You are an entrepreneur, you have an innovative idea that you think maybe lucrative, and you’ve started your own business. That’s terrific! But before you get bogged down in the details of everyday operations, know that small businesses face particular challenges and are vulnerable to some particular risks that large businesses are not.
You don’t have a bookkeeping department, an HR department, an IT department: in fact, it's very likely it's just you and maybe a handful of employees. So how are you supposed to identify and mitigate the risks your business faces by yourself?
Start here. Read this article for the five most common pitfalls for small businesses, and how to mitigate the risk of suffering any of those pitfalls.
Risk #1 - Financial
Start-Up Costs
As the owner, you probably personally financed your small business. This may have entailed refinancing your house, running up credit cards, or taking out a business loan with your personal guarantee it will be repaid.
Operating Costs
In addition to the money needed to get off the ground, you need some cash to pay employees, maintain your operation, and market your business.
Economic Conditions
Depending upon the service or product you are offering, the state of the economy may affect your success or even your ability to keep your doors open.
Mitigating Financial Risk
Prepare your business for the worst by pre-planning the launch of your business. Don’t overextend yourself with loans you will not be able to keep up with. That being said, be sure to secure the best loan terms you can. Be sure to save cash and negotiate the best purchasing and employment terms you can.
The most important thing you can do to mitigate financial risk in starting a small business is to underspend and underpromise, in the beginning. This is so that minor bumps in the road do not close your doors. Working with a nest egg means that the inevitable minor financial setbacks will not be fatal to your new business.
Risk #2 - Strategic
Internal Strategic Risk
Before you open your doors you need to decide on your business structure, product or service offered, ideal target market. You also need to craft your sales and marketing strategy and figure out how you are going to produce your product, and how much, or how you are going to provide your service.
External Strategic Risk
Competitors may appear or may offer new products or services that directly compete with yours. New technology might be created that could render your product or service obsolete, or, could make manufacturing that product or offering that service less expensive for you and for your competitors. Last, local, state and federal government regulations are always changing and may impact the way you operate.
Mitigating Strategic Risk
All you have to do is research, plan, prepare, and periodically revisit your strategic decisions to mitigate the risk of acting on a wrong or outdated strategy.
Using this article as a starting point, list all the aspects of your business where strategy is key. Then conduct research on your industry and note the market trends, how your competitors got started, and what your competitors are currently doing. Be guided accordingly. Then revisit this list at least once a year to update your research and shift strategy accordingly.
Risk #3 - Reputation
Your company’s reputation is its single most valuable asset.
With the internet and social media, it is easier now than ever to get your business out there and known to your target audience. The downside is that it is also easy for an unhappy customer or client to air their views to a wide audience via Twitter, Facebook, an industry blog, Google reviews, and more!
Mitigating Risk to Your Business’ Reputation
First, ensure that your product or service is the best you can offer. If your product or service is not of high quality, you cannot really combat damage to your business’ reputation.
Second, make sure that anyone who is unhappy with your product or service has a productive way to give you feedback, positive or negative. For example, if someone purchased your product online, you have their email address and their shipping address. There are automated services that send a follow-up email to your customer asking for a rating of your product, and if the rating is five stars, send another email asking for a review. If the rating is negative or there is constructive criticism given, you are notified of that and have the opportunity to take action to rectify the problem.
You have that customer’s shipping address - send them a postcard with a discount on future purchases to thank them for their feedback (either way!). There are a few things people like more than saving money.
Risk #4 - Liability
Your small business is at more risk of closing due to a lawsuit than a large corporation, because that kind of business has more resources than you do.
Whether the problem is that someone was injured on your worksite, your failure to perform on a contract, or damage to your commercial property, these are all liability risks that can be mitigated.
Mitigating Liability Risk
First, consult a business attorney to help you draft employee, vendor, contractor, and distributor contracts. Draft your safety best practices and HR protocols at this time as well.
Property damage, as well as employee, customer, or vendor injuries, can all be insured against - do it! This will require workers’ compensation insurance as well as general liability insurance.
As far as executing your contracts goes, you must underpromise, especially in the beginning. Get a reputation for producing on time or early, and the size of those contracts will grow in time.
Risk #5: Business Interruption
Business operations could be interrupted at any time, for a number of reasons. What if there was a natural disaster, and your building and equipment were damaged? Or, what if a key employee falls seriously ill and there is no one who can take her place? What if your supply chain of parts is interrupted?
Mitigating the Risk of Interruption of Business Operations
All of these scenarios can be anticipated and the risk of interruption of business operations mitigated by creating a business continuity plan.
In the case of a natural disaster, if it is just that the electricity is out, get a generator. If natural disasters are more serious than that in your area, consider planning ahead by stockpiling product in an amount that makes sense to you, in a different location. Then research-ready sources of the equipment you use as well as available commercial contractors who can repair your building. Form a relationship with these people so that when you need them, they will help you.
Never rely on a single source for anything you need to make your product or perform your service, because if that single source fails your operations will cease. Diversify your vendor list so that you have two, three, or four different supplies for everything you need to do business.
Similarly, never rely on one employee for a vital task in your business. Always have a backup in the form of another person who can do that job. That redundancy will pay off the very day the key employee calls in sick.
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy bankruptcy lawyer in Philadelphia.
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