Risk management: 5 common business risks and how to protect against them
According to the Bureau of Labor Statistics, 18% of small businesses fail within their first year, while 50% fail after five years and approximately 65% by their tenth year in business.
While no business owner expects their enterprise to fail, most recognize that starting a business comes with financial risks, and they are ready to accept those risks. And the risks don’t end once the business is launched. With every additional investment in the business, every expansion, every new product or service, business owners continue to take calculated risks.
The key is not to eliminate risk from a business but to understand the risks your business is exposed to, make informed decisions about how to proceed, and reduce your exposure to unnecessary risk.
Here are five key risk areas that every business owner needs to be aware of along with tips on how to minimize risk exposure in each area.
A business’s liquidity and cash flow are top areas of financial vulnerability. There is very little wiggle room for a business that is unable to meet its financial obligations, especially when those include payroll or loan payments, which means that even a minor misstep in this area can have catastrophic consequences.
While extending favorable credit terms to customers can help you stay competitive, it is also a common source of cash-flow issues. Providing too much credit to customers or being lax about enforcing the agreed-upon terms can result in payment delinquency or, in the worst cases, default.
A 2022 survey by PYMNTS found that 93% of businesses experience late payments from customers, and research by Atradius found that 47% of all B2B invoices (invoices issued by businesses that sell products and services to other businesses) issued in the U.S. were paid late. Even more concerning, 6% of the total value of B2B invoices were written off completely, a figure that represents hundreds of millions in revenue lost every year.
HOW TO MINIMIZE THIS RISK: To minimize the risk of cash shortages, borrowing money may not be the ideal option, since nearly three-quarters (74%) of firms already have debt outstanding. But there are other options that don’t increase the business’s debt load:
- Take accounts receivable seriously. Don’t extend payment deadlines unless you have to, and stay on top of your accounts receivable and collections processes. (Read this blog post for more tips on improving billing and collections processes.)
- Look into invoice factoring. Factoring your customer invoices selectively is a good way to improve liquidity and accelerate cash flow without incurring more debt. Instead of taking out a loan or line of credit, factoring lets your business access earned revenue as soon as a customer invoice is issued.
While a healthy cash flow is essential, that cash needs to flow into equally healthy business operations in order to support day-to-day functions and business growth. If those operational processes, procedures, and controls aren’t designed wisely, documented clearly, and followed regularly, they can expose your company to considerable risk.
Here are a few examples:
Employee errors and inefficiencies. When employees don’t have the support or oversight they need to do their jobs safely, correctly, and efficiently, it can cost the company money and prevent the company from scaling. If those employees are responsible for service or product quality or the customer experience, it can even result in lost customers.
Poor supplier management. When suppliers are not properly vetted and managed, it impacts the company’s ability to deliver products and services on time, on budget, and to the standard expected by its customers.
Weak or outdated systems. When technology is outdated or poorly designed or integrated, it has a direct impact on the company’s core capabilities, levels of efficiency, and visibility into operations.
Lack of disaster preparedness. In addition to standard procedures to guide day-to-day business operations, companies need a plan for rare and unexpected events, such as natural disasters, power outages, and cyber events.
HOW TO MINIMIZE THIS RISK: The best way to minimize operational risk is to strengthen tools and processes related to employee and vendor performance.
- Create an employee handbook so that all employees understand what’s expected of them on the job. The National Federation of Independent Business provides a free, customizable handbook template.
- Request a free on-site health and safety consultation from Occupational Safety and Health Administration OSHA.
- Implement a workplace safety program.
- Task key employees with documenting standard operating procedures related to their jobs.
- Create a business continuity plan. (The Department of Homeland Security has a helpful template).
- Develop a vendor evaluation process and a simple system for tracking vendor performance.
Failing to meet legal and regulatory requirements can expose your business to the risk of penalties, monetary fines and reputation damage. Companies in the U.S. must follow a range of privacy, employment, environmental regulations set by the Occupational Safety and Health Administration (OSHA), the Department of Labor, the Environmental Protection Agency (EPA), and the California Consumer Privacy Act (CCPA). International regulations such as General Data Protection Regulation (GDPR) and Canadian Anti Spam Legislation (CASL) may also apply to U.S.-based businesses. And finally, dozens of industry-specific regulations apply to companies in specific industries.
HOW TO MINIMIZE THIS RISK:
- Familiarize yourself with the laws that pertain to your operations, location, and industry. The U.S. Small Business Administration provides a list of helpful links.
- Consider becoming ISO or SOC certified as a way to proactively align your business with multiple compliance requirements and operational best practices.
Reputational risks are often overlooked by business owners because the effects of a damaged reputation can be harder to quantify than the costs of a financial, legal, or cyber issue. But the loss of a company’s reputation can have a devastating impact on the ability to find and keep customers, attract investors, and secure partnerships.
Social media has amplified the risks and the impact of reputational damage because a single negative customer experience can now become a prominent and permanent part of a company’s online presence. B2B customers trust reviews and other forms of user-generated feedback more than anything else they read about a product or service, and 90% of B2B buyers are more likely to make a decision after reading a trusted review.
HOW TO MINIMIZE THIS RISK: Here are three ways to protect your company against reputational damage.
- Implement a quality assurance program for your products and services that includes spot checks, customer feeddback forms and surveys.
- Create a crisis management plan that outlines the steps your company can take to address negative feedback or a public relations issue.
- Set up social media monitoring and Google alerts so that you are aware of what’s being said about your company online and can respond courteously and promptly.
Nearly half of U.S. companies (47%) reported a cyber attack in 2022, and the median cost of an attack was $19,000. While cybersecurity used to be an issue that predominantly affected large, high-profile enterprises, it has become one of the biggest threats to small and mid-sized businesses as hackers pivot to targets that are less protected and easier to penetrate. According to data from Cisco, 43% of all cyberattacks now target small businesses, which suffered nearly $7 billion in losses in 2021.
Unfortunately, awareness of this business risk is low, with 61% of small-business owners reporting that they are not concerned about cyber attacks.
HOW TO MINIMIZE THIS RISK: There are several relatively low-effort, cost-effective ways for small businesses to protect themselves from cybersecurity risk.
- Get insurance. In 2022, 65% of U.S. companies purchased cyber insurance as a standalone or part of a broader policy. This type of insurance can ensure your company has the resources it needs to restore operations in case of an incident.
- Strengthen passwords. Require your employees to use a different password for every login account and turn on multifactor or two-party authentication. Consider providing password management software such as Bitwarden or 1Password to employees as well.
- Update software. Only use reputable software to operate your business and keep it patched and updated.
- Back up data regularly. Schedule backups regularly (once a week at a minimum) to guard against ransomware attacks.
Find additional resources from the Cybersecurity & Infrastructure Security Agency (CISA).