Risk Management For Small Businesses: Risk Versus Reward

If you are the type of business leader who is prepared to take risks, then you may often reap the rewards of your confidence. But how can you minimise the impact of negative consequences should those risks not pay off?

As a small business owner, it is important to understand potential consequences and rewards for the decisions you make, and you should try and find a balance between business risk vs reward. Some business leaders can be over-diligent and unable to take a leap of faith, while other entrepreneurs chase opportunities without considering the pitfalls. As a result, risk management as a small business owner is vital.

If your primary aim as a small business is growth, it’s good to take a chance, but keep a careful eye on the areas and aspects of your business that could be badly impacted because of a poor decision.

Regional Head of Information and Grading, Paul Anderson, believes that failing to plan for a ‘shock’ is often the result of a business having seen success from risk-taking in the past. “It’s a mistake to assume ongoing success,” he explains. “Just because you have done okay in the past doesn’t guarantee it will continue to be so in future. For example, the bigger you get, the more you will appear on competitors’ radar, which is a risk in itself.

There are multiple risk management factors in play when you are a small business owners, including increasingly competitive environments, cash flow problems, bad debts, political risk and late payments. It was estimated that in 2021, UK SMEs were chasing more than £50bn owed by late payers.

There are ways to reduce risk with robust cash flow forecasting. Business failures are often preceded by money troubles, so a key part of risk management for small business owners should be checking customer profiles, calculating their average payment times and identifying late payers to help reduce the risk of currency casualty.

But credit controls can’t protect against so-called ‘black swan’ events – events that have huge impacts on a business and are completely unpredictable despite any pre-emptive measures. “A big reason why companies suffer from bad debt isn’t because they have poor credit control procedures, but because we are seeing huge companies going bust,” says David Edgell, Regional Commercial Manager – South at Allianz Trade.

Carillion had £850m [owing from] unsecured creditors when it collapsed and only £40m of the total was credit insured. When big companies become insolvent this has a knock-on effect all the way down the supplier chain to small businesses feeding in. We see quite a lot of companies suffering and, sadly, by the time they start to look for solutions such as insuring against bad debt, it’s generally too late.

An area of risk management for small business owners to focus on, should be technology. As businesses and information transfers to cloud-based IT platforms, and remote working becomes the norm for many, the tools that you use to project manage your finances are at risk of falling prey to cyber criminals.

In the first half of 2021, individuals and businesses in the UK lost £1.3bn to fraud and cybercrime, with around 60-70% of UK SMEs suffering a cyber-attack during the 2020 pandemic, only 11% of whom had cyber cover.

Many SMEs are now suffering from ‘alert fatigue’ and are ignoring important warnings because of the number of alerts they receive each week – many up to 75 a day.

Unfortunately, your own team members are another area of risk. Relying on an individual or a small collection of employees to handle the majority of your business details can impact you in the long term, if these employees fall ill or jump ship. Having a plan B for your team as part of your small business risk management strategy means that skills, knowledge and expertise are never lost, but rather passed on.

With UK unemployment rates falling, it’s tough to find the best recruits, so a sudden loss of key people could be a serious challenge to your business. Investing in training and asking employees to shadow key staff and deputise can help reduce the threat.

There are risks associated with growing at pace, so the people you bring in are crucial,” says Paul Anderson. “Over the years, I’ve seen small businesses grow from a sole trader into a limited company, but the owner-manager is still trying to do everything. They haven’t brought in new managers or delegated responsibility.
Using a SWOT analysis technique (strengths, weaknesses, opportunities and threats) will give you a better perspective of your position in the market. Who are your competitors? What is your business model, data, people, suppliers and location? Are there any of these areas that you are concerned about or feel should be reassessed?

Addressing the main threats to your business and then acting on them will go a long way to securing your business’ future. Add layers of security to your business to neutralise as much financial risk as possible. An example of risk management for small business owners could be taking out adequate cover or looking at trade credit insurance.

Lead Commercial Underwriting Manager, Victoria Keeling favours a practical approach: “It just comes back to knowing the market, knowing where your obstacles and risks are and trying to prevent them via training and sharing information.

Taking a level of precaution to balance out business risks vs rewards could mean a brighter future. What are you prepared for?

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