All small businesses have risk, regardless of business type, industry, or start-up preparation; it’s simply an integral part of doing business to deal with risks. But what types of risks are there? While there are more than the ones listed here, it helps to understand the most common types of small business risks. Having a handle on the most typical business risks gives you the opportunity to mitigate them, if not avoid them altogether.
There’s always going to be a financial risk in small business, but the amount of risk depends on the type of business, the initial cash flow, and the indebtedness. Financial risk is an umbrella term, and includes credit risk, investor risk, liquidity, and debt obligation risk, to name a few.
Business risk may seem like an obvious type of risk for a small business start-up, but it is more complex than what you might imagine. While business risk may be related to financial risk, business risk commonly refers to the chance that a small business’s will experience lower than anticipated profits, or won’t make a profit at all.
Every small business also has to contend with operational risk. Your operational risk is tied to your business operations, such as your employees, the kind of work you do, and unexpected events that may keep your business operations down temporarily. It can make a big impact on your business. For example, if your delivery trucks break down, you can’t make any deliveries until the truck is repaired or replaced.
With any type of business, your reputation is extremely important as it can propel your business to the next level. However, there is always a bad reputation risk, which can occur as a result of a lawsuit or other type of negative publicity, such as a bad product reviews published online.
Your small business also has a strategic risk, which is a risk resulting from future strategies and plans, such as entering a new business line or launching a new product or service. For example, if you plan on selling a new type of electronic device that hasn’t trended yet, you’re exposing your business to a strategic risk by hoping consumers embrace the product.
Last but not least, your small business needs to contend with compliance risks. Compliance risks stem from certain rules and regulations set forth by agencies and organizations, such as the Environmental Protection Agency and the Occupational Safety and Health Administration. You need to adhere to rules, regulations, and laws to avoid potential compliance issues.
While these are common small business risks, there are also a variety of other risks, such as natural disasters, that can have a negative impact on operations. When operating a business, it is your responsibility to keep risks in mind, take calculated risks, implement precautionary safeguards, and protect yourself with small business insurance.