4 Biggest Risks To Your Small Business And How To Protect Yourself
Guest post by Heather Redding
The failure rates of small businesses are staggering. In the US, 50% of small businesses fail within their first year, and 95% fail within the first five years of operation.
Doing business is a numbers game.
And small businesses, in particular, are vulnerable to all sorts of risks and threats. They do not have the capital reserves that large corporations have, such as Procter & Gamble.
With plenty of reserves, companies can weather many storms. Therefore, as a small business owner, you must be diligent and proactive about risk management to compensate for the lack of capital buffers. Then, you will be able to survive a tough business environment and turn threats into opportunities.
How To Conduct Effective Risk Management
First, identify key risks that can impact your ability to achieve business objectives. Then, develop risk responses for those threats. Any event that can alter your likeliness of achieving business objectives, be it positive or negative, is a business risk.
To keep things simple, we’ll divide risks into internal and external.
Internal risks are mainly risks related to your performance as a business manager or the performance of any member of your team. 88.7% of business failures happen due to management mistakes.
Therefore, addressing those risks is more vital than addressing external risks.
#1 Poor Leadership And Management Skills
Lack of industry experience, lack of the necessary communication and relationship building skills, lack of adequate motivation and drive, poor competitive advantage, are just a few factors that can drive small business to failure.
Invest in yourself and be open to feedback about your performance. Keep improving yourself and your leadership and management skills.
If you are not organized — don’t expect to have a well-organized company. Those skills are indispensable, and your business cannot possibly succeed without them.
Poor management can lead to another threat—losing a key team member.
Small businesses rely on their people more than larger businesses because they may not have established systems to compensate for the skills of employees. Losing a key team member can have a detrimental impact on team morale and productivity.
#2 Disorderly Or Uncontrolled Growth
Fast undisciplined growth can lead to troubles for small businesses. For example, borrowing a large sum of money without ensuring that there are stable market conditions can be a risky step.
Purchasing new office locations, hiring more staff, or buying new equipment without proper business justification are similarly risky measures.
Structure your business around the customer. Be as customer-centric as possible and ensure your business processes are pull-based. That is, your business should only produce goods based on available confirmed demand from the customers.
This would significantly reduce waste in costs and time and ensure customer satisfaction while maintaining efficiency.
External threats originate from outside your organization, but they can have a significant impact on it.
IT managers in small and medium-sized businesses say that cyber-attacks are a daily occurrence.
Back up your data periodically to mitigate the risk of data loss or breach. Remember, often information is the most important asset you may have, and it is your responsibility to protect it.
#4 Negative Operating Cash Flow
Negative cash flows mean that you are unable to pay your creditors when their payments are due. Negative cash flow can happen due to a variety of factors, which can include delay in receiving payments from clients, overreliance on a few customers (more than 20 percent of your revenue coming from a single customer), seasonal factors affecting demand, and many others.
Any business risk can materialize and develop into a cash flow problem.
It is important to distinguish between profit and positive cash flow. Even profitable small organizations can have a negative net cash flow if they are not receiving due payments in time. To maintain control over cash flow, it is important to keep an eye on key metrics such as days payable and days receivable.
You should ensure that the days payable (how long you wait before you pay for your purchases after they have been delivered to you) are longer than the days receivable (the number of days customers wait before they pay you after delivery).
The ratio should preferably be 1.25:1. That is, if your days payable is 4 days for example, then your days receivable should preferably be 3 days. Other ratios can also be monitored, such as your interest cover ratio, especially if you have high debt levels.
Small businesses face many threats, but they have a few advantages as well. For example, they can operate with more agility and flexibility than large multinational corporations and have significantly less bureaucracy. Also, they can be disrupters and innovators and make inroads in the market quickly.
However, they require good management and leadership to capitalize on those strengths. Such leadership can overcome most, if not all, types of risks.
Author Bio: Heather Redding is a part-time assistant manager, solopreneur and writer from Aurora, Illinois. She is also an avid reader and a tech enthusiast. When Heather is not working or writing, she enjoys her Kindle library and a hot coffee. Reach out to her on Twitter.