When you start a business, several things can go wrong and leave your company in shambles. From an irreversible strategic fail to a failure in the production unit, the business world is always prone to risks.
Therefore, having a reliable business risk management policy in place will strengthen your organization’s core and prepare it to overcome those hindrances.
Starting with an unshakable risk management method will be fruitful in the long run, and remove multiple loopholes from your business plan alongside.
Not all companies flourish like Amazon, and not all die like Enron, there’s always an in-between situation. The way you deal with the rising issues determines your company’s fate.
According to an estimate, only 56% of the businesses started in 2014 could make it till 2018, while the others lost their battle somewhere in the middle.
CB Insights says that 42% of companies failed because they didn’t have a market share after some time; their products were no more relevant, can you believe such a disaster?
But what made that 56% of companies different from the rest? Did they have unwavering funds, or was it better risk assessment and planning?
If you want to see your company achieving milestones, read on because we’re going to explain a fundamental step of the business, i.e., risk management.
What is business risk?
The magnitude of factors that can stop a start-up from achieving its target is called business risk. When you estimate an annual revenue, but multiple factors can affect it, it’s called exposure to business risk.
What is risk management?
The business world is full of competitors and hindrances that can harm your company’s achievements by halting its growth.
But when you plan and are ready to uproot these challenges, it’s called effective business risk management.
Let’s say a company manufactures carbonated beverages, and there’s an ongoing debate that these drinks should be banned due to their potential health threats.
Now, if that company doesn’t sense the roaring difficulty and operates unbothered, it’d surely face a huge slash in the sales.
But, when the same business changes its products’ composition and resorts to healthier substitutes, it won’t be severely harmed.
In business, it’s all about how you plan and execute things; if these two stages are undisturbed, everything else will fall in place.
Why is risk management important?
No business can survive in the market without having a reliable mitigation strategy. When you are aware of the risks and ways to eradicate them, your start-up will surely rise. Most companies start without a documented business risk management plan and eventually face ambiguity in the process.
When every step is well-planned and sorted beforehand, taking timely actions gets easier. Moreover, this business risk management is crucial to keep a system running.
What are the 5 main risk types that face businesses?
The severity and longevity of a business risk depend upon its type. Whether its internal or external, and how much time would risk management take varies drastically according to the type.
Here are top 5 business risk types that a start-up may succumb to:
Every start-up initiates with a comprehensive and actionable plan because without a strategy; nothing can succeed.
But the always-changing marketing dynamics and competitors can easily make your business plan irrelevant. When your core business scheme weakens, it’s called a strategic risk.
Some multi-million dollar businesses have failed due to this strategic failure when they couldn’t upgrade timely.
Blockbuster was a marketing giant in the video-renting business from 1885 till 2010. This company had seen incredible success in those years, which was evident by around 900 Blockbuster rental stores in the US.
However, when market trends changed, Blockbuster couldn’t keep up with them. Eventually, a smaller competitor i.e., Netflix, surfaced and pushed Blockbuster to the backseat.
This once large company had to file for bankruptcy in 2010 and ceased to exist after that.
That’s what strategic business risk can do to a company, irrespective of its scale.
Rules keep changing, and businesses are compelled to upgrade accordingly. But when a start-up, knowingly or unknowingly, fails to comply with those rules, it has to face severe consequences.
Political influences have a direct impact on business rules, which ultimately impact the success of your previously set plan.
Let’s say you were paying a 7% tax on your home-based business. But, due to the change in the government rules, your payable tax rose to 10%.
This might not affect MNCs and NCs, but for a small scale business, this can be disastrous.
This change in the stats can reduce the productivity and scale of the company, eventually making it handicapped.
If a business fails to operate uninterruptedly, it falls into the category of operational risk. When your company’s system crashes, and you lose some precious files, or there is a sudden power outage in your production plant, we name it as operational failure/risk.
Some of these risks are avoidable i.e., having a backup source of energy. But that isn’t always applicable i.e. when your unit is hit by a storm, eventually stopping the production, it is not much you can do.
The general perception of a business decides its fate, and the number of opportunities it should expect. When a positive image is associated with your name, you get endorsements and support, which affect the success ratio of a business.
Whether you fund your start-up alone or have partners on-board, the risk of facing losses and disturbed cash flow is persistent. When a start-up cannot arrange funds to meet its expenses, the debt increases.
