What Will I Learn?
- 1 How are risks categorized?
- 2 How do you measure risk?
- 3 What are common business risks?
- 3.1 1. Examples of fraud in a business
- 3.2 How can you prevent fraud in your business?
- 3.3 2. Examples of incorrect Information business risks
- 3.4 3. Small business disaster risk example.
- 3.5 4. Small business personnel risk and examples.
- 3.6 5. Small Business Capital Shortage.
- 4 How to prevent a small business capital shortage.
- 5 Conclusions.
Every business has risks, and management of risks is a day-to-day activity. There are four common risks: fraud, incorrect information, disaster, and personnel risks. These risks are common in start-ups and existing businesses.
When starting a business you are subjecting yourself to risks, if you don’t know the risks likely to affect your business. When writing or updating your business plan, It’s very important to make sure all the risks are written and you have measures to control or avoid them. It’s also important to update your employees, and they should all know the measures to control your business risks and they should have access to your business risk management plan..
How are risks categorized?
Business risks can be categorized into two types. The first type is known as the “statistical” risk, which refers to risks that are likely to occur in the future, such as being sued by a customer, losing a contract, bankruptcy, or having a competitor steal your customers. These risks are usually not visible but are often the most important risks for a business. The second type is known as the “operational” risk, which refers to risks likely to happen shortly; for example, your employees will steal from you, or thieves will rob your business while you are closed.
How do you measure risk?
These risks are usually visible and can be prevented or minimized. Several methods can be used to calculate the probability of a business risk occurring, including:
- Mathematical analysis.
The mathematical analysis method is based on the “probability” concept. This method calculates the probability of a risk occurring using either the “frequentist” or the “Bayesian” approach. The frequentist approach is based on the idea that risk can occur with a finite probability.
What are common business risks?
Risk management is a form of risk management that seeks to ensure that the organization is protected by ensuring that it is prepared to cope with the risks and hazards it may face. This process involves identifying all the organization’s risks, analyzing them, and planning for them.
1. Examples of fraud in a business
A business in the financial industry should have a written business plan with a section explaining the risks likely to affect them. Financial companies are prone to risks relating to fraud, because of their involvement with liquid cash.
This is also a reason why businesses in the financial industry such as banks have risk management teams, that keep tabs on fraud-related risks.
Start-ups and small businesses are the majority of new businesses, they are more likely to face fraud without even knowing.
The first type of risk every business owner should be aware of is the diversion of cash. Diversion of cash occurs when an employee or partners conduct transactions at a higher price than in the market for their own benefits. Diversion of cash affects a business’s movement of goods and services because you will price them at a higher price than your competitors.
For example, If you look online, the pricing of business plans is not constant it depends on your consultant, and ranges from $1,000 to $15,000. Your accountant or business consultant might engage in a profitable personal engagement at the expense of the firm.
Employees can also sell products and services at a higher price, and record incorrect value of positions. Such employees might appear to be operating within the company limits but they are actually misleading the owners. Employees can also fail to put money in the business accounts, fail to record transactions, or park the records to take a position back in the future.
How can you prevent fraud in your business?
For small and medium businesses the most common fraud prevention is the separation of the front desk and the support staff. Business owners should place all entries of transactions as a responsibility of support staff. Support staff should also have a direct reporting line and their interest should align with the management.
The business owner can also offer cashless payment systems. If your business is a big business with a high cost of sale of products, such as real estate, it’s okay to allow your customers to deposit to the business bank account.
2. Examples of incorrect Information business risks
Examples of incorrect information include errors in reporting systems such as accounting software. for small and medium businesses is advisable to have a set of eyes looking at and confirming all transactions entries.
It’s important to have support staff responsible for the accuracy of the business records and goods and services positions. The support staff should be highly knowledgeable of the business and market conditions.
To ensure your support staff responsible for the accuracy of the records is dedicated to the task, they should produce daily informal reports. The reports should then be compared with the software-generated reports for comparison. If a high difference is spotted they should now audit the reports.
Support staff can also be responsible for confirming payment details and recorded transactions. It’s also important to make sure accounting recording resources and support staff are available. Business owners should also avoid having transactions that are not aligned with their resources. For example, a business accounting software can record 10 transactions in 10 minutes, but the number of clients per 10 minutes is 15. management should plan on systems upgrades as the business grows.
Small business accounting risks.
Accounting risk falls under incorrect information such as accounting errors. Accounting risks might not affect the business bottom line but can affect the business rating with investors and creditors.
3. Small business disaster risk example.
It’s imperative to plan for small business disasters such as power outages, fires, and computer failures. Small business disasters should be managed and planned for depending on the demand of the product likely to cause the disaster.
