Small Businesses Need Risk Assessments, Too

Mitigating small-business risks essentially entails making judgments founded on the best information. Because guaranteed security is never possible for an entrepreneur, effective management of risk should be your most important goal. Therefore, you will need to adopt a system that delivers the information necessary to drive sound actions that will minimize your risk.

Informed decisions are required at small enterprises as well as in large organizations. Even though you’re a one-person operation, you can still create a basic risk assessment system. Some risks are intangible, such as harm to reputation or brand. But many can be measured quantitatively. Risk management planning focuses on avoiding the tangible risks that can imperil the functioning of your business.

Types of risk

Determining whether your financial house is built on sand or rock begins by considering the types of risks your business is exposed to.

Topping the list of risk variables to consider is your company’s current financial situation. Have a system for maintaining contemporaneous financial data that you compare to targeted projections. Know your trends for sales and profit margins, and identify the causes of fluctuations to determine if there are any red flags that could potentially trigger a business crisis.

When taking on an expansion or a new opportunity, always determine the expected risks relative to the rewards. Growth requires capital, which often means taking on debt. Compare the borrowing costs – in addition to the increased expenditures for growth initiatives – to anticipated future benefits.

What can’t be controlled are external risks, such as market conditions and industry trends. If a quantitative financial assessment reveals adverse results, the culprits could be these external risks. Although they’re beyond your control, you can still position your business for the new conditions with revised cash flow projections.

Conducting a risk assessment

Reduce the complexity of risk assessment planning by considering some basic questions. Begin by determining the direct as well as indirect risks imposed by a new project, new customer, new product, or new strategy. Next, consider the possible adverse consequences and how serious these consequences could be; know the extent of your worst-case scenario. Only you can decide what amount of risk is right for your business.

After assessing potential consequences and the financial effect they would have on your business, develop countermeasures to protect your vulnerable spots. The main element of a risk assessment plan is what to do when any potential threat morphs into a problem that could seriously impact your business. Ensure that you have action plans ready for each risk, should it become a reality.

Solid financial data is critical to risk oversight

Finally, risk management hinges on knowing in advance when one of these potential threats is about to become a danger. In risk oversight, it’s accurate, up-to-date financial data that will give you this heads-up. There’s no substitute for reliable real-time financial statements and your ability to interpret them. In doing so, you can be vigilant in evaluating risks so that your business thrives rather than topples.

Good News: You Can Survive a Temporary Cash Crunch

Bad news: you’ve been hit with a surprisingly high tax bill this year. Good news: That means profits were higher than expected!

More bad news: The cash drain after paying the taxman may have triggered a cash crunch. More good news: Several mechanisms exist for surviving this temporary crunch.

In this scenario, the solution starts with a well-crafted cash flow projection. The forecast quantifies the impact of your survival measures.

Predict how new initiatives alter your cash flow: Making cuts in operating expenses is the first tool in the entrepreneur’s kit. But don’t engage in a broad slash-and-burn strategy. Make prudent reductions that don’t cripple ongoing sales and service. A key area for saving precious cash is delaying capital expenditures, such as new equipment or upgrades to existing machinery.

Evaluate accounts receivable and inventory: When money conditions are tight, this step is vital. Needed cash can be generated by offering discounts to customers for paying early or by selling excess inventory at reduced prices.

Make sure these are limited-time offers rather than permanent changes to your business policy. And convey the message that you’re offering rewards to customers, not that you’re experiencing cash flow difficulties.

Examine the liability side of operations: Look into restructuring debt with lower monthly payments. Ask for concessions – such as extended payment terms – from vendors. Communicating frankly with creditors is the best way to show that you value the continuing relationship and want to assure them that they will be paid. This is the good news they want to hear.