Any time you start a business endeavor, you expose yourself and your business to risks. In order to determine how to handle the risks associated with your business, you should first identify and quantify them. Quantifying small business risks is about identifying the risk and coming up with the best way to measure the expected risk. In order to improve the success of your business without fault, you should not only quantify your risks, but manage your risks. This process begins with being in the know as far as the types of business risks.
Know the Types of Business Risks
The first step to quantifying your business risks is identifying them. The following risks are ones you should know and become familiar with.
Financial Risks – The financial risks your business may face can vary anywhere from higher interest rates from business loans, to income from investments, and loss of funds as a result of market fluctuations. Many of these are unavoidable, but you can prepare for them by using a common formula that is used for an investing ratio. The formula takes your investing net cash flow divided by the net cash flow used for financing.
Legal Risks – Regardless of the type of business you own and operate, you’ll need to deal with legal risks. Legal risks may include regulation compliance, labor or pay regulations, and not following through with non-discrimination laws and regulations. Being aware of such rules and regulations as they pertain to your company can avoid such risks being a factor.
Technology Risks – As a business in the modern technological age, you’ll undoubtedly use technology as the basis for much of your business operations. The more electronic of a company you are, the more risks you have. In order to quantify technology risks, such as those from lost or stolen data or cyber attacks, you should use a formula that will add your employee costs (direct and indirect), non-employee costs, employee recovery costs, IT recovery costs, and value of client services.
Decision Making Risks – The decision making risks your company may contend with include any business decisions regarding investments, marketing or advertising, competitors, or product development. To quantify such risks, consider the cost of your first preferred choice and a second alternative; this will give you an approximate opportunity cost.
Market Risks – Losing market share to your competing companies can put a large impact on your company’s profits, as well as the risk. If you want to quantify this type of risk, you should analyze your competitors as well as the demand of your business in an expected market drop for economic downturn.
Workforce Risks – A risk every company should be aware of is the workforce risk. Also known as labor risk, your workforce risk has to do with your employees; they may not be trained properly, lack the creative thinking needed for success, or your company might have a high turn-over rate. Replacing employees can cost you thousands of dollars, so avoiding this and properly training and motivating employees in the first place may be your best bet to quantifying this kind of risk.
Environmental Risks – Your work environment is an important factor when considering the various business risks. Environmental risk, such as possible accidents, illnesses from work-related duties, liabilities from products you offer, damages, and other related incidents, can cause not only an impact on business income and assets, but your reputation. Quantifying the environmental risks is done by creating a risk management program specifically for your work environment.
Improving the longevity of your business is not just about avoiding risks, but learning the best ways to handle them should they arise. Many business risks you will contend with are unforeseen and therefore cannot be avoided completely. But by quantifying small business risks, you’re setting the framework of giving your business the best chance at overall success.