The First Step To Managing Risk Is To Identify Risk

A successful business is not perfect and risk free, nor is that a desir­able goal.  Art­ful man­age­ment and

growth, prof­itabil­ity, sus­tain­abil­ity and risk are what cre­ates a sell­able busi­ness.  But often its unmit­i­gated risk that causes a good busi­ness to go bad.  Los­ing a key cus­tomer or key staff mem­ber, a change in laws or reg­u­la­tions, or the poten­tial to lose crit­i­cal finan­cial sup­port can bring about dif­fi­culty for small busi­ness owners.

The abil­ity to mit­i­gate risk begins with iden­ti­fy­ing where risk resides in your busi­ness.   Busi­ness own­ers have at least three areas within the busi­ness where risk can be iden­ti­fied and prioritized.

1. Finan­cial Risk
2. Oper­a­tional Risk
3. Legal Risk

A busi­ness can never be totally with­out risk.  A successful busi­ness is one that has iden­ti­fied risk and cre­ated the appro­pri­ate mit­i­ga­tion strategies.

Finan­cial risk involves how you acquire and use money.  This might include access to cap­i­tal and lines of credit, invest­ments and investors, and over reliance on sin­gu­lar sources of rev­enue.  The owner must also consider the market con­di­tions, com­pe­ti­tion, revenue risk, and prod­uct and/or ser­vice obso­les­cence when ana­lyz­ing finan­cial risk. Under­stand­ing finan­cial man­age­ment and cash flow is fun­da­men­tal for small busi­ness health and is essen­tial for the owner to mas­ter.  A rela­tion­ship with a “banker” and not just a bank can be a valu­able asset in under­stand­ing finan­cial risk. They often can help the owner under­stand the acqui­si­tion and use of money and offer sug­ges­tions on improvement.

Oper­a­tional risk may be the broad­est area of risk as it includes almost every aspect of the busi­ness. Sup­ply chain risk, process and pro­ce­dure, equip­ment, tech­nol­ogy, envi­ron­ment, and resources are all ele­ments of oper­a­tional risk. Reliance on a sin­gu­lar sup­plier or cus­tomer, busi­ness dis­rup­tion due to weather or the volatil­ity of a pre­cious resource are exam­ples of where risk is obvi­ous but hid­den risk may be in the areas of aged equip­ment, key employ­ees, loca­tion changes that may increase costs, or insuf­fi­cient con­trols. Detail­ing the busi­ness model and iden­ti­fy­ing rela­tion­ships, chan­nels, key resources, processes and part­ners are great ways to iden­tify oper­a­tional risk.

Legal Risk deals with not only the poten­tial lit­i­ga­tion areas of the busi­ness but also the reg­u­la­tory and statu­tory envi­ron­ment.  Under­stand­ing risks asso­ci­ated with safety, staff conduct, intel­lec­tual prop­erty, and cor­po­rate respon­si­bil­ity must be bal­anced with changes in the reg­u­la­tions and laws that gov­ern the loca­tion and indus­try of the busi­ness. Legal risk, espe­cially in the reg­u­la­tory and statu­tory areas, may seem like the least man­age­able area of risk but iden­ti­fy­ing what the risks are pro­vides the basis for plans to address these legal risks.

A busi­ness can never be totally with­out risk.  A sell­able busi­ness is one that has iden­ti­fied risk and cre­ated the appro­pri­ate mit­i­ga­tion strategies.

What do you think is the tough­est risk to mit­i­gate?  How have you addressed this risk in your business?