How Small Businesses Can Identify and Manage Risks

Greetings,

Risk is indeed a natural thing in business activities. For this reason, it is important for us to understand what risk is and the types of risk in business.

The definition of risk more specifically, can be interpreted as a consequence that arises as a result of the impact of uncertainty, thus creating adverse impacts on the business. The uncertainty can occur from internal and external forces. Based on the definition according to Abbas Salim, there are 3 factors that influence uncertainty which will later cause a risk of loss. This uncertainty can be caused by factors as follows:

Economic uncertainty (economic uncertainly caused)

Uncertainty caused by nature (nature uncertainly caused)

Uncertainty caused by human behavior (human uncertainly caused)

The most common type of risks that can impact upon small business are:

• Production Risk

• Marketing Risks

• Human Resources Risk

• Financial Risks

• Environmental Risk

• Technology Risks

• Market Demand Risk

• Competitor Risks

• Government Regulation Risks

There are many more risks that are not mentioned. Each small business should assess their own risk on a regular basis and put into place the relevant mechanisms to reduce potential risks.

Risk management is a process that includes the identification, evaluation and control of risks that can threaten the continuity of your business and its activities. Let me show you three examples of risks that are fairly common in a small business and I shall provide some tips to minimise these risks.

Example 1 - Customers not paying their invoices on time.

This is a common risk that most businesses face on a daily basis particularly with small businesses being held back from payments by large business. The key tips for small business to consider are:

Develop a credit management policy that will be enforced by employees. It is no use having the best credit management policy in the world if it is not being implemented by the employees.

The credit management policy should include procedures on new customers, amount of credit given to all customers, terms, follow up procedures for collection of money, credit collection agencies and risk identification for each customer.

Ensure that you have the best credit collection employees that are trained for credit collection.

Give your customers many options for them to be able to pay you.

Example 2 - Not enough cash in the business to pay employees

A frequent problem in most small businesses particularly with customers not paying on time or the business has too many expenses. The lack of cash in a business will impact on your ability to be able to pay employees or suppliers on time and could eventually lead to your demise. Some simple strategic ideas that can be adopted today to reduce this risk will eventually make your business strong with surplus cash.

Ensure that your customers pay you on time.

Review your expenses and reduce expenses that are not needed for the business.

Create a second bank account that you can transfer excess funds to meet future obligations such as taxation.

Example 3 - Your business is holding too much stock

Do you have too much stock that is just not moving? Your business may have purchased too much stock last season and it did not sale. So what do you do with this old stock? The problem is that you have tied up your cash in inventory that is not converting back into cash. The more money you have tied up in inventory, the less you'll have to cover essential daily expenses such as rent and payroll. You might be able to get better prices on inventory by buying in volume, and your production may be more efficient when you produce more inventory and achieve economies of scale. There is an additional risk with the carry cost of this inventory.

Look at each inventory item that is on hand and determine the amount of risk in quantity and dollar value with the item not selling. Your accounting system should be able to help you with your risk analysis plus calculation of inventory turnover days.

Develop plans to move this inventory such as packaging your salable stock with non-moving item as promotion or bonus stock if it is not out of style.

If your inventory system is manual, adopt an accounting system that will give you quality information and you can see at any point in time your inventory levels and costs.