We all know that running a business means encountering some degree of risk, that doesn’t mean that the risks can’t be minimised however. Welcome to the world of risk management.
A Risk Management Plan is exactly what it sounds like, a way to manage risk within your business. There are a number of different business risks to consider such as financial, lack of diversity and competition. Knowing your risk factors is the first step in developing your own risk management strategy.
If you have a business development plan in place then you will already know from your SWOT analysis what the risks to your business are.
Once you’ve identified the risks you need to assess each one and rank them in order of urgency.
As an example a zombie apocalypse is less likely to affect your small business than your clients not paying their accounts promptly!
As you identify the risks then you need to look at what you can do to help minimise them. If possible you should aim to remove the risk completely, but with some risks this isn’t possible so it’s a case of managing the predicted effects and minimise the risk to your business.
Another vital thing to do when it comes to risk management is to monitor and review the strategy on a regular basis. This is definitely not something you can ‘set and forget’.
While risk management is essential at any level of business, small businesses can see the greatest benefits from having a plan in place. As a small business has fewer resources to call upon should something go wrong it means that there’s a smaller margin of error for them.
Instead of being able to take the hit, recover and keep going there’s a much higher percentage of small businesses that would be out for the count. By preparing in advance with a risk management plan you will have the foresight to see it coming and therefore either avoiding it or at least minimising the impact on your business.
Every business is unique which is why you really do need to do your own homework when analysing your risks, but there are a few main areas that apply to many small businesses.
Lack of Diversity
You need to look at where your business income is coming from. Many businesses will find that only a few of their clients account for the majority of their sales in fact in business it’s often said that 80% of your income comes from 20% of your clients.
If you’re in a niche market you might be more vulnerable, but sometimes it’s a case of thinking out of the box for ways of diversifying your sources of sales and reducing your concentration of risk. You could even just look at widening your client base with marketing.
Compliance
Depending on your business, there’s a strong possibility that somewhere along the line there are laws, rules and regulations to comply with. For example, hiring an employee brings employment law into the picture.
This brings the risk that your business isn’t meeting compliance requirements.
Reviewing any grey areas of your business, or bringing in someone that can review the legal side, is a good way to ensure you are protected.
Competitors
The most obvious risk that small business owners tend to be aware of are the competing businesses in the same area.
Knowing your immediate competitors is very important – learn everything you can about them from how long they’ve been in business to possible strengths and weaknesses. By researching your competition and breaking them down it will give you insights into what your company could do to improve its bottom line and stand out from the crowd.
Finances
Only approximately 54 per cent of Australian small businesses are cash flow positive, according to Xero’s small business insights, and on average companies are waiting 34 days to get paid. Money makes or breaks a business, and you need to know where the risks are when it comes to the business’ finances.
One of the reasons why small businesses need a good accountant is because they can discuss how things are looking within the business and consult on what needs to be done to maintain a healthy cash flow and prepare for risks.
Planning & Strategy
The leadership within your business guides it and makes decisions regarding business objectives. If a strong strategy isn’t in place your business could run the risk of floundering. One solution for this is to set up a Business Development Plan and keep that updated regularly too so that you know exactly where you want your business to go and how you plan to get there.
As well as these five reasons you also need to consider document protection, privacy security, technology and employee resignations when looking at potential risks to your business.
If you want more information why not phone us or email us and talk to one of our business accountants.
