How to manage risk as a small business

Ed Davis, Hertfordshire Growth Hub

At times of political and economic uncertainty, it’s more important than ever for a small business to understand critical risks and get ready for them. Not everything can be foreseen, but a prepared business will be more resilient in the face of challenges ahead.

Risk management is different for every business, but it should begin by focusing on known changes and risk factors that could most affect your business. In the current context, those might include changes in trading relationships, new immigration controls or the potential of rising prices. Good advice is to think about these risk factors on a scale of 1-10. If you feel like something is at least a 6 on that scale of severity, then it’s too important to ignore or hope for the best.

You need to make a plan for how you will respond to this change or scenario. This can be done by looking at how four key areas of your business will be affected: financial management, recruitment and retention, sales and marketing, and regulatory compliance. You should review your operating procedures in these areas, identify potential vulnerabilities and decide what changes you can make either now or contingent on potential outcomes. 

Risk management is partly about specific issues that could adversely affect your business. It should also focus on making a company as financially and operationally robust as possible, the best buffer against future uncertainty. The obvious place to start is cash flow, the lifeblood of any small business and the place too many go wrong through lack of rigorous management.

Look at controllable costs and where you reasonably reduce the amount of cash your business consumes. Consider if you have too much cash tied up in stock, a common issue for small businesses involved in manufacturing or distribution. Finally, think about giving yourself headroom on your overdraft: have a conversation with your bank and shop around to see where you can get the best deal. Use the relationships you have with providers and suppliers to ensure the terms on which you do business day-to-day are in your favour. These will be incremental rather than transformational benefits, but they help to ensure your business is running as cost-efficiently as possible.

Similar to cash flow, supply chain is another area of business where you can stumble by taking things for granted. When thinking about economic or regulatory changes, remember that they affect your suppliers as much as your own business. So, you need to be thinking about risk across the entire supply chain, and areas where your supply of goods or services may be threatened. If you have concerns, consider finding alternative suppliers or spreading the risk across a few different companies.

These measures may seem boring or insignificant when compared to bringing a product or service to market. Often, it’s the latter where small businesses thrive: building a brand, finding customers and making sales. But all that hard work can be undone if your cashflow seizes up, holes are poked in your supply chain or your business is blindsided by an unforeseen (but entirely foreseeable) change in the business environment.

Long-term success is as much about doing the unseen work of making a company resilient as it is the more gratifying business of racking up sales. Which means one of the greatest risks a business can take is to approach the future without being ready for it.

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