All businesses are prone to risks. However, small businesses are at a higher disadvantage since they don’t have similar access to resources as larger organizations. Thus, they are more vulnerable and face amplified risk consequences, which makes risk management important.
Risk management encompasses identifying potential risks your business is prone to face, evaluating them, and formulating a plan to mitigate them. The risk management process is lengthy and should end with a plan that safeguards your small business from these potential risks.
What Are Some Common Risks Small Businesses Face?
Before creating a risk management plan, it is essential to understand some common risks that all small businesses face. They include the following.
- Business Interruption
Small businesses are prone to business disruption from several factors like natural disasters. A natural disaster can cause damage to your business premises or inventory and cause a significant disruption in your daily business activities.
Therefore, small businesses need to adopt a continuity plan to help the business avert a crisis and resume normal functioning on the occurrence of these crises. The plan should also ensure fast response to situations to minimize business interruptions.
- Financial Risk
The most common risk small businesses face is financial risk. At the onset of a small business, cash flow is a primary concern as most business owners invest all their life savings in the business.
Besides, economic conditions can amplify this risk. Thus, the business needs a risk management plan that prepares the organization for any rainy day.
- Reputation Risk
Though often ignored, reputation is an important asset, especially for small businesses looking to penetrate the market. The business needs its potential customers to perceive it in a good light. Therefore, negative reviews about your business can significantly affect your sales and, consequently, revenue.
To mitigate reputation risk, you should clearly define your employee’s code of conduct. Define how they should interrelate with customers to portray a good image.
Two Main Ways Risk Management Can Help Your Small Business
There are numerous ways your small business can benefit from effective risk management. The two main advantages are.
- It Saves You Money And Protects Your Business Resources
An effective risk management plan will help save thousands you would have spent dealing with the risk after it happens. Besides, risk management looks at different risks and comes up with a comprehensive solution for all.
A risk management plan makes it possible for your business to prioritize risks. Each business has its most valuable resources that will negatively affect your business performance when impacted during the occurrence of a risk. Thus, having a course of action in place will save money and physical resources in your business.
- Boosts Business Growth
Risk management includes anticipating what could go wrong with the business, then developing plans to prevent losses. Thus, the business is forced to study its process, risk, and shortcomings helping with business growth.
Once you become aware of these risks, you become more careful with decision-making to avert them. Thus, your business will only take calculated risks, which can help with growth.
Step-By-Step Guide On Drafting Risk Management Plan
Now that you understand the risks your business faces and how a risk management plan can help, it is time to develop it. Here is a step-by-step guide to follow.
- Identify The Risks
Each business is unique and faces its own set of risks, some more significant than others. Begin by identifying risks relating to your business by brainstorming together with your business partner or employees.
Once you identify the risks, find a Risk Register and document them in the register starting with the highest risk. Then, consult a risk management expert for help preparing an effective plan.
- Assess Each Risk
From the list of risks, the next step is to analyze each individually. There are two main categories that you can use to assess the risks. What is the probability of the risk occurring, and how greatly will it affect the business?
The most common method to assess risk is through a matrix. The matrix results will shed light on the risk and show how each risk will likely affect the business.
- Managing The Risks
You know which risks are likely to occur and how each risk will affect your business. It is time to craft an affordable risk response strategy that will deal with each risk once it occurs.
You can either choose to avoid the risk if possible. If not, you can put in measures to mitigate the risk once it occurs. Alternatively, you can transfer the risk to a third party or accept it and deal with it if it occurs.
- Monitor Your Plan And Review
After developing a plan, you should constantly monitor these risks. Monitoring ensures you catch the risk in real-time and control it early before it affects your business.
Let your insurance company know about your plan to help customize your business coverage accordingly. Occasionally review your plan to ensure it is effective.
Create A Risk Management Plan Today
Since risks are amplified for small businesses, it is essential to develop a risk management plan for your business. It will help save money, resources and boost your business growth. Follow the steps outlined above to create your plan.