Five Types of Risks That Can Easily Damage Your Small Business and How to Avoid Them

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A range of risks comes with owning and operating a business. Some of these risks have the potential to destroy an organization, while others can do major damage that is costly and time-consuming to fix. However, the most vulnerable when hit by these risks are the small businesses.

Being new to the business industry will not be as smooth as you want it to be. As you desire success for your venture, there will always be risks during your business’s lifetime. As a business owner, you should be knowledgeable about these five types of risks so that you will know how to deal with them one by one.

Top Five Small Business Risks 

Different risks may come in various instances. To protect your business from significant impact and damage from these risks, you should know how to combat or prepare for them before actually starting your business operations. We have listed the top five risks that are affecting small businesses along with their solutions:

Risk #1: Financial Risk

One of the most common risks that a small business encounters is financial risk. Think of this type of risk this way: It is the danger of losing your money allocated to establish your business. There are various reasons a business venture may suffer from financial risks.

• Liquidity Risk: Business’s cash flow or income may not be adequate to pay its obligations. Sometimes the expenses and liabilities exceed the revenue generated. Thus, it creates a breakeven or negative amount in the income statement.

• Market Risk: Businesses can also suffer from a decrease in demand in the market. They often experience instability with the number of orders or products bought since they are new to the industry. Hence, this can affect their revenue growth if they have already produced an ample supply.

• Credit Risk: This is the manner of having losses because of the failure of the customer to settle its contractual obligations on time. Many traditional small businesses opt for this method. However, most of the time, due to a lack of customer evaluation and due diligence, small businesses cannot collect the principal and interest owed by their customer. Big organizations have a bad debt account to cover this credit risk. Yet, for small businesses, often they do not. This lessens their chance to meet their obligations to their suppliers on time.

• Financial Management Risk: Some new business owners may not know how to handle financial records. Remember that numbers convey your small business’s status. Sometimes human errors are hard to avoid, especially when you manually do accounting through a ledger. Wrong records can be one reason for financial mismanagement. It will give you an inexact report resulting from poor decision-making.

Solutions:

• Perform a Financial Risk Analysis. It is vital to discuss your small business’s financial health status with your team. First, list all the potential risks you expect and the risks you think might recur soon. Examine your financial operations and ask, “Where does the largest chunk of my business budget go all the time?” Know what bulky eats up your income. Is it the electricity or your fuel that is always running out? The next question you can ask yourself is, “What is the best solution to this problem?” After knowing all the problems, try to pose solutions for them. For instance, you found out that your electricity has the highest cost among all the expenses on the list. Then, devise a plan to tone down the energy usage or investigate which among your appliances or pieces of equipment is more likely electric consuming.

• Purchase Income-Generating Assets. Make sure that the assets you gain will serve their purposes for your business. Sometimes, lack of proper planning may push small business owners to perceive equipment and other materials as essential, yet in the end, they may only take up some space in the storage. Before actually purchasing things, evaluate their purpose. Ask how it will increase the business’s efficiency, productivity, effectiveness, and income.

• Use Accounting Software. To have a better record of your small business’ financials, it is better to shift to the digital way of financial management. Accounting software like QuickBooks and Xero may help you have seamless income statements. It will give you a better overview of your profits and losses, thus giving you an idea of running your business correctly. If you are not comfortable using computer software, you may also hire a small business accountant, advisor, or bookkeeper to assist you. However, doing so may incur a higher cost on your part.

Risk #2: Security Risk

It is a misconception that only the large corporations appear shiny to the eyes of cybercriminals. Security risks or cyber risks may also threaten small business owners. This type of risk may include information breaches, financial loss, reputational damage, and hacked accounts. This often happens to small businesses doing their transactions in the e-commerce space.

There are people out there, such as information phishers, hackers, and other forms of cybercriminals that do this for a living. These people target small businesses since they are the most vulnerable. They do not have enough sophisticated protection to combat security breaches.

Hackers may post a virus-containing clickable link or clickbait that may appear as a trusted source. The moment an employee clicks this link using the business’s equipment, it will pave the way for the hacker to have access to your confidential data.

There are attacks involving the use of your credit cards or banking details. If this scenario occurs, it will be hard for you to retrieve your money. Hence, minor negligence can have a negative impact on your business.

Solutions:

• Provide Proper Team Training. Most of the time, security problems like data breaches come from the honest and innocent mistakes of employees of small businesses. All your employees must grow awareness of these issues. There are many proposed solutions to build walls against a security breach. In addition, the first one is providing your team with proper training. Employees belonging to the business must be knowledgeable that they should check first the credibility of a source before giving out confidential information. A safe website should hold an SSL certificate. Business owners should use strong passwords unrelated to their data.

