The most successful companies are not only aware of risk management but it has become an ingrained part of their corporate culture. But what if you are a start up? What if you are a younger small business just starting out? You mat have the entrepreneurial mindset but due you have a tolerance for risk?
Most misconception centers on the myth that entrepreneurs and small business owners are risk takers who care little for risk management. Nothing could be further from the truth. Entrepreneurs take risks, sure, but they are calculated risks, never reckless ones. Risk tolerance and risk management often starts with the individual. Some people can’t even handle the risk involved with their 401(k).
What countless research has found, especially those performed by some business management schools, has shown that a person’s risk tolerance may not be an accurate assessment with regard to their overall success as an entrepreneur. What does matter, it seems, is their ability to recognize risk and to install proper risk management strategies to minimize those risks. Having a plan and being flexible seems to be the hallmark of the successful entrepreneur.
As the legendary entrepreneurial motivational speaker Harvey MacKay once noted: “A dream is just a dream. A goal is a dream with a plan and a deadline.”
So, what does the small business owner really need to be concerned with when it comes to risk and risk management? Generally speaking there are four major categories every business must put under the risk microscope.
The first is your operational risk. Basically, this means that something is braking down within the company. Employees are failing or internal company procedures have broken down and are not working. Sometimes it is both. If the system is not working correctly, any production performed by your employees is bound to be flawed. You must have operational systems in place that will allow your company to thrive.
Market risk is another area of risk management that cannot be overlooked. Changes in the economic picture, a rise or fall in interest rates, your suppliers need to raise prices or demand has slackened because your customers are pulling back. All of these factors can play a huge part in your demise. If this risk is properly managed, however, you will be prepared to whether through any foreseeable crisis.
Credit is another key player in your solvency. Every time you extend credit to a customer or client, you run the risk of them never paying you for your product or service. When economic times are tough, this risk management concern often becomes glaring. Perhaps you might institute risk based pricing or taking out some insurance to hedge against losses.
Finally, there is your reputation to worry about. You risk your reputation every day so it is important that you have risk management policies in place to ensure that there is no damage done. Your reputation is everything and the survival of your business depends on it.
