Business Risk Management: Tips for Business Owners

As businesses begin to rebuild after the Coronavirus pandemic and ensuing recession, the importance of proper business risk management has become more and more apparent.

These risks don’t just include worldwide pandemics, but also economic downturns, natural disasters, security breaches, and so many more.

And, these risks affect small business owners and startup entrepreneurs disproportionately. In fact, 90 percent of small businesses will fail due to poor planning and high-risk ventures.

Evaluating potential risks and avoiding them or preparing to work through them will help small business owners minimize the impact of the risks and be better equipped to deal with their impact. 

Ultimately, creating a sound risk management strategy will alleviate the stress of the unknown and help entrepreneurs build their business successfully.

In this post, we’ll discuss how to protect your organization from the next unexpected crisis and why it is important to plan for bumps in the road so you can protect your business.

1. Identify risks early on

When you are starting your business, there are certain steps you need to take to ensure you are establishing your business on a solid foundation, both legally and financially- including risk management.

From the get-go, you need to create a list of potential risks, the probability of each one, and formulate plans to act upon them should the time come, as opposed to scrambling during a time of emergency.

This will not only help relieve the concerns of investors considering an investment in your company, but it will also ensure your business is set up to support itself when needed.

This will protect you long-term and provide you with a document to lean on so you’re always ready to support your business’s needs should the time come.

If your business is already well-established, you should revisit your business plan and initial emergency plan (if any existed) and adapt it to your current business needs.

While no one can truly plan for the scope of what the world has experienced over these last few months, having firewalls in place can only be beneficial should something come up in the future.

2. Minimize risks

After you’ve identified what could threaten your business, it is time to take action to reduce its potential impact. Create specific strategies for each element of risk so you can avoid them as much as possible.

For example, if your business is in an area susceptible to hurricanes, you know you’ll likely experience some kind of property damage.

You can create physical protections around your business, like thick storm windows, or you can set aside money for emergency damage repairs. On the other hand, insurance that protects your business from natural disasters can be a wise financial investment. 

Or, perhaps your product is in a niche, ever-evolving market. Could your product be obsolete in a few years?

A beneficial way to manage that risk could be to invest in product diversification and innovation to stay competitive or spend time performing regular focus groups to keep a pulse on changing consumer sentiments.

Whichever plan you make to reduce the risks inherent in your business’s location or industry, they will help you protect your business and allow it to continue to grow despite challenges.

3. Build an emergency budget

To cover the costs of emergencies, it is important that you’re always budgeting money to cover unexpected expenses. 

Re-evaluate your current business budget and look for areas where you can pull resources away so you can continuously contribute to your emergency fund. 

Consider whether or not you’re spending more than necessary on any particular section of your business, such as travel, office expenses, or technology.

After a full audit of your external cash flow, you might be surprised by how much you can cut back on certain areas.

How you add to this budget depends on your preference, your business’s financial situation, and the seasonality of your organization.

Perhaps a 5 percent contribution every month or quarter would suffice, or perhaps you’d rather add in a certain, set dollar amount every pay period.

Whichever way you choose to add, be sure you are continuously adding to this fund, even when you’re at top revenue. An economic hit can happen at any time, so you need to be ready always.

4. Keep clear records

Record keeping is an underrated aspect of business risk management. Even if you face a crisis, you’ll still be expected to file your taxes and pay your bills on time. 

If you maintain a consistent filing system that you can reference during a crisis, you’ll be able to stay organized, find important documents as needed, and work with an already-established understanding of your organization and its finances. 

This will allow you to make more informed choices quickly and pull relevant information for decision making.

Experts recommend you utilize digital storage tools to back up your information so your documents will be protected in case of a natural disaster.

If you need assistance setting this system up, or in maintaining clear records, reach out to an IT consultant or hire a bookkeeper who will be able to offer assistance.

5. Create a disaster plan

If risk management fails and a disaster occurs, you’ll want a business disaster plan to act upon immediately. 

Spell out emergency responsibilities so there is a clear delineation of authority and decision-making.

Who will be making critical financial decisions? Who will be making the call on closing the business temporarily?

Who will be in charge of personnel communication? Ask yourself these questions so you can address them in your plan.

Then, create a strategy that requires the least expense possible while still allowing your business to function effectively.

This may include personnel cuts, marketing spend decreases, or slowed product innovation. 

Although it is clearly not the ideal scenario, having an action plan to rely on when you are facing an emergency can be the difference between your business succeeding and succumbing to the risks.

6. Communicate the plan

Then, once you’ve created a plan, be sure anyone involved is aware of their role so they understand their responsibilities ahead of time. The last thing you want is for chaos and disorganization to take control of your business during a time of crisis.

Clarify how you’ll stay in communication with each other– will it be in-person or over video conferencing platforms? Will your team issue a statement or do you want to maintain a policy of silence? Who will let everyone know that you’re entering the “emergency plan” phase?

Share the document with the entire team, including those not involved, so there is no confusion about leadership across the organization.

Even staff members who will not have a role in emergency planning will be called upon to change their reporting structure and regular workflow.

Therefore, it is important that everyone’s on the same page so you can all work together in the same direction if the time comes.

Conclusion

There is no denying that emergencies can’t always be planned for and are never welcome. A poor response to a crisis situation can spell the difference between success and failure for a small business.

But as a business owner, there are steps you can take to minimize the risk that your organization is exposed to in order to protect it to the best of your ability.

Use the tips in this article to shape your response and take control of your business during times of need.