According to Small Business Administration (SBA) statistics approximately 40% of small businesses fail to survive more than three years. It’s fair to say that many of the business that failed did not adequately manage risk. Starting and managing a business, no matter the size or industry, involves significant risk. Without risk there would be no growth or innovation. It is about taking the right risks, eliminating the unnecessary risks and controlling the impact of a failure. Taking a systematic and organized approach to risk management has critical advantages. The following tips will help you identify, analyze and plan to eliminate or manage risks. If you have legal questions, call your LegalShield provider law firm.
- Identify – The process of identifying your potential vulnerabilities may seem daunting. First, take note of different types of risks. Internal risks, such as loss of a critical employee, equipment failure or insufficient cash flow, may be prevented or at least managed with appropriate planning. External risks like market changes, natural disasters or political changes, while impossible to prevent, should nonetheless be considered. Take a brainstorming approach to considering potential risks to your business. You should also consult with employees and trusted advisors and research common risks in your industry.
- Analyze – Once you have identified the various risks to your business you should begin to consider each risk’s likelihood relative to its potential cost to your business. For example, in a highly competitive industry a business operating with tight margins would be have high probability and high cost risks. These high probability and high-cost risks require the most immediate and thorough planning. Once you have sorted your list by likelihood and cost you can begin the process of preventing and managing risk.
- Prevent and Mitigate – You cannot eliminate every risk. Mitigating risk involves finding practical and affordable ways to eliminate as much risk as possible and developing a plan to overcome the risks you cannot eliminate. Your focus should be on the risks that are the greatest threat to your business. Some risks like product liability, natural disasters or theft can be mitigated by purchasing the appropriate insurance policies. Other risks, such as market or political changes, require careful planning to properly manage. You may find it necessary to diversify your business plan or add a new product line to meet a changing marketplace. Your LegalShield provider law firm can help by advising you on potential liabilities and reviewing the terms and conditions of your insurance policies.
- Document – Documenting your risk assessment and responses has several key benefits. Documentation will give you a starting point to reassess risks and potential responses on a regular basis. You will also have a check list of items to continually manage risk and update your strategic plan. Risk management is not something you do one time and forget about. Risks change and new risks will be exposed over time. Make sure you update the list often to protect your business.
- Resources – There are many articles and sample risk management plans available online. The SBA guide to risk management for small businesses offers key insights and includes many common examples of small business risk to help you develop your list. SCORE has a number of excellent blog posts on eliminating and minimizing risk. Learn from the mistakes and challenges other businesses have faced.