• Have a Risk Management Plan. Next, risk management should not be taken for granted. Many cloud-computing platforms available help business owners and managers in cyber risk management and risk management of information systems. By doing this type of planning, owners save their small businesses from risk-related costs, making the businesses more contingent.

• Get Cyber Risk Insurance. Most times, the smaller your business appears, the more impact it receives in terms of loss. Cyber risk insurance will serve as a backup for a small business after the attack. The policy can help with the expenses for data recovery, public relations services, and incident response.

Photo by Pavel Danilyuk from Pexels

Risk #3: Business Interruption Risk

There are unforeseen events that may leave a powerful impact on small businesses. Usually, these events are natural or fabricated disasters such as storms, tsunamis, or fires. If these disasters happen, the damage may temporarily force a business to close. Sometimes, they hamper the flow of the operations.

Disasters could severely destroy the inventory or other equipment. There is also a chance that the supply chain will be interrupted. In addition, lack of electricity can be another reason for a business to stop its operation.

Upon the temporary cease of the operation, small businesses are less likely to survive. Sometimes closures become permanent because of the piling up of expenses and other obligations to pay.

Solutions:

• Acquire a Small Portable Generator. Even though disasters are unstoppable, business owners can still prepare for them. Every small business should have a small portable generator to avoid business interruption during electric blackouts. The generator should be enough to make the equipment and gadgets function.

• Have a Contingency or Continuity Plan. Every small business should have a contingency or continuity plan. The plan should show how the team responds before, during, and after the disaster. Each employee should have his/her role to perform during the crisis to avoid confusion. Having a contingency or continuity plan lessens the damage caused to the business. Thus, the business will be back on track immediately, keeping its customers and maintaining its reputation.

• Get Business Interruption Insurance. Another solution for this type of risk is business interruption insurance. This type of policy will help small businesses to recover quickly by covering expenses and lost income during temporary closures.

Risk #4: Liability Risk

There will always be risks that tag along the moment an individual establishes a business. No matter how much planning a business does, unforeseen events and unavoidable scenarios may incur liabilities in the business. Liability risk is the risk carried by the business because of accidental infliction of bodily injury, property damage, death, or financial loss to the other party. When these untoward incidents happen, the victim (the other party) may sue the business.

There are various types of liability risks that a business may suffer from. It may be a premises and operations risk, such as an employee slipping and falling on the wet floor inside a store. The risk can also be a product liability risk that, for instance, a customer gets sick after eating a to-go meal from your restaurant. Many dangers may happen that have the power to ruin the reputation of the small business when they occur.

Solution:

• Obtain a Commercial General Liability Insurance Policy. As the cliché goes, “An ounce of prevention is better than a pound of cure.” One best way to protect small businesses during their operation from liability risks is through acquiring commercial general liability insurance (CGL) policy. A CGL policy can help reduce a business’s loss the moment it is proven to be liable for causing injury or damage to a third party on and on the business premises. Even though most small businesses find having liability insurance expensive, it is still a must-have. A CGL policy covers bodily injuries and property damage. Bodily injuries may occur to people present in a business, including customers, employees, staff, vendors, delivery persons, and other visitors.

Risk #5: Strategic Risk

Putting up a business should not be done overnight. Lack of strategic planning causes the business to hop on from one crisis to another. If this scenario happens frequently, it will lead the business to crumble. Businesses that lack planning could vanish as quickly as they are established. A business that does not do strategic planning does not have a clear foresight, direction, or strategy to thrive. Yes, some businesses may survive without plans, but they will never succeed in the brutal and tight competition in the market without proper objectives and goals laid on the table.

Solutions:

• Have a Business Plan. Before delving into the market competition, a business should have a well-curated business plan. The business plan contains what the business is all about: its product offerings, target market, goals, and objectives. It will help the business owner to stay on track. The business plan also defines the marketing efforts that the business should take and its position in the market — who are its competitors. It is significant to know who a business’s rivals are to know what strategies the business should devise to win the fight.

• Know the Business’s Unique Value Proposition. Another consideration is that businesses should know their unique value proposition — something that a business offers that its competitors do not. This will make a business stand out from other similar businesses in the market. Remember that a strategic plan is like a road map to success. Without it, a business will not last its operation for many years.

Photo by Thirdman from Pexels

Final Thoughts

Running a business entails a variety of risks. Some of these risks can completely ruin a business, while others can create significant harm that is expensive and time-consuming to repair. Here are the essential things to remember before starting a small business:

• Have a proper business plan.
• Buy an insurance policy for various types of risks to help the business recover quickly.
• Identify the risks that are likely to happen to your business before operating.
• Perform risk management and business impact analysis to help the business owner land on sound decisions.

Remember the different risks listed in this article and the recommended solutions. It is always better to be ready and prepared than sorry.

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