Originally published in The Frederick News Post
By Randall Reardon Special to The Frederick News-Post
Risk is inherent in business. If you are starting a business, a discussion of risks should be included in your business plan.
If you are already in business, when is the last time you focused on the risks to your business and what you should be doing about them? If you haven’t looked at them for a while — or have never looked them — it’s time. Not doing so can have serious consequences and even put you out of business.
Business risks generally fall into five main categories. In each of the categories there may be multiple elements that can have serious consequences or even result in business failure. The five general categories are:
- Market/competitive risks
- — Examples of market or competitive risks are making the wrong products, using ineffective sales and marketing strategies, cut-throat price competition, or industry-specific risks like collapsing oil prices or obsolescent technologies.
- Financial risks
- — Financial risks can appear as poor operating cash flow, insufficient funds for replacing capital equipment, excessive expenses, and reliance on a few major customers for most of the revenue.
- Technology/operations risks
- — Types of technology or operational risks that can disrupt business operations include poor product or service quality, inadequate computer security practices, supply chain disruptions, broken equipment, natural disasters, or safety and environmental issues.
- Personnel risks
- — Personnel risks come in both internal and external varieties. Theft, fraud, sabotage and corporate espionage can affect many businesses; as can poor morale, inadequate employee training, high personnel turnover and poor personnel management practices.
- Legal/regulatory risks
- — Regulatory compliance issues, product liability problems, permit issues, privacy violations, and intellectual property concerns can all tie a business up in legal or regulatory knots.
A good way to tackle business risks is to construct a risk management plan. A plan helps determine how serious the risks may be and what you need to do to avoid or address them should they materialize. Follow these five steps to develop a simple risk management plan for your business.
1. Make a simple matrix template or table with four columns. Label the columns Potential Risks, Chance of Occurrence, Business Impact and Mitigation Strategy.
2. Brainstorm with your team all of the risks that can potentially affect your business over the next six months to one year and list them in the first column, Potential Risks.
3. Estimate the probability of each identified risk actually materializing by rating it on a low-medium-high scale based on how likely you think it will occur. Put that rating in the second column labeled Chance of Occurrence for each risk listed.
4. Assess each risk’s impact on your business if it does occur. Use the same low–medium-high scale, and put that rating in the third column, Business Impact.
5. In the fourth column, Mitigation Strategy, identify the action(s) you will take to prevent the risk from occurring and/or limit the business impact if it does occur. For example, increasing insurance, conducting audits and diversifying suppliers.
Any risk assessed as high for Chance of Occurrence and high for Business Impact should be addressed immediately. Risks rated as a mix of high-medium or medium overall should be looked at carefully to see if they need mitigation, and if so, should be addressed as soon as possible. Risks determined to be low overall may or may not need particular attention depending upon their nature, unless there are special circumstances involved.
Risks can change over time and vary with the different stages of a business. Revisit your risk planning at least annually to monitor them and keep them tamed.
When it comes to dealing with business risk, the timeless advice of Benjamin Franklin is as valuable as ever: “An ounce of prevention is worth a pound of cure.”
Randall Reardon is the principal at Strategy Sphere LLC, which provides business and strategic planning for small businesses. He is a certified SCORE mentor with SCORE Frederick.
SCORE is a nationwide volunteer network of 330 chapters dedicated to the formation, growth and success of small businesses. SCORE Frederick provides free and confidential business advice and mentoring to start-up businesses and to established small businesses in Frederick and Carroll counties. SCORE Frederick also offers workshops for both start-ups and established businesses. For details visithttp://www.scorefrederick.org or call 240-215-4757.