How to Manage Small Business Risks

July 10, 2017
Woman standing next to coffee machines in a coffee shop

The business you are building has been an all-consuming priority, a labor of love. You’ve devoted time and trouble to get the business up and running. Your creativity keeps it growing. You’re a rock of commitment.

It’s exactly because you’re so devoted to the business, though, that you might be overlooking business risk factors that are obvious to others.

Experts call it “confirmation bias.” People see what they want to see, filtering out facts and observations that contradict what they want to believe. It’s a universal affliction, doubly dangerous when you’re making decisions about your company, because you’re shaping your financial future as well as that of your family and your company.

The odds of success are with you, at least if your company is big enough to have employees. The Small Business Administration reports that about two-thirds of businesses with employees make it for at least two years, and about half survive to their five-year anniversary.  Small business survival rates are remarkably consistent, changing little in boom times or recessions, regardless of the type of business or industry.

That makes you, the owner, one of your company’s biggest wild cards. Here’s how to manage business risks as well as the risk you represent to your company.

Head in the clouds, feet on the ground

Eric Sowatsky, a senior manager with accounting and consulting firm Yeo & Yeo, headquartered in Saginaw, Mich., says the entrepreneurs he works with bring energy and enthusiasm to their concepts—along with a determination to overcome barriers to success.

Sowatsky seeks to be a voice of reason for his clients without being a buzzkill, asking questions designed to uncover small business risk factors that have the greatest chance of derailing the venture.

He starts where all entrepreneurs should start: with a business plan. He and Emilia DiMenco, president and CEO of the Women’s Business Development Center, which provides business advice and financing to startups and established businesses alike, agree that solid business plans are important.

Entrepreneurs, says DiMenco, “must have a business plan that includes their business goals and objectives and that addresses potential barriers and market realities.” That means being realistic about the likelihood of success and being careful not to be so in love with your ideas that you underestimate the competition and other market realities.

Talk to partners about business risk management

Neutralize the risk factor that is your enthusiasm by having a tough-questions session with a business partner, peer group or financial professional who knows you well, recommends Sowatsky. If they’ve seen you manage business decisions and deal with the repercussions, they will provide the dose of common sense that you probably need.

“You want someone with experience who can point out things you haven’t thought about and possibly say, ‘That’s a great idea, but I don’t see how that’s a valid business right now,’” says Sowatsky.

Checks and balances for business risks

Business advisors agree that starting a company requires an assessment of your family’s financial future so you can create a buffer zone.

How you structure your venture will dictate the risk you take on. Many business owners choose to incorporate because it creates an element of distance between their family’s finances and the company’s operations. Informal partnerships can be vulnerable because one partner might be sued for another’s actions. This is a key topic to review with a business advisor or attorney.

Have small business insurance to help cover business risk

Small business insurance is an elemental expense, experts say. Business insurance covers errors, omissions and other liabilities that are created simply because the company exists.

As your company grows, you’ll have to cover the lives and ability to work of key players, such as the partners or top executives.  If one key player dies or cannot work, the policy covers the cost of bringing on a replacement and, depending on the particulars, might also cover the cost of business continuation, such as consulting to recover lost information. Assess how your own death or disability might affect the company’s ability to operate and your family income, and insure accordingly.

In addition, stay ahead of risks to help avoid the damage they can cause before they occur. Find out if your insurance includes access to risk management resources. While a business continuity plan can help prepare you for the unexpected, other loss control tactics like ergonomic programs, routine safety meetings or maintenance inspections can reduce risks you may not have considered. Taking these precautions can help protect both your bottom line and your reputation.

Adding up small business risks

Outlining small business risk factors isn’t a glamorous entrepreneurship exercise, but it can be turned into a chance to sharpen your financial acumen, says DiMenco. Investors and business partners expect to see risk management as part of your strategy, she says.

“What happens if Plan A doesn’t work? What’s your Plan B?” That’s the risk management mind-set that becomes second nature for seasoned business owners, says DiMenco. “What causes a business to fail is often not lack of profitability in the first year but poor cash management,” she says.

One way to minimize business risk all the way around is to consider your entrepreneurial venture as another phase in your career, not as a one-way exit from the corporate world, says E.J. Reedy, a senior research fellow with the Kauffman Foundation in Kansas City.

As you size up possibilities for a launch or expansion, explore how this step develops your skills and marketability, should you return to traditional employment.

For instance, winning and keeping customers makes you adept at “business development and customer service.” Shifting gears to offer what customers truly want—not just what you want to sell them—is “product innovation.”

The process of starting up and growing a company expands your network in new directions. “Exiting the company is not necessarily failure,” says Reedy. “There might be a business there, but not the business you want to do forever. Think of entrepreneurship as a phase of your career. “

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