Business owners and entrepreneurs are often big sky dreamers and visionaries. They see opportunities and focus on the positives. It’s what makes them successful. But it’s also what makes them vulnerable. In order to succeed in business, you also need to focus on what could go wrong. It is crucial to understand your business risks so that you can effectively manage them or avoid them completely.
In my experience, there are 8 business risks that all business owners need to consider.
1 Strategic Risk
If your strategy goes pear-shaped, so will your business. This risk refers to your big ideas, the direction you plan to take, what you do, and how you do it. If the very essence of your product or service fails, your business risk increases. Business objectives and decision making needs to be carefully managed to ensure strategic risk is minimised.
2 Client risk
It goes without saying that losing clients or customers poses a major business risk. It’s a dangerous game to build a business around one or two big clients. Apart from getting fired, your clients are subject to the same business risks that you are, and may have to terminate your services if they find themselves in trouble. The greater the percentage of income that a single customer accounts for, the greater your risk. Therefore, no client should account for more than 15% of your business’ income.
3 Supplier risk
Similarly, there is a business risk if your suppliers go bust, or if their quality starts deteriorating. When you rely on suppliers to provide a product or service that is critical to your delivery to your clients, you need to manage that risk carefully. Develop close relationships with suppliers, take a share in their business, or diversify your risk by having a couple of suppliers who can provide the necessary materials and services.
4 Team risk
One of the most common business risks is building a company around a core team of people who become indispensable. It’s true – without people, your business doesn’t exist, so it is vitally important to get the right people on board. However, you need to put the processes in place to ensure that your great people can be readily replaced by other great people if they leave the business for any reason. Documenting processes and keeping meticulous records of transactions and decisions will ensure that the company’s intellectual property and institutional memory resides with the company.
5 Financial risk
We are all in business to make money. Therefore, financial risk is one of the most dangerous business risks. These include cashflow, bad debts, contracts with penalty clauses, and the like which need to be carefully monitored and managed.
6 Operational Risk
As a business owner, you need to consider the worst case scenario regarding the failure of systems, machinery, processes and technology and put the relevant controls in place. Systems and processes need to be evaluated for completeness, accuracy, validity and timeliness. There needs to be a clear segregation of duties and any risky transactions need to be authorised and approved.
7 Reputational risk
Your reputation is everything, and more so in today’s digital marketing world. Social media means every bad experience can be broadcast to thousands of people at the click of a button. And a quick search on the internet can reveal more than just your controlled marketing messages. This type of business risk requires a consistent and sustained effort at service and relationships.
8 Economic Risk
If your business is sensitive to exchange rates, government policy, import duties and taxes, you need a proper plan to manage the negative consequences of these risks.
While business risks have the potential to destroy a business, they also often present an opportunity for the business. Risk taking is part and parcel of successful businesses. How you identify and manage these risks is the difference between success and failure.
Who is helping you navigate this fine line? I’m available!