Business Risks: A Guide to Apply Risk Management in 2021
Risks are part of building a business. Without the right way to limit the effects of these risks, which will no matter what you do strike you in some way, your business can join the 90% of startups that fail. That's why in 2021 it's essential to apply a business risk management plan!
20% of businesses close shop in the first year, while another 50% run out of gas within the first five years.
Thanks to the explosion of the digital economy, business founders have plenty of opportunities that they can tap into to build a winning business.
Unfortunately, there is a myriad of challenges your new business has to navigate through. These risks are inevitable, and they are a part of life in the business world.
However, without the right plan, strategy, and instruments, your business might be drowned by these challenges.
Therefore, we have created this guide to show you how can your business utilize risk management to succeed in 2020.
What is Business Risk?
The term "business risk" refers to the exposure businesses have to factors that can prevent them from achieving their set financial goals.
This exposure can come from a variety of situations, but they can be classified into two:
Internal factors: The risk comes from sources within the company, and they tend to be related to human, technological, physical or operational factors, among others.
External factors: The risk comes from regulations/changes affecting the whole country/economy.
Any of these factors led to the business being unable to return investors and stakeholders the adequate amounts.
What Is Risk Management?
Risk management is a practice where an entrepreneur looks for potential risks that their business may face, analyzes them, and takes action to counter them.
The steps you take can eliminate the threat, control it, or limit the effects.
A risk is any scenario that harms your business. Risks can emanate from a wide variety of sources such as financial problems, management errors, lawsuits, data loss, cyber-attacks, natural calamities, and theft.
By setting up a risk management plan, your business can save money and time, which in some cases can be the determinant to keep your startup in business.
Not to mention, on the side, that risk management plans tend to make managers feel more confident to carry out business decisions, especially the risky ones, which can put their startups in a huge competitive advantage.
Types Of Business Risks
There are many types of startup and business risks that entrepreneurs can expect to encounter in 2020. Most of these threats are prevalent in the infancy stages of a business.
To know what you’ll be up against, here is a breakdown of the 12 most common threats.
1) Economic Risks
Failure to acquire adequate funding for your business can damage the chances of your business succeeding.
Before a new business starts making profits, it needs to be kept afloat with money. Bills will pile up, suppliers will need payments, and your employees will be expecting their salaries.
To avoid running into financial problems sooner or later, you need to acquire enough funds to shore up your business until it can support itself.
On the side, world and business country's economic situation can change either positively or negatively, leading to a boom in purchases and opportunities or to a reduction in sales and growth.
If your business is up and running, a great way to limit the effect of negative economic changes is to maintain steady cash flow and operate under the lean business method.
Here's an article from a founder explaining how he set up a lean budget on his $400k/year online business.
Competition is a major business killer that you should be wary of.
Before you even start planning, ask yourself whether you are venturing into an oversaturated market.
Are there gaps in the market that you can exploit and make good money?
If you have an idea that can give you an edge, register it. This will prevent others from copying your product, re-innovating it, and locking you out of what you started.
Competitive risks are also those actions made by competitors that prevent a business from earning more revenue or having higher margins.
4) Execution Risks
Having an idea, a business plan, and an eager market isn’t enough to make your startup business successful.
Most new companies put a lot of effort into the initial preparation and forget that the execution phase is equally important.
First, test whether you can develop your products within budget and on time. Also, check whether your product will function as intended and whether it’s possible to distribute it without taking losses.
5) Strategic Risks
Business strategies can lead to the growth or decline of a company.
Every strategy involves some risk, as time & resources are generally involved to put them into practice.
Strategic risk in the chance that an implemented strategy, therefore, results in losses.
If, for example, the Marketing Department of a company implements a content marketing strategy and a lot of months, time & money later the business doesn't see any ROI, this becomes a strategic risk.
6) Compliance Risks
Compliance risks are those losses and penalties that a business suffers for not complying with countries' and states' regulations & laws.
