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Starting and operating a small business is a risky proposition.
When starting out, you’re perhaps leaving the stability of full time employment to start a venture you’ve always had a passion for, with no guarantee that you’ll able sustain the lifestyle you perhaps had whilst working full time. You have debts to pay, and mouths to feed.
There are many sources of risk within every business, regardless of what industry you operate in. When starting your business, it's important you understand there are certain risks you can control and other events you can't. Internal risks may be around policies and procedures, employee risks, or customer risks, whereas external risks may involve broader industry risks, changes in government legislation affecting your product or service offering, or increased competition.
External risks cannot be controlled directly by you, however you can put safeguards in place to minimise the impacts some of these potential events may have on your business. Internal risks can be directly controlled and managed to reduce potential adverse impacts. But how do you do this, and where do you start?
If you ask any business owner, there is a common theme that risk management is very low on the priority list, why should we worry about risk when we need to grow, develop and promote your product or service offering, build our customer list, and manage cash flow? The failure to acknowledge and act upon the fact that no business is risk free, and put a structured approach in place to minimise the impact of certain events affecting your business are key contributors to business failure.
Minimising business risk
Identifying and managing risk is an integral component of building a successful small business. It would be impossible to remove risk from all situations but you can take steps to remove or reduce your business risk. The process for minimising business risk is graphically illustrated below.
1. Risk Identification
2. Assessing level of impact of risk occurrence
3. Prioritise risks to be actioned
4. Develop risk minimisation/mitigation strategies to address prioritised risks
5. Implement and monitor strategies identified
6. Continual monitoring of ongoing risks
To minimise business
risk, small business owners need to implement effective risk management
strategies into their business. This is an often difficult process of
identifying what is a possible risk event, assessing the level of impact of the
event occurring, and then designing a strategy to minimise, manage or remove
the risk, the latter being the more preferred. A key step often missed in the
risk management process is to continually monitor the strategies you have
designed. By “testing” these strategies, you are able to determine whether they
are able to hold up and mitigate any risks should they eventuate.
Here’s an example of how risk management strategies work for small businesses, using an all too familiar example of small business owners being the only ones managing their business.
Example A – A small business owner runs a small fruit and veg retail outlet, employing 5 staff. They do all the customer orders, manage the business’ cash flow, manage staff payroll, and ensure all workplace safety is adequately managed.
Working through the risk management process above:
1. Risk identification - One major risk here is that does the business have adequate insurance coverage should something happen to the business or the owner of the business to ensure the business continues to operate.
2. Level of impact – The impact of not having adequate insurance cover would be rated as HIGH
3. Priority – HIGH
4. Risk management strategy – Review current insurance cover with perhaps use of external consultant, and adjust accordingly. Some of the types of insurance often needing consideration are listed in the table below:
General insurance
|
Risk and Life
|
Business Disruption
|
Buy/Sell
|
House, Vehicle and Personal Goods
|
Income Protection
|
Key Person insurance
|
Property
|
Life
|
Public Liability
|
Total and Permanent Disability
|
Work Cover
|
Trauma
|
5. Take out identified insurance as required
6. Annually review insurance cover depending on what activities have happened throughout the business over the past year, and are anticipated to occur in the next 12 months.
Outsource your risk management strategy
The risk management process is time consuming and lengthy, but is critical to ensuring business survival. We know that small business owners are time poor, therefore engaging an external consultant to assist you in developing your risk management may be worth considering.
At SJN Chartered Accountants we have a passion for assisting business owners (and those planning to become business owners) plan and achieve their business goals through a structured process of continual communication. Please contact us to find out more.
Phone: 8333 7300
Email: info@sjnca.com.au
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