The disparity between the invested and earned amount decides how long a business would survive. According to CB insights, 29% start-ups failed in 2019 because they ran out of cash.
Now, this risk can happen due to a variety of reasons; no backup, increased costs, and fall in demand are few of them.
Maintaining a steady cash flow, and generating a handsome revenue after the initial struggle will keep you alive in this nerve-wracking race.
What is business risk management, and why is it important?
The steps a company performs to overcome the damage done by internal and external hazards fall under the risk management category. After pinpointing the loopholes, the next step is to find the solutions.
If a plan is designed before the risks overtake, the damage is controllable than otherwise. Therefore, it is advisable for both small and large businesses to either have a risk management consultant on-board or outsource this task to a third party.
How do you do a business risk assessment?
Identifying the shortcomings and working on them is a whole process that prepares the companies to beat their competitors. Here’s a breakdown of the risk management process for businesses:
Identify the root causes
Before executing a risk mitigation strategy, you must know what’s causing the trouble. Whether there is a lack of credible human resources or there are more new competitors in the field, the identification of these factors makes things more manageable.
Analyze the severity
Whether or not a risk is controllable is crucial for this process. If it’s an operational risk, improvement of the equipment could do the job. But when a lack of funds is the problem, you’ll have to cut many costs off your list or reduce the product line to meet the requirements. Either way, a clear analysis is helpful.
Plan a mitigation strategy
If you don’t have funds to keep a production unit operational, you’ll have to design a strategy that can lure collaborators for this task. Similarly, if your company is facing staff-related problems, devising a better HR department and hiring suitable staff for the purpose is the way.
Whichever mitigation strategy you decide, map it out. Note down the pros, cons, hindrances, risks, and any related challenges that might affect the outcomes. This way, you’ll be ready for a plan B without wasting time.
Research new trends in the market
Just like Blockbuster, there are thousands of examples where the companies didn’t follow market trends and fell into an endless rat race. If your sales are dropping or the products are less popular now, it’s the time for an upgrade. Find out what your customer base is interested in, and bring products according to their demand.
Doing thorough research on the competitive market and customer base is a highly beneficial step in the risk management process. If you succeed in tracking the trends, your start-up will soon turn from irrelevant to relevant.
Calculate your business’s current/estimated revenue
Change in economic rules and business dynamics can get you laid off the track within days. That’s why you must have a precise estimate of your company’s annual revenue and act accordingly. If you cannot afford to replace several people, start from the key roles, and make a trickle-down change.
Review the results
After the risk management process is completed, tracking its progress should always be on the company’s to-do list. Bi-annual or annual audits will show how good or bad your risk management plan was.
This will allow you to add/remove specific steps from the process the next time you plan a risk management process.
Small Business Risk Management Tips
When you are the person-in-charge, many factors must be taken care of. The dynamics are different in small businesses because they are mostly area-specific. Here are a few tips that’d help smaller companies:
Be watchful of the emerging competitors
If your services/products were once popular, it doesn’t mean they’ll always be. Technological advancement has caused such rapid change in the business world that every other company is struggling to follow the changes.
If you rely on old-school methods, it’s time to level up. There are thousands of competitors in each field, which makes this phase challenging. However, if you have a credible research team on-board, it will keep you aware of the shifting dynamics.
Observing the business plan and strategies of well-established rivals is a trick which most business owners follow. If you want to outperform them, always be in the know.
Just like large-scale companies, your customers will also expect change and better products/services. However, most start-ups stick to their original idea and eventually fall behind the trends.
As much as it’s essential to follow your long-term business goals, following the public demand is also inevitable. Small businesses must keep room for change in their business models.
Have a backup
When a major risk management phase is going on, a plan B is mandatory. You never know how the external factors turn out and if the plan goes as smoothly as you expect. A risk management process is inclusive and must be carried with all ups and down in mind.
Overlooking small details or stressing over unimportant things doesn’t go a long way. Instead, calculating the impact of each step in your risk management process is the key.
Track everything that goes on in your company and devise the plan accordingly. Subtle changes and unplanned improvements don’t accompany business growth; there must be an authentic reason behind every step.
Have trustees on-board
Although individuals operate most small businesses, it’s still beneficial to have a board of directors. However, it’s not mandatory to follow MNCs while developing your company’s key people.
You can have friends, mentors, and family members as trustees who can give sound advice. When you feel stressed because of the business risks, have a third party get a bird’s eye view of your company.