As an SME or startup, risk management is hugely important to the success of your business. With 60% of businesses going bust within the first three years, understanding how to manage and minimise risk will help you navigate upcoming challenges and make the right decisions to maximise business growth and development.
We've already looked at the four main risk management strategies as well as how to deal with the most common types of business risk - but many often wonder, is there anything you can do to prevent or minimise risk before it occurs?
In this article we'll explore what risk management is, types of risk to your business and provide 8 ways you can minimise risk to your business.
What is risk management?
To define risk management we must first understand risk. A business risk is any factor that could threaten a businesses ability to achieve its objectives, or result in financial loss.
Therefore, risk management is a detailed plan which identifies and evaluates risks, and lays out details on how to mitigate the risks found. To mitigate a risk means to take steps to lessen the impact of the risks to your company.
Types of Business Risk
Business risk can come in many shapes and forms, it can be confusing to differentiate so we have previously detailed the nine main types of business risk in depth on our blog.
To summarise, the examples of the types of risks include:
1) Financial e.g. foreign currency value depreciation or risky borrowing
2) Strategic e.g. cost of supplies increasing
3) Competitive e.g. a new competitor entering the market
4) Operational e.g. deficient metric performance
5) Security e.g. phishing and other forms of scam
6) Human e.g. poor management or health issues
7) Reputational e.g. a scandal that impacts public opinion
8) Physical e.g. natural disasters
9) Compliance e.g. privacy breaches
How to Minimise Business Risk
While there are 4 main risk management strategies, there are several ‘quick wins’ you can do now to minimise business risk from the offset:
Create a business plan
All businesses should have a business plan to ensure growth and future success. A business plan is a written document that describes and details your company and plans for the future. This document is essential for explaining business strategy, business goals and how you expect to achieve them.
By detailing and understanding your business objectives, target market, competition and financial goals you will be able to make good business decisions. You can minimise business risk by understand what resource is needed where, and risks you are prepared to take in order to succeed.
Insure your business
By purchasing insurance, you are able to transfer your risk to a third party. Insurance is a risk management strategy that comes at a cost, but the small cost of insurance will usually largely outweigh the potential costs of an uncovered risk.
Legal regulations will most likely dictate the types of insurance required for your business, these could include but are not limited to: life insurance, public liability insurance. Business equipment and contents insurance and indemnity insurance. We recommend all companies seek independent advice on what types of insurance your business will need.
Keep an eye on cash flow
The biggest risk when it comes to a relatively new business is running out of money. A study by CBInsights revealed that 29% of startups failed because they ran out of cash.
By fully grasping the cash flow of your business, you will be able to make more informed decisions and therefore reduce risks associated with financial planning. An understanding of your cash flow requirements that is properly documented will also help when it comes to attracting investors.
Broaden your products and services
By diversifying the products or services that your business offers will ensure you have multiple channels of income, as well as increasing public interest by providing more choice for your customers.
This quick win is also allow you to stand out from your competitors. You want to strike a balance between only offering in-demand high quality products or services, but also not pigeon holing your business with just one product or service that you rely too heavily on.
Document as much as possible
Clearly documenting everything your business does is essential to a smooth running business with minimal risks. You want to be documenting details such as sales, tax payments, operational costs and any action or task your staff complete.
By having a paper trail for everything, you minimise the risk of fraud, theft or overspending. When looking at your business plan and the future, by having an accurate picture of the past you will be able to identify weaknesses and areas that need addressing to mitigate future risks.
Protect your data
In an increasingly digital world, the instances of cyberattacks are a very real threat for all businesses. A cyber attack can not only cause financial loss, but also result in a loss of customer trust.
The latest UK government survey showed 39% of UK business identified a a cyber attack in the last 12 months, and from those businesses 20% said they experienced a negative outcome as a result of the attack.
Investing in protecting your companies data can save you a lot of money in the long run. It will also help you adhere to GDPR laws potentially preventing breaches and associated fines and reputation damage.
Control your growth
Its the age-old expression ‘quality over quantity’. If you set unrealistic goals, yourself or your employees might be drawn into taking unnecessary risks in attempt to achieve those goals. High-pressure sales tactics are just one example on how the pressure to reach goals can have a detrimental impact, as customers don’t usually respond well to these tactics and ultimately your business will suffer.
This also applies to innovation, while it is always a good idea to keep progressing, too much reliance on new products and services can create a problem when something inevitable fails to succeed as expected.
Seek expert help
While the quick wins we have detailed are a step in the right direction when it comes to risk management, it does not replace the need for a comprehensive risk management plan.
Get in touch with our finance experts today if you need assistance with identifying or minimising risks in your business.