There’s some degree of risk involved in almost everything we do in life, starting the moment we get out of bed in the morning. As a business owner, though, you deal with a multitude of different kinds of risk that aren’t faced by non-entrepreneurs.
The fact is, starting and running a business is one of the riskiest things you could choose to do. Statistics reveal that about one-quarter of new small business startups will fail after one year, about one-third will fail after two years, and more than half will fail after five years.
While it’s impossible to eliminate the risks involved in owning a small business, there are things you can do to manage and minimize these risks. In fact, many veteran entrepreneurs will tell you that risk management should be at or near the top of every business owner’s priority list.
Following are four of the most common risks associated with owning and running a small business, along with suggestions for ways you can manage and mitigate these risks:
1. Financial risk - Of course, the biggest small business risk is the risk of running out of money. This makes sound cash flow management perhaps the most important task for most small businesses.
Often, owners get preoccupied with growing sales and neglect the all-important job of collecting and properly managing the cash that they’re owed. So job number one is to stay on top of your accounts receivable collections. Create an accounts receivable aging report that will track and measure the payment status of all of your clients. This will enable you to see at a glance if payments are late so you can prioritize your collection efforts.
Once you have collected cash, you should manage it as judiciously as possible. Consider using cash management tools from your bank that can help you get cash into your operating account faster and remit payments to your customers and vendors more efficiently. With remote deposit capture (RDC), you can scan and deposit checks from your office without having to go to the bank to deposit them. And you can pay your employees and suppliers electronically using ACH (Automated Clearing House) direct deposit reducing costs and potential fraud associated with issuing paper checks, while controlling the timing of payments to more efficiently manage your cash flow.
2. Customer concentration risk - If a large percentage of your sales and profits are derived from just a few customers — or worse, just one or two customers — then you are facing a high degree of customer concentration risk. Losing one of these customers could result in a financial hit that jeopardizes your business’ very existence.
If a large percentage of your sales and profits are derived from just a few customers — or worse, just one or two customers — then you are facing a high degree of customer concentration risk. Losing one of these customers could result in a financial hit that jeopardizes your business’ very existence.
3. Employee risk - You have probably invested a tremendous amount of both time and money in hiring and training your employees to perform specific job functions. But your employees, of course, are free to seek other job opportunities if they choose, or listen to offers from other companies if they are approached, thus exposing your business to the risk of their loss.
While you can’t force your employees to stay with you, you can take steps to become an employer of choice and make it less tempting for them to leave. For starters, make sure you are paying competitive wages. Be quick to offer praise and recognition for a job well done — many employees value this as much as or more than financial rewards. And operate your business with the highest levels of honesty, integrity and professionalism, as most employees appreciate working for this type of employer.
But despite your best efforts, some of your employees will eventually leave your business through no fault of yours. To minimize the risk of business disruptions, cross-train your employees so others can step in and perform departed employees’ jobs until you find replacements. And adopt a hiring attitude of constant recruiting — in other words, you should always be looking for skilled new employees even when you’re fully staffed. Then when valued employees leave, you’ll have a pipeline of good candidates to contact right away so you can hire replacements and get them up and running as quickly as possible.
4. Business interruption risk - The normal daily operations of your business can be interrupted by many different types of disruptions, ranging from power failures and computer and server crashes to natural and man-made disasters like storms, floods, earthquakes and cyber-attacks. The best way to guard against the risks posed by these types of interruptions is to implement a business resiliency plan.
The goal of such a plan is to make sure that essential business services, functions and operations can continue after a disruption, or be brought back up to speed as quickly as possible, resulting in minimal business down time. A business resiliency plan goes beyond a disaster recovery plan by spelling out contingency plans for a wide range of different types of interruptions.
Other Common Small Business Risks
These are just a few of the risks faced by small business owners. Others include the risks associated with strategic planning, regulatory compliance, operations and your company’s reputation in the marketplace. Depending on your industry, you might also face the risk of suppliers that don’t meet delivery expectations or equipment that fails or doesn’t work properly.
Therefore, it’s important to assess the specific risks associated with your particular business and industry. Take the time to evaluate these risks periodically and make sure there are mitigation strategies in place to minimize their potential impact on profitable business operations.
To discuss risk management in more detail, including cash management tools that can help you minimize your financial risk, give us a call at (800) 773-7100 or Contact us to request that a Relationship Manager contact you.