of possible adverse consequences. Know the magnitude of worst case results. Only you can decide the right amount of risk that your business should tackle.
After assessing potential consequences and the financial effect they would have on your business, develop countermeasures to your vulnerability. Assure that you have action plans ready for each risk if it becomes reality. The main element of a risk assessment plan is what to do when any threat confronting the business manifests into a problem.
Lastly, risk management hinges on knowing when a dragon of difficulty has begun to exhale fire. Your watchtower for risk oversight is accurate up-to-date financial data. There’s no substitute for reliable real-time financial statements and the ability to interpret them. This assures your vigilance in evaluating risks so that your business thrives rather than topples.
The Finance Writer 