Small businesses are unique in many ways. They do not have the extensive resources or knowledge-base that multimillion dollar organizations may have.

Because of this, while small businesses may face similar risks to their larger counterparts, they may be more vulnerable and thus should employ more careful mitigation strategies.

Here are the six biggest risks to small businesses and what you can do about them: 

6 Biggest Risks for Small Businesses

1. Financial risk

The biggest risks facing many small organizations are actually financial. Founders often have invested their life savings or taken out significant loans in order to get the organization off the ground, so there is a lot of pressure to be successful. 

Cash flow is one of the biggest concern at the beginning. You must consider where money will come from to maintain operations, pay employees, and invest in market penetration and growth.

Depending on the industry, you may have to make a large upfront investment and it can take a while to begin seeing a return. Careful preparation and planning, as well as support from third parties, can help you mitigate this risk. 

Economic conditions are also an important factor to keep in mind. A serious recession can damage even the most wealthy of organizations and are more than able to put a small organization out of business.

You must consider the current and future climate and prepare the organization. This process is usually best when it takes place during prosperous times: it allows you to save excess cash, negotiate favourable purchasing terms, and more as explained in this article, Best Ways to Prepare your Business for a Recession. 

2. Strategic risk

It can be hard to know what steps to take when your organization is brand new. There are probably not formalized decision-making processes in place, and each stage of the business life cycle comes with its own challenges. Any small organization must decide its ideal structure, target market, sales and marketing strategy, production strategy, and more. 

The shifting external environment is also a risk for all organizations. Competitors may appear or change and begin offering a similar product or service. Technology can shift, presenting a new opportunity or rendering a current process obsolete. New regulations may force you to change the way you operates. 

To address this risk, you must simply prepare for it through research and planning.

Bring a diverse group of your staff together from various departments or divisions, brainstorm a list of risks and prioritize them, then ask what you are doing to mitigate each risk and what you should be doing. Conduct research based on industry trends, your competitors, and prior experience.

Constantly work towards improvement by coming back to the list at least annually to ensure you are on track and that the list is current and accurate. 

3. Reputation risk

Reputation risk is one of the most commonly overlooked risks. A company’s reputation is its single, most important asset. This is particularly important for small businesses because they need to create a good reputation in order to grow: if nobody has heard of your organization or only knows bad things about it, they're not likely to become a customer. 

With the ever increasing use of social media and technology, it has become both easier and harder to manage your reputation. It's harder because every customer has a public forum an audience that they can go to if they are not happy with your organization; but these conversations are no longer happening behind closed doors and be addressed publicly to maintain your image.

It is not enough to simply sign up for a Twitter account or create a Facebook Page; business owners should monitor online conversations about their brand and participate.

Encourage feedback, both positive and negative, and always show gratitude and empathy in responding. While responding to negative views can be difficult, it's crucial to maintaining reputation. Vendasta offers an excellent guide on responding to reviews in their blog here. 

In addition, every organization should have a social media policy, defining how employees should interact with customers and portray the company, both on organizational and personal pages. This ensures that your employees are aware of how their social media use can have both positive and negative impact on the company.

4. Liability risk

While all organizations are subject to liability risk, you're most vulnerable at a small size, in part because of reputation risk. You also may not have the resources to effectively pay for damages without risking cash flow. 

Employee or customer injuries, property damage, or failure to meet contractual obligations are all examples of liability risks that can lead to costly lawsuits and fines for small organizations. 

What is the best way to mitigate against lawsuits? Invest in good legal advice!

Small organizations may believe they don't have the resources to invest in a full-time lawyer, but the average businessperson cannot stay on top of the daily changes in laws and legal precedents. You should always consult with legal when drafting your employment contracts or developing safety and HR practices. An upfront investment can save a lot of resources down the road.

In addition, every organization needs to have appropriate insurance coverages. It is one of the most important things you can do to protect yourself.

Find an insurance agent or broker that has experience and a good reputation in representing your industry and work with them to find the right coverages and terms for your risk.

5. Business interruption risk

Your organization can be disrupted at any time. 

For example, a natural disaster could impact the area you operate in, making it impossible to go into the office or causing severe damage to inventory or equipment. Or, if your team is very small as is often the case in small businesses, even something small like an illness could interrupt operations for a day or two. 

Another risk in this area is supply chain. Is the business relying too heavily on others to manufacture its product, subcontract part of its service, or deliver the inputs needed to sell its products?

With just-in-time inventory and lean business models becoming more pervasive, companies need to be more concerned about where their inputs are coming from and what their contingencies are if they are delayed or lost.

Small businesses should prepare and practice business continuity plans. These plans, often in response to a crisis, assign roles to all members of the organization so that they can react quickly.

This will minimize the impact of the interruption, retain customers and reputation, and get the organization back on track as soon as possible. A detailed guide on forming a business continuity plan can be found here.

6. Security risk

Cyber risk is the threat of financial loss, disruption, or reputational damage to an organization due to some sort of failure from its IT systems.

Hackers are becoming increasingly skilled and sophisticated. At the same time, organizations are collecting more personal data from their customers. This combination presents a potent security risk that must be actively mitigated through security protocols and monitoring. 

The best advice for any new business owner is to formalize risk management right from the start.

It does not have to be perfect. Considering all risks and planning for how they will be mitigated will help reduce risk-related costs such as insurance premiums, claims deductibles, and downtime.

Good risk management protects the reputation of the company and helps it plan for contingencies. This will make the business more profitable and ensure the longevity of the company.

ClearRisk's Claims, Incident, and Risk Management Information System can help organizations of any size manage and mitigate risk. Our platform is built on the #1 cloud-computing platform in the world, making it extremely secure, and our risk industry experts are happy to provide guidance on any risk-related issues. Want more information? Learn more below. 

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