The word ‘risk’ always seems to have a negative connotation, yet any entrepreneur will tell you that in order to be successful it’s something you need to face - again and again and again. If you’re looking to start your own business (which I assume you are if you’re reading this article) then you’re already contemplating taking a risk. You’re making a decision as to whether you’re going to step out of your comfort zone, and into the unknown.
For some this carries more risk than others, for example, if you’re thinking about quitting your full-time job in order to pursue a dream you have of being your own boss. That means giving up financial security without knowing with absolute certainty that a year or two down the line you’re going to be making a healthy profit. But, and here’s the thing, who is to say that you won’t be? Taking a risk in this situation can be good - as the famous saying goes you never know until you try! I’m sure many very wealthy entrepreneurs never envisaged they’d be as successful as they are today.
Part of why they became successful is because they learnt the art of knowing when or when not to take a risk. And that all started from the very moment they decided to start their own business. The key is to gauge the level of risk you’re taking by asking yourself a few simple questions:
1) Have I identified who is going to buy my product / use my services, and why?
2) Have I spoken to my target audience to see whether the above is true?
3) Have I done enough competitor research to ensure I have a better - or different - offering to my rivals?
4) Have I created a sound business plan, which indicates clear goals and aims with realistic financial projections?
5) Have I done all that I can to protect myself and my business - such as an accounting and cashflow tool, business insurance and patent grant?
Of course, there are many other things you’ll need to consider but these are the basics and will help you mitigate your chances of risk in the future.
What are the different types of business risk?
As a new entrepreneur it’s important to understand the different types of risks you may encounter. Business risk, according to Investopedia, is the “possibility that a company will have lower than anticipated profits or experience a loss rather than taking a profit”. Here are some of the common risks that companies of all sizes face:
● Strategic risk – for example, new competitors coming on to the market, merger and acquisition activity and industry changes.
● Compliance risk – for example, changes in the law. You may also need to comply with new rules and regulations if you decide to export.
● Operational risk – risks that occur within your own business, for example a machinery failure, server outage or theft or fraud.
● Financial risk – for example, non-payment by a customer which could lead to a written-off debt. Poor planning of financial projections and fluctuating foreign currency exchange rates can also contribute to financial risk.
● Reputational risk – anything that can ruin your brand’s image, for example a product recall, court case or negative story in the press.
How can I manage risk in the early stages?
It’s important to stress that some of these things are beyond your control; you can’t stop new legislation from coming into force, or new competitors from entering the market, for example. Having a plan in place which explores all possible eventualities, and how you’re going to deal with them, is the best way to minimise each type of risk. Here are four things to consider:
● What type of risks does my business face right now? Start with those things which could present an immediate ‘threat’. Write them down, including as much detail as possible.
● Can I put any prevention measures in place? In another column, write down whether there is anything you can put in place to minimise the chances of each risk becoming a reality.
● How will I react if a risk materialises? This is worth the thinking time! Imagine how you’d feel if a risk develops? What would you do?
Lastly, it is important to reflect and re-evaluate. Every six months or so sit down and take another look at your list - what did you handle well? What could you have handled better? Which risks are no longer? Which new risks can I add to the list?
What about financial risk management in specific?
Last year, a study by Ormsby Street found that after five years, just four in ten small businesses will still be trading. Poor cash flow was cited as one of the main causes of problems, often as a result of late payment of invoices. In its own survey on financial risk, Company Check found that 63% of UK businesses have had to deal with late payments in the past and 53% have had to write off bad debt.
One way to mitigate your chances of developing cash flow issues is to monitor the finances of the companies you do business with. This can be done through an online database that gives you detailed financial and credit risk information. Here are three things you should pay attention to:
● Years trading – check out how many years the company’s been trading for – it’s not the be all and end all but it’s a good indication. The distinction between years trading and years incorporated is important as some companies are bought ‘off the shelf’ as an already aged company.
● Assets to liabilities – if the latter is higher that the former for one year or more, that could indicate that there are large bank loans outstanding, high wage costs or mismanagement.
● Business directors – are they easy to find, and do any of them have closed or resigned directorships, or have they been involved in businesses which have since dissolved? This can happen for many different reasons (administration, wind up orders or voluntary liquidation) but it’s important to know.
This article was written by Katie Deverill, operations manager at business data provider Company Check. For more of her insights into topics that matter to small businesses, visit the Company Check Hub.