Small business is inherently risky. You’re flying without a safety net, but that doesn’t mean you have to take irrational risks.
As a small business owner, there’s an inherent desire to take leaps of faith. The problem is that, eventually, taking on the world all by yourself will cause you to misjudge the distance.
When you fall, it’s going to be catastrophic. Imagine losing not just your business, but your home, your personal retirement, and saddling your spouse and children with a black hole of debt.
Fortunately, it doesn’t have to be this way.
5 Ways to Reduce Small Business Risks
Here, I present to you five important ways with which you can minimize small business risks and improve performance.
1. Drive The Company From The Top
Form a “big picture” view of risk exposure that’s unique to your industry. Not all risks are the same.
For example, in the banking industry, a company needs to be mindful of credit, operational, and market risks related to lending. Both short and long-term lending needs to be managed properly.
One of the biggest risks a bank takes is in the long-term loan market. Banks essentially make money by borrowing short and lending long. This means that a bank will accept deposits from bank customers, place them in savings, money market, or time deposit accounts (CDs), and then lend that money out for things like mortgages.
2. Avoid Duration Mismatch
When there’s a duration mismatch (i.e. a customer wants to withdraw his money from a bank CD at the same time the bank has lent that money out to another customer), there’s always risk that the bank won’t have the funds to give to someone who is demanding a withdrawal. Yet, duration mismatch is how a bank makes money.
It’s a risk that many banks manage effectively by placing restrictions on deposits and withdrawals and by retaining significant capital reserves in the form of “net equity” (investment into the bank from the bank owners).
Similarly, in your small business, you must come up with the same kinds of rules and procedures that limit the inherent risks associated with your business activity while still offering value to the marketplace.
Often, this is done from the top down, since the CEO sets the internal policies for the company.
3. Quantify Risk Exposure
If you want to control and manage risk, you have to have some way to quantify it – you need both internal risk and supplier risk management.
Why? Because you can be “attacked” by risk from both inside and out.
Otherwise, you’re trying to hit a moving target in the dark. It’s true that quantifying risk in absolute terms is really difficult. Risk is the measure of downside that you’re exposed to in your industry. Isolating that requires some sophisticated mathematical modelling.
While no model is perfect, a good one can accurately predict risk in terms of per cent – in other words, a good model might tell you what your odds of failure are.
You may have a 40 per cent chance of failing at something or a 90 per cent chance. When you know what your odds of success or failure are, you can move forward with some type of action plan to protect your company.
4. Install a Risk Management Culture
In business, culture is everything. When you install training programmes, employee incentives, and standard operating procedures that make it impossible to operate the company without being risk averse, then you radically change the way the company is run.
You also increase your odds of being around in 10 years. This is something that’s especially important in the tech industry, but it could easily apply to almost any niche.
5. Insure Un-retainable Risks
Some risks are not retainable. In other words, if you were to try to protect yourself against a particular risk, and the event occurred, you would probably be out of business.
Usually, these are catastrophic risks. For example, floods could wipe out your operations in a heartbeat. Solution? Get flood cover.
Another example would be business interruption cover – you can’t stay in business if your source of income is choked off. Liability cover would be yet another example of insurance that’s probably a good buy. Again, this is about balancing the inherent risks of being in business.
Running a small business requires an in-depth analysis of its risks. Forewarned is forearmed. Follow these ways and minimize your small business risks.