The 5 Biggest risks to Small Businesses

by | Oct 5, 2020 | Methodologies

As Small businesses start off they are unable to access resources that are available to multimillion-dollar organisations. Due to the uniqueness of small businesses it is therefore difficult to have the knowledge base to prepare for any risks the business faces.

However, as the larger organisations may have the resources to prepare for risks on the other hand the small business also faces the exact same risks making them more vulnerable. The question therefore arises, what risks are small businesses more vulnerable to?

Here are the 5 biggest risks to small businesses:

1. Financial risk

The financial risks by far is the biggest risk that the small business face due to the hard-earnt investment through personal savings or money from family members that has been used initially. Therefore, this puts a huge amount of pressure on the business to be successful.

Here are few things to consider:

  • Cash Flow – this is one of the main issues the small business must deal with. Paying employees, maintenance of the operations and investment for growth.
  • Economic conditions – Keep this risk in mind no matter the type of business. As an example, a recession can cause serious damage to small businesses. Take Covid-19 as another example. How many businesses have been forced to close?

Also think about the current and future climate and ensure your business is prepared.

2. Strategic risk

As a new organisation it can be difficult to understand the next steps your business should take. There could be many challenges that could impact the business, such as a formal decision-making process and the business lifecycle. No matter the type of business, it needs to have a structure, target market, sales and marketing strategy, production strategy, and more in order to succeed.

Here are some factors which you may consider:

  • External environment – This risk affects all organisations no matter the size or business type. The larger businesses adapt to the environment by changing or modifying their products to the ever-changing external environment.
  • Legal – The business may be mandated to adhere to new regulations which may require the business to change the way it operates such as General Data Protection Regulation (GPDR).

To address these risks, you must simply prepare for it through planning and research.

3. Reputation risk

This is one of the most underrated risks that is ignored by most businesses. Reputation is the most important asset particularly for small businesses as they need to create a good reputation which will benefit their growth.

  • Social Media – This is probably the best way of increasing the reputation for any business. Whether it is Facebook, Instagram or Twitter people review products and services which impact the business’s reputation in both positive and negative ways.
  • Feedback – As a business you should accept both positive and negative feedback. Whilst responding to negative views can be difficult, it is crucial to be prepared and respond in a swift and concise manner as this may risk your new customer base.

Remember to manage this risk closely, a social media policy can be a really good mitigation in order to manage this risk.

4. Business interruption risk

The reality of owning a business is that your organisation can be disrupted at any time, take the recent Covid-19 epidemic. Some of these situations can be local to your area and some can be international i.e. wildfires, earthquakes or even wars. These events not only reduce the business capacity to operate in but also cause damage to your inventory and equipment. On the other hand, if you have a small team and this could likely be the case for a small business, even something small like an illness to a few team members could interrupt operations for a couple of days.

Here are some factors which you may consider:

  • Supply Chain – Some businesses rely heavily on manufacturers for their products or have other partners who provide part of the business service. You must ensure that your business is prepared for it if these elements are affected.
  • Lean Business Models – With just-in-time inventory and lean business models becoming ever popular, businesses should understand where their inputs and supplies are coming from and what their contingencies are, if they are delayed or lost.

To mitigate this risk small businesses should produce and implement continuity plans. These plans are put in place to be able to respond to a crisis where roles are assigned to all members of the organisation so that they can react quickly.

 

The key point to remember here is that the business interruption should be minimised and you should have the correct plans in place to get your business back on track as soon as possible.

5. Security risk

The technology world has been evolving for many years now. Due to the development of new and easier methods of going about our business everyday cyber security has become a major risk. This can lead to financial loss, disruption, or reputational damage due to failure of IT systems.

Here are some factors which you may consider:

  • Hackers – some people use the means of IT to hold others to ransom through hacking their IT systems. This can have a tremendous negative impact on the business and its reputation, as your business will be collecting personal data from your customers. This presents a major security risk that must be actively mitigated through security protocols and monitoring.
  • IT systems – Ensure your IT systems are continuously updated as the older IT systems are likely to disrupt your daily operations.

Remember to keep a close eye on the IT systems in your business. As a small business owner, you need to keep your costs low, however, it may be wise to invest in this area if you have the capital available.

Conclusion:

Reading through this piece you may wonder on the next steps. ESBM-HUB’s advice for any new business owners is to formalise risk management as soon as possible, preferably right from the start. You can find an example template risk register compiled by ESBM-HUB here.

It does not have to be perfect. Considering all risks and planning for how they will be mitigated will help reduce risk-related costs and downtime.

Good risk management protects the reputation of the business and helps to plan for contingencies. This will make the business more profitable and ensure the longevity of the company.

 

 

 

 

 

Mohammad Iqbal

Mohammad Iqbal

Author

Helping small businesses achieve full potential by delivering project management training customised to their needs.