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.
- Financial Risk
- Operational Risk
- 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?