The survival of many small businesses is often threatened by a number of internal and external factors. These can range from a loss of customers due to poor service delivery or something beyond the entrepreneur’s control, such as a volatile economy.
While some may argue that at some point, every business will suffer losses in one form or another, there are some measures that can be taken to mitigate loss. Many businesses tend to focus on the conventional business processes of marketing, accounting or production whilst neglecting risk management as a key part of building a successful enterprise.
I remember some years ago I was looking for a publisher to help launch a children’s book. So through an acquaintance I met this guy who claimed he could do the job. Based on the level of trust I had for my acquaintance I chose to keep it as a gentlemen’s agreement and skipped the paperwork. Fast forward to a few weeks later, I still had no published book. I had lost a significant amount of money and there was no paper trail so even the police couldn’t do much.
Many small business owners go through even worse scenarios: an employee leaves with half your customer base, your company gets shut down due to breaching health violations or worse. This article will discuss various risk management tools and mechanisms that small business owners can implement to safeguard their businesses.
Risks
These can be loosely defined as the probability of loss or anything that has the potential to keep you from achieving your business objectives. This loss can be financial, material or unmeasurable such as a bad reputation. It is therefore essential for the small business owner to put measures in place to protect their business or minimize these losses if they should occur.
Types of risk
1. Strategic Risk:
Strategic risk is the probability of loss that results due to your organisation’s failure to match its long term objectives with the market. This might be a failure to innovate or providing a service whose value your customers do not find valuable. A typical example is the BlackBerry phone. Despite being a dominant force at its peak, the company lost that position due to its failure to adapt to changing market needs.
2. Compliance Risk:
Compliance risk refers to all the threats that result from a business’s failure to follow the rules and regulations that govern its operations. This varies with the nature of your business but a common example is the failure to pay taxes. This could result in heavy penalties for the Business or even jail time for the owner.
3. Operational risk:
Operational risk is any loss that could result due to a failure in your company’s daily operations. This might be a technical fault, a power outage, no internet connection or an absent employee. All these could affect production and in turn cost your business valuable funds.
4. Financial risk:
Financial risk refers to anything that could disturb or stop your company’s cash inflows or cause your business to lose money. This could be a customer paying you later than agreed. This might temporarily cripple your business when you fail to purchase raw materials and produce.
5. Reputational risk:
Reputational risk is anything that could tarnish your organisation’s image or cause it to be viewed in a negative light by customers and the public. A bad reputation could mean a loss of customers and consequently, a loss of income.
Now that we have discussed the various risks to which your business is exposed, we will now discuss some risk management essentials to protect your business and ensure it’s longevity.
Risk Management
Risk management is therefore the process of forecasting all your business risks and then evaluating each of them so as to come up with ways to avoid them or reduce their impact.
Risk Management Essentials
Document all your business activities
• Record all transactions
• Record minutes for all your meetings
• Ensure that all your employees have signed contracts
• Have written agreements that are signed by all partners and contractors.
Meet all legal requirements and mandates
• Make sure the work environment is safe and meets health regulations.
• Put in place measures to manage family and leave matters
• Hire fairly and avoid discrimination
• Follow appropriate disciplinary measures
• Implement a grievance reporting mechanism
• Investigate all complaints and take appropriate action
• Ensure all employees are classified appropriately i.e. independent contractors, exempt/non-exempt.
• Include statements in job advertisements and your employee handbook.
Implement best practices in human resource management
• Come up with a proper hiring mechanism
• Check former employee
• Manage employee salaries and compensation
• Keep up to date standardized employee records.
• provide opportunities for growth within your organisation
• Evaluate employee performance
• Implement proper release and severance agreements.
Nurture strong workplace relationships
• In partnership with your employees create a company handbook to govern relations in the workplace.
• Encourage initiative by delegating tasks
• Invest in character development exercises
• Enhance communication channels to encourage two way communication
• Implement health and stress management programs for your team
• Implement performance agreements to outline expectations and rewards.
• Put in place a system to monitor and manage employees when you can not be present.
Insurance
• Get worker compensation
• General liability insurance
• Insure all assets such as motor vehicles. You can read a detailed guide about car insurance here.
Rewards and Celebration
• Provide health and financial benefits to your employees
• Celebrate important milestones. These can be organisation milestones or individual milestones such as birthdays, marriage or retirement.
Create a “learning” organisation
• Clarify your strategic direction and get your team to buy in.
• Implement an internal communication system that ensures transparency and accountability.
• Invest in customer oriented research and development
• Use a suggestion mechanism or surveys to get feedback and useful decision making information.
Protect your intellectual property and strategies
• Protect trade secrets through non-disclosure agreements
• Get patents, copyrights and trademarks
• Include a non-compete clause in your employees’ contracts
• Get appropriate licenses and agreements in place
These mechanisms will help your business stay prepared for any eventualities. It must be noted that these are a starting point to protecting your business and therefore must be reviewed regularly to ensure that your organisation stays protected.
Conclusion
Businesses are constantly exposed to various kinds of risk. Some are internal and the business owners can put measures in place to mitigate their effects.
There are however external risks which the business owner might have little or no control over. There are still ways and means to protect the business from some of these or to counter any adverse effects of the risks.
As a business owner or entrepreneur, it is therefore important to anticipate the various risks and then take action to mitigate these risks.
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