Identifying 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?

By continuing to use the site, you agree to the use of cookies. More information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.