There are some industries that are highly-regulated so the compliance risks of businesses within them are super high.
For example, in May 2018, the EU Commission implemented the General Data Protection Regulation (GDPR), a law in privacy and data protection in the EU, which affected millions of websites.
Those websites that weren't adapted to comply with this new rule, were fined.
7) Operational Risks
Operational risks arise when the day-to-day running of a company fail to perform.
When processes fail or are insufficient, businesses lose customers and revenue and their reputation gets ruined.
One example can be customer service processes. Customers are becoming every day less willing to wait for support (not to mention, receive bad quality one).
If a business customer service team fails or delays to solve customer's issues, these might find their solution in the business competitors.
8) Reputational Risks
Reputational risks arise when a business acts in an immoral and discourteous way.
This led to customer complaints and distrust towards the business, which means for the company a big loss of sales and revenue.
With the rise of social networks, reputational risks have become one of the main concerns for businesses.
Virality is super easy among Twitter so a simple unhappy customer can lead to a huge bad press movement for the company.
A recent example is the Away issue with their toxic work environment, as a former employee reported in The Verge.
When a business invests in a new country, there is a high probability it won't work.
A product that is successful in one market won't necessarily be in another one, especially when people within them are so different in cultures, climates, tastes backgrounds, etc.
Country risk is the existing failure probability businesses investing in new countries have to deal with.
Changes in exchange rates, unstable economic situations and moving politics are three factors that make these country risks be even more delicate.
10) Quality Risks
When a business develops a product or service that fails to meet customers' needs and quality expectations, the chance these customers will ever buy again is low.
In this way, the business loses future sales and revenue. Not to mention that some customers will ask for refunds, increasing business costs, as well as publicly criticize the company's products, leading to bad reputation (and a viral cycle that means even less $$ for the business).
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11) Human Risk
Hiring has its benefits but also its risks.
Employees themselves involve a huge risk for a business, as they become to represent the company through how they work, mistakes committed, the public says and interactions with customers & suppliers,
A way to deal with human risk is to train employees and keep a motivated workforce. Yet, the risk will continue to exist.
12) Technology Risk
Security attacks, power outrage, discontinued hardware, and software, among other technology issues, are the events that form part of the technology risk.
These issues can lead to a loss of money, time and data, which has many connections with the previously mentioned risks.
Back-ups, antivirus, control processes, and data breach plans are some of the ways to deal with this risk.
How Businesses Can Use Risk Management To Grow Business
To mitigate any future threats, you need to prepare a comprehensive risk management plan.
This plan should detail the strategy you will use to deal with the specific challenges your business will encounter. Here’s what to do.
1) Identify Risks
Every business encounters a different set of challenges.
Before mapping the risks, analyze your business and note down its key components such as critical resources, important services or products, and top talent.
2) Record Risks
Once risks have been identified, you need to assess and document the threats that can affect each component.
Identify any warning signs or triggers of that recorded risk, also.
The best way to beat a threat is to detect and prepare for it in advance.
Once you know your business can be affected by a certain scenario, develop steps that you will take to stop the risk or to blunt its effects.
4) Prioritize Risks
Not all types of business risk have the same effect. Some can bring your startup to its knees, while others will only cause minimal effects.
To keep your business alive, start by putting in place measures that protect the vital functions from the most severe and most probable risks.
5) Have a Backup Plan
For every risk scenario, have at least two plans for countering the threat before it arrives.
The strategy you put in place should be in line with the current technology and trends.
Ensure your communicate these measures with all your team members.
6) Assign Responsibilities
When communicating measures with the team, assign responsibilities for each member in case any of the recorded risks affect the business.
These members should also be responsible for controlling the risks every certain time and maintaining records about them.
Becoming your own boss is one of the most rewarding things you can do.
However, launching a business is not a walk in the park; risks and challenges lurk around every corner.
If you are planning to establish a new business come 2020, make sure you secure its future by creating a broad risk management plan.