Insights

How to Successfully Manage Small Business Risks in 2022

Written by Glen Tavares

Risk management is crucial for any business. Risk management considers different events that could damage your business and how to reduce their likelihood or impact. Risk comes in many forms such as Financial Risk, Operational Risk, or Human Error Risk. It’s a good idea to know what risks are out there so you can plan accordingly.

This article will look at different types of risks small businesses may face and provides tips on managing and implementing risk management in your industry. While it’s impossible to avoid risk altogether, you can significantly reduce the chances of something going wrong by following some simple steps.

What is Risk Management?

Risk management is the purposeful activity of identifying, evaluating, and prioritising risks to minimise them where possible and maximise opportunities. Risk Management is vital for keeping a business afloat, and has become more necessary in today’s COVID pandemic world as business faces new challenges every day. 

The Importance of Risk Management for SMEs

Understanding risk is essential for small businesses because it helps them avoid potentially devastating problems. Small businesses tend to have less resources, less development capital and fewer opportunities than larger companies. As a result, risk management provides many benefits.

Common Risks Small Businesses Face

Some of the common risks SMEs face include Financial Risk, Operational Risk, and Human Error risk. It’s essential to be aware and take steps to mitigate them wherever possible.

Financial risk can come from various sources, such as fluctuations in the stock market or interest rates. Still, there are ways to protect your business against these fluctuations. Operational risk includes system failures or natural disasters. In contrast, human error risk is just that – any avoidable mistakes your employees may make. These are important to know about, and a company can mitigate them through proper risk management strategies.

Financial Risk

Small businesses face several types of Financial Risk, such as market risk (fluctuations in the stock market), foreign exchange risk (when trading with another country), interest rate risk (the possibility that the cost of borrowing will increase), and credit risk (the chance that a company will not repay a lender).

Market Risk is the most common type of financial risk. It is the potential for losses resulting from changes in the prices of investments. For example, suppose your small business has invested in financial instruments such as stocks, and the stock market crashes. In that case, you could lose a lot of money.

Foreign Exchange Risk is the danger that arises when you conduct transactions in a foreign currency. For example, if your small business exports products to America and you are paid in USD, but the value of the dollar drops, you could lose money.

Credit Risk is when your business suffers a monetary loss because a lender does not repay or renegotiate an unpaid debt. For example, if you are leasing space in a building and haven’t been able to make rent payments for three months, you would be at risk of losing the area and your business.

Interest Rate Risk is realised when interest rate changes cause unexpected losses for an investment. For example, suppose you’ve been paying $250 per month on a loan by credit card, but the interest rate goes up to 20%. In this case, you may have trouble making payments.

Operational Risk

Operational risk is the risk of financial loss from inadequate or failed internal processes, systems, people or external events. Operational risk is composed of two sub-categories:

Systems Risk involves hardware and software failure. An example of Systems Risk is when a user deletes important files accidentally or malware corrupts data on your computer.

Human Error Risk is just that. An example of Human Risk is an under-qualified employee who can make poor decisions that impact the organisation.

Risk managers have a lot to think about when mitigating operational risk.

Risk Management in Action

Risk Management often means the difference between closing up shop and thriving in the competitive world. However, Risk Management is not one-size-fits-all. While a company may avoid some risks, other risks may require a small business to be innovative and use the resources at its disposal.

Risk Management may involve an extensive range of strategies. Here are some simple steps small businesses can take to reduce the likelihood of financial, operational and human risks materialising.

Risk Identification

Risk Identification is the first action of Risk Evaluation. Risks are identified by analysing a company’s strategic plan, market assessments, industry forecasts and competitor analysis. Information gathered from these analyses can be used to identify potential risks.

Risk Assessment

Risk Assessment is the process of identifying and evaluating health risks, safety, the environment and any other aspects of significance. Risk assessments are planned methods that assess both the likelihood of a risk occurring and the severity, should it occur. A small business can use risk assessments for many purposes, including environmental impact statements, product labelling or community planning.

Risk Monitoring and Control

Risk Monitoring and Control is a process that any business should establish to identify the risks it faces, analyse those risks, plan strategies for addressing them, monitor risk mitigation efforts, and improve risk management processes. Risk Monitoring and Control helps avoid or minimise losses from unforeseen events by understanding their causes and planning appropriately to cope with them.

Risk Transfer (Insurance)

Risk Transfer is a fancy term for taking on risk. Risk Transfer is a process in which, by payment or agreement, one party takes on the risk of loss from another party.

Risk Transfer entails transferring risk – whether by insurance, negotiation with suppliers – for a fee or consideration – or through means such as contract provisions that provide compensation. Risk Transfer can be direct or indirect and may occur before or after the loss event.

Embedding Risk Management in Your Business

SMEs must embed Risk Management into their business. It helps reduce risk, increases your competitive advantage, and saves you money.

Here are three risk management strategies that any risk-aware business owner or financial manager should consider.

  • Make risk management part of your company’s culture through employee risk training and awareness programs
  • Start by assessing low-risk areas before moving onto riskier areas
  • Don’t forget about risk management when your business is going well

Risk Management Training

Every business needs risk management, no matter what size it is. Likewise, employees, including managers and business owners, need risk management training to identify and mitigate potential risks before they impact the business.

When someone in an organisation has risk management knowledge, everyone benefits. Here are three reasons why your business might need risk management training:

  1. Risk management training ensures that every staff member understands risk management. Keeping an eye on potential problems is also a great way to limit damage to your business should something terrible happen.
  2. Without risk management knowledge, employees can cause serious problems for a company and business owners. When small businesses take the time to identify risks, they can develop ways to reduce the likelihood that these risks will happen.
  3. Training in risk management benefits everyone: the business owner, managers, staff, and your business as a whole.

Conclusion

Small businesses are the backbone of the Australian economy. They provide jobs, support local communities and drive innovation. However, to be successful, small businesses need to take risks. It can be a scary proposition for business owners already juggling a million things. That’s where risk management comes in. By implementing risk management strategies and processes, you can mitigate the effects of risk on your business while still taking necessary (and sometimes profitable) chances.

If you’re looking for ways to get started with Risk Management in your small business, we have plenty of training resources and options available to help you out. EZY Skills offers Management of Risk (MoR) training and certification for employees via e-Learning or virtual workshops to business owners and their staff so that everyone is on the same page regarding identifying, managing and mitigating risks.

“The opinions expressed by BizWitty Contributors are their own, not those of BizCover and should not be relied upon in place of appropriate professional advice. Please read our full disclaimer."

About the author

Glen Tavares

Glen is senior business and technology delivery professional with over 30 years of experience and is currently the Director and Co-Founder of EZY Skills, a Melbourne based, Australian EdTech Start- Up providing accredited eLearning training courses and globally recognised certification to professionals and organisations around the world. Glen’s primary passion is “growing Australian business through professional skills development”.