Mitigating Risks for Small Business Owners

Mitigating Risks for Small Business Owners

May 27, 2024

Creating a Risk Management Plan

Small business owners power the U.S. economy. According to the U.S. Small Business Administration (SBA), almost 50 percent of Americans either own or work for a small business.1

Further, the SBA states that small businesses account for the majority of the nation’s firms and contribute significantly to new jobs created in the U.S. each year.
In short: Small businesses are a key part of the U.S. economy.

That's the good news. The not-so-good news of small businesses is as sobering as the good news is exciting.
According to data from the Bureau of Labor Statistics2 about:

Creating a risk plan that touches on four major categories should improve the chances that a small business will survive. Let's examine the four major risk categories.

MARKET RISK

Market risk can cover just about any aspect of your business. But it makes sense to focus your market research on two key groups: your consumers and your competitors.

You need to understand your consumer base and your competitors well before you launch a small business— and you probably do. But have you gathered empirical data to support your business ideas?

Start by answering these basic questions:

First, is there a demand for your product or service? If there is a demand, how many people would be interested in your offering?

Are there competitive options that are already available to your customers?

And if so, what do people pay for these alternatives?

How is your offering different? By taking time to answer them, you will better understand your opportunities and limitations for gaining customers.

CREDIT RISK

There are many reasons why 50 percent of small businesses fail by their fifth year, but there are a few reasons that seem to recur more often than others. At the top of the list is a lack of funding.

But cash flow is not just tied to start-up capital, it is also very much tied to accounts receivable—when your customers pay you. And since many business transactions are conducted on credit, it's important for small businesses to understand their clients and their clients' ability to pay.

When you open a business where you don't ask for payment before (or when) you deliver your product, then your credit risk increases.

OPERATIONAL RISK

Investopedia defines operational risk as “the risk not inherent in financial, systematic or market-wide risk" [and] “includes risks resulting from breakdowns in internal procedures, people and systems."3 That's a big one.

Small business would do well to summarize operational risk as “human risk" and recognize that:

  • It changes from business to business and industry to industry; and
  • A business with less human interaction will by definition have lower operational risk.

REPUTATIONAL RISK

Reputational risk is the one that probably keeps most small business owners up the at night. It's also the one that can be very challenging to manage. Reputational problems often begin inside the organization. But third-party relationships also heighten reputational risk as more companies are being held accountable for the actions of their vendors or other business partners. In addition, perceptions will often vary from location to location, so an issue that threatens a location in Connecticut, for example, might not matter in Arizona.

Create a Risk Management Plan

Owning and operating a business—no matter its size—brings a number of risks that can dramatically alter your business and potentially cause you financial hardship.

But you can protect against those risks by creating a risk management plan in a few very simple steps:
• Identify the risk.
• Assess the likelihood of the risk.
• Attack the risk.
• Periodically monitor and review the risk.

SOURCES

1 “2020 Small Business Profile.” U.S. Small Business Administration, 2020. June 1. https://cdn.advocacy.sba.gov/wpcontent/uploads/2020/06/04144214/2020-Small-Business-Economic-ProfileStates-Territories.pdf.

2 “Entrepreneurship and the U.S. Economy.” U.S. Bureau of Labor Statistics, 2018. April 16. https://www.bls.gov/bdm/entrepreneurship/entrepreneurship.htm.

3 Segal, Troy. “Operational Risk.” Edited by Amy Drury. Investopedia, 2020. September 13. https://www.investopedia.com/terms/o/operational_risk.asp.