December 29, 2016
Why Risk Management is Important for a Small Business
Risk management is something that large businesses spend a lot of time discussing. They consider the components of risk within their organizations and develop processes to identify, measure, and manage that risk. Often, small business owners do not consider this a vital conversation for their business culture. However, in today’s competitive business environment, there has never been a more important time for small businesses to consider these risks. Here are four areas of risk that every small business owner should consider.
Market Risks – Market risk is the value your company’s assets will decrease if there are external changes. For example, how might a change in interest rates impact your business? Have you considered how an exchange rate change or a drop in commodity price might affect your organization? It is important to create a plan to identify the market risks, monitor them, and create an action plan so that you are prepared should a change occur.
Credit Risks – Do you bill customers for your services? What happens when they don’t pay? This customer is a credit risk for your organization. It is crucial to have a plan in place to identify credit risks (and avoid them) as well as to determine what to do if someone defaults on their payment.
Another form of credit risk is having all your eggs in one basket. Putting the bulk of your business in one organization can be a big risk. Especially if that organization goes out of business or decides to work with another vendor. In these cases, it is crucial to diversify your client base to ensure that you have support should one vendor or client fall through.
Operational Risk – What are your internal processes? Are they creating risk for your organization? Failed processes, including sub-par employees, can create profound operational risks that eat into your bottom line. It is crucial to identify any operational risks and come up with a plan for managing them.
Reputational Risk – You are only as good as the perception your customer has of your business. Your company’s reputation is hugely important in getting ahead. Not only does this mean that you are trustworthy and reputable, but that you choose to associate with those who have similar reputations.
Do you need help defining the risks within your organization? Contact the team at Tax & Business Consultants for assistance.
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