Business by its nature involves taking risks. However, the level of risk taken must be proportionate to the rewards of the enterprise.
As a business owner, it is important to understand the risks that your business faces every day, so that you are then better prepared to manage them. The first step in implementing a risk management plan for your business is in identifying all potential risks your small business faces. Successful risk management is not just about the prevention or avoidance of losses, but includes the proper assessment of risks, measurement, thereof, mitigation and transfer of risk through tools such, as insurance for example, training and contingency planning for loss situations.
What are some of the business risks faced by SMEs and what can one do to mitigate against them?
Failure to manage cashflow is one of the biggest risks facing small and medium scale businesses. This risk usually leads to business failure. Every business must carefully understand where the money to sustain the core operations of the business is coming from every day. Critical issues such as rentals, bills, wages and payments for supplies are the lifeblood of a business enterprise and these commitments must be met timely for a business to be sustainable.
To reduce the risks of getting tight on cash, the business manager must carefully work out each month how much money the business needs to have ready at hand to meet these needs. The entrepreneurs must have a sense of how long it will take for the business to feel liquidity pressures should sales or income fail to materialise, as anticipated. It is critical to speed up the rate of collection on your accounts receivable because the longer your customers take to pay, this will usually lead to cash flow challenges.
To avoid these cash pitfalls, it is prudent to have a contingency funding plan that sets aside three to six months of operating costs in a reserve, which one can draw on should sales and income not be stable.
A company’s reputation is its single, most valuable asset. However, this is by far the most commonly overlooked risk by most business owners. However, many realise quickly that if you lose your reputation in business, the business will quickly go under. Every SME business needs to carefully monitor its reputation. This risk has dramatically increased in recent years due to the increased use of social media and has become both easier and more difficult to manage.
Managing your reputation has become harder because every disgruntled customer now has easy access to a public social media that they can go to if they are not happy with any aspect of your company. However, reputation management has also been made easier because social media conversations are no longer happening behind closed doors and with a smart strategy it is easier to also respond and address customer concerns quickly on the online space.
Therefore, as a business owner, you should play very close attention to online conversations about your company and its services and even actively participate in the discussions. It is imperative, therefore, for your business to have a social media policy, and strategy.
Supply chain risk
Your suppliers of goods, raw materials and services are as important as your customers. Failing to manage your supply chain risks can spell doom to your business. Overstocking can be avoided with careful inventory control, meaning you don’t have money tied up in stocks. You need to keep things lean and efficient. Lean business models have become more pervasive and the modern company needs to be acutely aware about the sources of their various inputs and put in contingency plans should usual suppliers fail to deliver on time.
If you rely on third-party suppliers for components used in your products, for instance, a disaster that interrupts your supplier’s regular business operations could have a crippling effect on your production abilities. Supply chain insurance can cover losses you incur as a result of an interruption to your supply chain.
Business interruption risk
A significant number of businesses never reopen following a disaster such as a fire or flood. Being ill-prepared in a moment of disaster can bring your business to a standstill, or can lead to you having to completely shut down operations either for repairs or for good. Such risks can permanently damage your reputation and brand, besides leaving your employees without a livelihood for the duration of the business interruption.
Fortunately insurance companies can help SMEs to mitigate this risk by using business interruption to your property insurance policy. These policies will cover your operating expenses and lost income while your premises or machinery are being restored. One remembers quickly the various fires that have affected SMEs in Glen View and other places.
Losing key personnel
One major weakness of many small businesses is that they are often built around the talents and expertise of a single or few individuals, usually the founders. This concentration risk on skills is a potential minefield. It is important in business to plan for the temporary or permanent loss of every key member of staff. Staff should also as much as possible be multi-skilled through deliberate training and rotation to ensure that they can fill in for each other should another staff member be for any reason unavailable for duty.
Having in place written down procedures and methods for key tasks, that is, operating manuals also helps streamline and focus employees and enables the easier take-over of duties.
This risk also manifests in another form, called human capital risk. This arises because many SMEs are family-run businesses with typically the founder as the chief executive officer, the offspring as the managing director and other extended family members working in various key departments in the company. The big problem with this set up is usually the lack of proper succession planning.
Due to the fact that all senior positions are usually reserved to be filled by family members, such SMEs will find it tough to recruit and retain talent since there is limited or no avenue of progression for non-family members.
The above risks are some of the more important but the list is by no means exhaustive or prescriptive. SMEs must however ensure that these key areas are adequately looked at.
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