Top 5 risks faced by small businesses

When running a business, you’re facing risks on a daily basis. Some risks are good, some are bad. Some risks you can prepare for, some you can’t. It’s all about planning and managing those risks to make sure the business can survive if things don’t go to plan.

Understanding what risks you’re up against is the first step to developing recovery plans.

1. Financial risk

Financial risk is what worries small business owners most. Which isn’t surprising, given that many of them invest personal savings and assets in their company.  

As the name suggests, financial risk is all about keeping money flowing in and out of the business. This covers a very broad spectrum, from not being able to find enough customers, to problems with late payments by clients, to changes in interest rates or tariffs. It can also include covering unexpected costs, such as replacing broken equipment, or finding cash to defend the business against a lawsuit.

Keeping a close eye on cash flow, credit checking potential clients, and having backup funds to protect the business from unforeseen expenses can all help reduce financial risk. 

2. Strategic risk

As a business expands, strategic risk often comes into play. A company that’s outgrown its current premises, wants to offer its services in a new territory, or needs to take on new employees, must consider the strategic risk presented to the business. 

Without being willing to embrace the risks that come with taking things to the next level, profits may remain stagnant. But if an SMB owner does decide to take the leap and invest in the next stage of growth only for things to not go as planned, they could find themselves in trouble.

Strategic risk also involves developing long-term plans for the business and factoring in what could disrupt them. What if a competitor moved into the area? Could sales of the best selling product dwindle leaving a huge income gap? What if demand for a service increased significantly? Weighing up the pros and cons after conducting a detailed analysis of the situation goes a long way to guard against these potential pitfalls.

3. Compliance risk

Compliance risk isn’t just for big companies. Nearly all businesses, even sole traders, will need to adhere to rules and regulations. Failure to do so can result in huge fines, lawsuits, and reputational damage. 

Laws and regulations vary from state to state, so what might be compliant in one location may not be in another. Additionally, if regulations change, there may be costs associated with ensuring the business remains compliant. 

Keeping up to date with national and state legislation that may impact a business, as well as those specific to industries the company operates in is crucial to effectively manage this type of risk.

4. Operational risk 

All matters relating to the day-to-day running of a business involve operational risk. From something as simple as a sick employee who was meant to be delivering a sales presentation to a prospect, to a delivery truck being out of action, to a cyber-attack, anything that causes an interruption to business as usual can be classed as operational risk.

The problem with operational risk is that more often than not, these issues appear without any prior warning, making them difficult to plan for.

Although it’s impossible to imagine every scenario in which a business is unable to operate, having a plan in place can reduce the impact of incidents that are likely to cause major disruption is a good place to start.

5. Reputational risk

They say bad news travels fast. And in a digital world, they’re not wrong. Reputation is everything, and something as simple as a negative social media post about a business can escalate quickly.

Reputational damage affects relationships with clients, but it can also cause a breakdown of trust with suppliers, investors, employees, and influencers. A negative view of a company can result in a huge impact on revenue overnight.

Whether it’s negative publicity, a lawsuit, or a problem with a product or service, appointing an expert who can manage a crisis, such as a public relations company, can prevent an organization’s reputation from being left in tatters following an incident.

Where to start with risk planning?

Risk planning might sound complicated, but with the right guidance and tools, developing a strategy that covers all the bases is relatively straightforward.

A risk planning checklist is an organized way of outlining everything that needs to be included and helps to make sure nothing is overlooked.

Once that’s in place, the risk planning process should be reviewed and updated each time something in the business changes. Complacency increases risk significantly, so risk planning is never a one-time job. 

As a small business evolves and grows, so must its risk plan. As Benjamin Franklin said more than two centuries ago: ‘By failing to prepare, you're preparing to fail”, and his words are just as valid now as they were back then.