Risk Management Basics For Small Business Owners

06 November of 2014

As a business owner, risk management is something you should always consider and take seriously. It’s common for businesses of all sizes to spend a great deal of time talking about risk management. They define what their risks are and develop ways to try to consistently identify them in the future. This requires setting a framework for how to identify and manage risks. Some novice small business owners make the unfortunate mistake of thinking that risk management is something that doesn’t necessarily apply to them, and they neglect putting time into it. Don’t make that mistake.

Let’s look at risk. Risk can be broken down in a number of ways. It’s generally dissected in into four categories: credit, market, reputational and operational risk. They all are fall under the umbrella of wide risk management approach.

1. Market Risk

Market risk refers to the risk of the value of your assets decreasing because of a change or an external factor. An example of this is if the economy is spiraling down. It is smart to look at all of the possible market risks your business could face, and write down a plan of action for each in case they happen.

2. Credit Risk

Credit risk is basically when you aren’t paid a debt that you’re owed. This could be in small form, meaning a customer doesn’t pay for something, or when a vendor fails to pay what is owed. This risk is one to be prepared for, because it’s probably going to happen now and then. You should assess where your risks are and look at what you would do if this were to happen. It may help to look at this from an accounting point of view.

By using risk management effectively, you be prepare your business for credit risks. Buying the right insurance is an example of this, as is adjusting your prices to risk-based pricing. You should also diversify your revenue, meaning don’t have all of your money coming from one place.

3. Operational Risk

Operational risks are the risks of loss of money or assets from a failure within the business. This includes a mishap in internal systems, processes or people. Some external events can also count as operational risks. This category of risk has a few subcategories such as client and business practices, employment practices, and internal and external fraud, to name a few. Operational risk is often overlooked by companies large and small.

Operational risk is very much within your control. Most of the risk factors are right under your nose, and you have the ability to create a defense against potential risks that can come your way. Being aware of what those specific risks could be is where you need to do some risk management. Make sure that nothing is slipping through the cracks. If you’re an establishment that serves alcohol, make sure that every customer is properly ID’d before being able to make a purchase that includes alcohol. If you have a bar, make sure that no one is over-served and could be a liability if they drive and get into an accident after leaving the bar. Monitor these variables, otherwise they could come back to bite you.

4. Reputational Risk

Reputation is an intangible asset, but it is one of the greatest assets a company has. A risk can be posed against the reputation of a business when negative publicity comes out about it, regardless of whether the content of what is said is grounded in truth or rumors. Anything that compromises a company’s reputation can result in loss of income and the value of the company. Prioritizing good customer relations and relationships with the community will help to protect against this risk.

To learn more and benefit from customized guidance, contact Broadridge Insights.

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