Out of the millions of small businesses created in the last year, only 30% of them will continue to operate a decade from now.
There are many reasons why businesses close. Entrepreneur burnout, unwanted products, cash flow issues, and cyberattacks are just some of them.
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What it really comes down to is the ability to manage business risk. You might not be able to completely prevent risk, but you can take steps to manage and reduce risk.
Find out how you can manage risk in your business by reading this guide.
1. Create a Risk Management Committee
Risk management is a long-term project. You need to have a team of committed employees to assess and manage risk on an ongoing basis.
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The committee should be comprised of people in different areas of your business, especially HR, IT, accounting, sales, and customer service.
This gives everyone a better overview of the risks and they can work together to prevent and reduce them.
2. Work With an Attorney
About 43% of small business owners said that they’ve been involved or threatened with a lawsuit. Such litigation can cost anywhere between $3,000 and $150,000.
It can be even greater if your company faces a personal injury lawsuit. This is one of the major business risks to address.
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There are also laws that you have to comply with at the federal, state, and local levels. Tax laws, employee laws, and industry regulations are overwhelming to understand.
Hiring an attorney to review your business risk is a smart decision. They can work with the risk management committee to reduce risk from lawsuits and fines.
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3. Identify and Prioritize Risks
The main risks to businesses are cyberattacks, reputation damage, market changes, business interruption, cash flow, and failure to meet customer needs.
Then there are industry-specific risks. For instance, the average age of workers in manufacturing is 55. It’s expected to have a labor shortage in the next few years.
The food industry faces higher-priced commodities, making it more expensive to produce products. Companies will have to pass the costs on to customers or reduce their profits.
Your business might have other liabilities that aren’t on the list. Sole proprietors have personal liability risks if they get sued. Financial risks include cash flow management and tax liabilities.
The risk management team should go through each part of the business to identify every business risk. Divide the risks into internal and external risks.
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Examples of internal risks are theft and top employees leaving the company. External risks are market conditions, supply chain issues, and weather-related issues, and third-party vendors.
They should prioritize risks according to the likelihood of occurrence. Risks that are highly likely to happen are top priorities, while something that has little chance of happening can wait.
4. Implement Prevention Strategies
Avoidance, transference, risk reduction, and acceptance are the primary risk management strategies.
Avoidance is where the consequences are so great, it’s best not to engage in that activity. For instance, a new product line has an ingredient that could cause harm.
That would lead to lawsuits and damage to your company’s reputation. The risk is too great, so you decide to avoid the risk and not produce that product.
Acceptance as a risk management strategy means that the decision-makers know the business risk and find that it’s at an acceptable level. They choose to go ahead with the activity.
Transference allows companies to shift risk to other parties. Insurance is one way to transfer risk to another party. Contracts can stipulate that third-party vendors assume the costs of damage if they don’t perform. Third party vendor management is necessary to make this strategy work.
5. Get Adequate Insurance
Businesses often find themselves underinsured. When they contact their insurance companies about an issue, they find themselves out of luck and out thousands of dollars.
General business insurance isn’t nearly enough to reduce the risks to your business. You might need to get product liability, cyber insurance, auto, and key person insurance.
Review your current policies and see what kind of coverage you have. The committee, attorney, and insurance company should compare your current coverage and business risk. Buy the coverage that you really need, even if it costs more.
Your insurance needs change every year. Sit with your attorney and insurance representative to update your policy every year.
6. Diversify Product and Service Portfolio
Look at your revenue reports. If you find that the bulk of revenue is from a single product or service, it’s time to diversify your offerings.
HVAC companies are a good example of this. Rather than relying on unstable installation and repair income, they offer maintenance plans. This gives consumers peace of mind while giving HVAC companies steady income throughout the year.
Survey customers and learn what their challenges are and what they need. Create a product that serves those needs to increase sales.
7. Conduct Employee and Vendor Training
Your employees have the potential to prevent risk. Identify the areas where employees can make significant contributions and train them in those areas.
Cybersecurity training is a must because employees are often responsible for attacks. Hackers send phishing emails with attachments that trigger an attack.
Vendor training is just as important. Make sure that vendors go through regular compliance training so they don’t accidentally expose your business to risk.
Learning How to Manage Business Risk
If you want your business to last for decades, you have to learn to manage business risk effectively. This article outlined ways you can prevent and reduce risk within your organization.
Approach risk management as an ongoing project, and work with everyone in your business to manage it. You’ll be able to reduce risk and have a successful business.
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