For example, a company relying 100% on their computers should have backup computers and UPS. Businesses in the transport industry should have backup cars or backup partners. Companies that rely on data should have a copy of their data in a backup server.
How to manage small business disasters!
A contingency plan is necessary for small business disaster management. The contingency plan should have primary and secondary backups. Some companies also implement contingency plans in different geographic locations. This includes banks, trading firms, consultancy firms, transport companies, farmers, and retail shops.
Before any risk is controlled the business owners should first organize and plan to manage the risks. It’s also important for business owners or managers to consult with experienced experts in risk management. Experts in this field include credit managers, finance managers, legal, and market risk.
4. Small business personnel risk and examples.
Good personnel is always in high demand, competitors can raid your firm and pluck out your most valuable employees. for example, if you have a good team your competitor can raid your small business and hire all of them including their managers.
Personnel planning can be divided into four main steps:
- Identifying your needs
- Selecting the group
- Planning the group
- Implementing the plan
Small business personnel is classified as a disaster since the small business that has been raided will now have to identify, hire and train new employees. The recovery from personal risk takes time and its impact can take years to recover.
How to manage personnel risk in small businesses.
Managing personnel risk is required, simple steps such as cross-training your employees, and having backup duties are some of the strategies small businesses can utilize.
This should not be taken as a replacement for departed employees but should be used as temporary risk management. Small businesses should have all their employee’s responsibilities written and documented.
5. Small Business Capital Shortage.
Most of my blog posts are read by small business owners and start-ups. Since they are tailored to help them during their start-up stages. I have decided to include capital risk as a bonus since this is one of the risks I advise business owners to be careful about.
A business capital shortage occurs in two ways.
The investor may pull out his funding, or even reaccess your credit risks and raise the interest compared to the industry competitors. Secondly, the business may use more funding capital to raise the funding costs compared to the competitors.
How to prevent a small business capital shortage.
There are three ways to prevent capital shortage or a financial crisis for your small business;
- Controlling investors’ perception of credit quality is one of the strategies to keep the investors happy. Investors look at liquidity for the small business, the use of their capital, and earnings.
- Small business should also keep their funding requirements at the same level as the industry competitors. The use of funds should also adhere to the industry standards, or increased based on the value proposition of the company. for instance, if the company has higher quality products they may increase the costs of producing their products which are reflected in the pricing of the products at a premium.
- Small businesses should also have funding plans to project their funding requirements in the future. stable investors can be onboarded based on the funding projections and business growth. This is mainly done on a business plan and reevaluated based on the business growth.
Not all capital shortages happen as above mentioned, some capital shortages can be due to the fact that the business has a disaster that has happened. a good example is the closure of small businesses due to riots, outbreaks, and also burglary.
Small business owners should identify these risks earlier and reduce the funding requirements to the bare minimum required during a crisis. controlling financial shortages should be planned earlier during business planning, and consultation with a financial expert, investors, and the management.
Managing risks can be approached in two ways, bottom-up or top-down, the same way financial projections of a business plan are projected. Business owners use the bottom-up approach when they want to manage risks using quantitative measures.
The top-down approach is used by business owners when they want to manage the risks using historical events in their business or the markets.
Business planning and risk management go hand in hand, employees procedures and day-to-day activities are important to plan. Financial projections are important, both investment and risk management procedures should be projected during business planning.
Investors should be vetted and background checks are important to implement, having clear policies of best practices should be the key goal of every business owner.
All the risks outlined in this article fall under the category of operational risks, and highly affects small business owners in the growth stage. And one of the primary methods of controlling these risks is buying an insurance policy.
Why is risk management important in business?
Businesses today, though, are more dependent than ever on risk management. The more risk that is taken, the greater the return. Companies cannot afford to risk failing to make a profit, so they are constantly looking at ways to lower their risks. This is best done through risk management.
What is risk management in a workplace?
Risk management means managing the risks for the organization to achieve its goals. It is the process of managing the risks that may affect the organization. Risk management is a continuous process that starts from the earliest stages of a project and is followed during the project execution. It is a part of the overall project management. Risk management is an important element of project management. The risks that could affect the business and its goals are managed so that they do not affect the business adversely.
What is a risk to a business?
A risk to a business is a chance of losses that will occur. These losses can include revenue, reputation, or even the company’s survival. In many cases, a business will have multiple risks, and the most dangerous risk is the risk of collapse. It is important to reduce risk to a business because it is the only way to ensure the company will succeed.
What is an example of business risk?
Business risk is the possibility that something will happen to a business that affects its profit or loss. Examples are:
1. A fire that destroys the building;
2. Bad weather that makes it difficult to run the business;
3. An accident that injures employees;
4. A loss of a major customer;
5. A change in the law that affects the business;
6. An act of terrorism that disrupts business operations;
7. A pandemic that affects the business.