a quick guide to business risk

A Guide to Business Risk

September 21, 2022Cash Flow

Business risk is a broad term that applies to an event or circumstance that could potentially keep you from reaching your business objectives and strategic goals.

Although random events beyond your control impact the success of your business, risks are often generically identified and addressed through management plans and strategies.

The estimated average cost of managing risk is close to $10 per $1,000 in revenue, which is why it’s important to stay on top of it.

Each risk needs to be treated and managed differently, which means knowing the exact risks your business faces.


Facing Business Risk as an SME

Small and mid-size enterprises can be devastated by unmanaged risks.

It’s said that between 25% to 40% of businesses fail to recover from an unforeseen event.

These events could be economic disasters, political unrest, employee theft or cyberattacks.

No matter what the threat or risk may be, failing to identify and plan for the unexpected is sure to lead to an uncertain business future.

These are some of the biggest risks your SME could face.


1. Security Risk

Security risks go beyond someone physically entering your office and vandalizing property or stealing the money.

Cyber risks are a serious concern for small businesses, many of which rely on the internet and IT to conduct daily operations.

The IT field is a challenging environment, given the constant updates, developments and advancements, and the overwhelming amount of digital data that is necessary for business transactions.

SMEs are extremely vulnerable to cyberattacks, with 90% of SMEs stating a cybersecurity issue would have a serious negative impact on the business within the first week of the incident occurring.

The more common security risks include:

  • Human errors such as failure to back up data, accidental data deletion or accidental damage to a digital device
  • Natural disasters that lead to technology failures
  • Malicious intent to do harm through insider sabotage or theft, infiltration of malware or a virus, or intentional destruction of IT property or devices

Cyberattacks are probable given the minimal resources most SMEs have to invest in strong network defense and IT departments.

Many SMEs are run from small offices and rely on basic software or websites to provide the necessary safeguards against cybersecurity risks.

The business risk concerning security is two-fold: the unauthorized access to data regarding client accounts as well as the personal information of employees.


2. Business Interruption Risk

At any given time, your organization could experience a sudden disruption in business as usual.

The threat of natural disasters is always present, and this risk increases when you factor in the geographic region of your office, warehouse, or manufacturer.

If you work with a very small team, illness could make normal operations difficult as employees miss work.

You may be able to recover from one day of unexpected closure, but it would be difficult to recover from supply chain interruptions that set your deliveries back by weeks or months.

Lean business models have many companies limiting their inventory and materials until orders are made or prices for goods and services fall, but this could backfire if orders are lost or significantly delayed.

If a customer contract can’t be fulfilled, you risk losing both the account and your reputation.

Addressing this business risk is best done through preparing and practicing a business continuity plan. A quick, organized response can get your business back on track.


3. Liability Risk

Even as a small business, you face liability risks from property damage, customer injuries, failing to meet contractual obligations or employee injuries.

If you deal with the sale of products, there is the additional concern of product liability.

Not only can a breach in the terms of a contract cause a problem, but issues with the safe operations of a product or the expectation of a product being free from defects can also bring risk.

Companies that deal in imported products may have a higher responsibility where product liability is involved.

You can effectively manage business risk related to liabilities with appropriate insurance coverages.

Pair your protection with best practices for safety and security around your office and use legal counsel when designing contracts and important documents.


4. Financial Risk

Many SMEs are working on extremely small budgets or with limited revenue streams, which often makes financial concerns the most serious business risk.

In the early stages of business, cash flow is always an issue. It’s vital to make wise decisions about extending credit or taking on customers without payment upfront or you could be left with bad debt.

Customer failure to pay can lead to getting behind on bills or an inability to secure new products or to pay yourself or your employees.

Financial planning can help mitigate some of the risks, but it’s always best to get support from third parties that specialize in financial services.

Money management and preparing for the unexpected can help your business weather financial uncertainties.


5. Reputation Risk

This is one of the most overlooked areas of business risk, but protecting your company’s reputation should be a priority.

SMEs rely on positive reviews and word of mouth to spread their business across the market, and because of technology and social media, news travels fast and all around the world.

Whether you are relying on Facebook, Twitter or other online platforms to share news and make connections, you need to carefully monitor conversations, respond to both positive and negative feedback and establish a social media policy for all employees.


6. Strategic Risk

Your organisation will need to adapt and change as it moves through the different stages of the business life cycle.

Technology changes, regulatory adjustments and new product offerings all require strategic decision-making.

Careful planning and research can keep you from making emotion-based decisions, as well as defining your sales, marketing and production strategies each year.


Reducing Business Risk as an SME

There are many actions that can help mitigate business risk and damage from it.

Working with PencilPay can address the financial risks associated with extending trade credit and managing customer accounts.

Contact us to find out more about the protection our software provides.