A Small Business Approach to Risk Management
01 Apr 2017
Entrepreneurs understand that businesses are subject to risks and uncertainties. Small and medium scale businesses are no exception. In fact, one could argue that they are typically more vulnerable to risks than large businesses because they may have less resources, knowledge and experience in dealing with the risk in its various forms. Any shocks to small businesses as a result of risk factors could lead to a catastrophic impact. The reality is that the world of business is super-charged with risk. It therefore behooves owners of small and medium size businesses to adopt some degree of formal risk management.
Risk Taking vs Risk Management
It is often said that to be successful in business one has to be a risk taker and that without taking risks businesses cannot grow and thrive. Interestingly, in 2015 a small business research by the the Hartford found that even though appetite for success was growing among small businesses their overall level of risk taking remained relatively flat. It was also interesting to note that despite the flat levels of risk taking, many small businesses were operating successfully. This seems to suggest that the correlation between business success and risk taking may not be as positive as what some resources suggest and that’s why entrepreneurs are becoming increasingly more conservative with the overall level of risk appetite in their businesses. It remains true however that risk factors have a significant impact on small business. Since risk appears to be inherent in business, I would like to suggest that in addition to taking risks, it is also imperative for small businesses to employ risk management strategies in order to control risk and benefit from available opportunities while working to minimise the impact of any potential negative events. Whether an entrepreneur is risk averse or otherwise, risk and uncertainty remain a key factor of business that needs to be managed and an entrepreneur’s successful management of risk can contribute positively to a business despite the level of risk taken. In my view, taking a conservative position toward risk implies that the business accepts the risk but takes positive action towards managing it and taking advantage of the opportunities it presents while minimising the impact of any potential downside.
Risk Management Process
Generally, a small business is not interested in introducing some of the good but non-core processes or practices that might be found in large companies for managing risk. On the other hand, it is important to note that some processes would make sense or are essential for small businesses because they add value, increase the chances of success while minimising the possibility of failure due to lack of attention to risk factors. The most important thing would be for the business to adopt those that are actually essential and design them to the size and scale of the business. Risk management is scalable after all.
In adopting even the most basic approach to Risk Management, the strategic goals of the business come into the picture. The categories of risk to be looked at for a small business can include the following (the list is not exhaustive):
- Financial Risk
- Legal Risk
- Regulatory Risk,
- Market Risk,
- Operational Risk,
- Reputational Risk,
- Technology and Cyber-Security risks, and
- Human resource risks, among others.
A basic process approach to managing these risks would entail multiple steps in two broad categories:
Identify risks (current or potential), and Prioritize risks
- Action(i.e implementing risk management strategies):
Accept, Avoid, Transfer or Mitigate risks.
Step one involves the business owner and key staff periodically reviewing the goals and identifying the major risks that might interfere with meeting them. This process would involve some sort of ranking of the risks, so that only those which are very likely or have potentially significant impact are highlighted for action.
Step two addresses the obviously critical part of the process, which is to decide how these risks will be managed, i.e. what actions will be taken to address the risks and to enact a plan to address them. The action would normally centre around transferring the risks, accepting it, reducing it or avoiding. The specific mitigation action planned will be dependent on many factors such as feasibility and cost.
I have created the infographic below to summarise the risk categories and provide a snapshot view of how risks are managed.
This article was created to promote the reality that risk management is becoming more essential for success of businesses and that it doesn’t only apply to big enterprises, even small business could employ a simple but formal approach to managing risks using appropriately scaled strategies to enhance their chances of success while minimising the potential impact of unmanaged risks. In the end, the benefits of employing risk management strategies would far outweigh the efforts, even for small and medium scale enterprises.