Running a business involves a variety of risks. Some of these risks have the power to completely dismantle a business, while others have the power to seriously damage it, making repairs expensive and time-consuming. Business owners, no matter how big or small the business is, may foresee and plan for risks that are inherent in doing business. Risks are being taken by small business owners every day. However, putting too much at stake could affect your net income. To ensure that you are making the right decisions, conduct a risk assessment for your small business.
While many people are involved in the process and several factors are considered, executing a thorough risk assessment boils down to three main components: risk identification, risk analysis, and risk review.
RISK IDENTIFICATION
To properly address hazards and risks in the workplace, they must first be correctly identified. The goal of risk identification is to identify what, where, when, why, and how a situation can hinder a company’s ability to function. For example, a business located near the Gulf of Mexico would list “the potential for hurricanes” as an occurrence that could interfere with normal business operations. This will enable you to minimize harmful risks before they arise.
Here are some ways that a small business owner can identify risks:
Brainstorming:
To brainstorm is to take a holistic view of the business you are developing. In doing this, you want to think about any challenges you anticipate as well as anything that you are unsure about.
Thinking Pessimistically:
Generally, pessimists have a gloomy or skeptical outlook. While pessimism is typically not encouraged in the workplace, asking yourself “what is the worst thing that could possibly happen to the business” is a good way to identify risks.
Imagining yourself in the employee’s shoes:
Even if you are a new business owner and currently operate as the sole employee, employee perceptions of a business’s dangers can be very different from those of the business owner. In their regular work activities, employees can come across new threats that were not previously noticed or anticipated. As a result, putting yourself in the employee’s shoes can give you a good sense of what could go wrong.
RISK ANALYSIS
After you have identified potential risks, you must prioritize them in accordance with an assessment of their likelihood of occurrence. With this in mind, establish a probability scale for the purposes of risk assessment.
For example, risks may:
- Be very likely to occur;
- Be somewhat likely to occur;
- Have a small chance of occurring; or
- Have little to no chance of occurring.
Failure to appropriately assess risk likelihood can have serious implications. If you underestimate the likelihood of an incident, you might not take the appropriate preventative measures, which can result in expensive mishaps or even fatalities. The opposite is also true: if you overestimate the likelihood of an event, you could take unnecessary precautions that cost you time and money.
RISK REVIEW
Once you have established a list of potential business risks and determined each risk’s likelihood of occurrence, detail them in a document. Develop a method to evaluate the impact of each risk, then consider the extent of the potential harm and the difficulty of recovery. Determine the controls you may apply to limit potential risks. To predict your revenue cycle, look at patterns over time. Additionally, evaluate the effect risks have on your business, and consider a risk’s importance as well as the possibility that it will affect your business.
Periodically review your risks. Your risk assessment is not a one-time commitment; it is instead an ongoing an ongoing responsibility. At the end of each year, you should evaluate your risk management procedures to assess how you manage risks. Additionally, keep an eye out for emerging risks that may not have been significant during the prior evaluation.
CONCLUSION
Risk assessments are an essential component of managing a business. Your business risk assessment can be used to inform decisions about funding. A quick risk assessment will assist you in avoiding problems that could impact your finances. You learn from the assessment what actions you should take to safeguard your company. This will enable you to recognize the situations you need to deal with, and steer clear of. In addition to helping you internally, a financial risk assessment can aid in your readiness for financer interactions. Before lending you money, these people want to know how risky your business is. They consider the potential of your business expanding as well as your likelihood of repaying the loan. By putting the aforementioned risk assessment methods into practice, you may control any potential risk to your business. Prepare your risk assessment plan so that you can take the time to identify and manage the risks that your company faces.
Jaiden Moore, at the time of this post, is a second-year law student at Penn State Dickinson Law. He has a B.A. in Liberal Studies from North Carolina A&T State University, and is interested in civil litigation. Jaiden is Treasurer of the International law society and is a member of the Black Law Students Association as well as the Business Law Society at Dickinson Law.
Sources:
https://safetymanagement.eku.edu/blog/risk-identification/
https://www.assp.org/news-and-articles/conducting-a-risk-assessment
https://www.patriotsoftware.com/blog/accounting/small-business-risk-analysis-assessment-purpose/
https://www.berkeleywellbeing.com/pessimism.html#:~:text=Pessimists%20typically%20have%20a%20gloomy,t%20willing%20to%20take%20risks.
https://www.eclipsesuite.com/risk-likelihood/
https://www.investopedia.com/articles/financial-theory/09/risk-management-business.asp
https://www.lucidchart.com/blog/risk-assessment-process
I like how you broke down the main components of a risk assessment. I also like how you encourage pessimism—definitely a trait entrepreneurs should have when considering potential risks. Because you mention the ‘potential for hurricanes’ in your first section, applying that risk to your other sections might be helpful. I appreciate how easy-to-read your blog was, and your risk matrix was a fine touch. Nice job!
Hi Jaiden,
Nice job! I think this is a well-written piece on a very important topic pertinent to new and experienced entrepreneurs. Specifically, that bit about risk assessments being an “ongoing responsibility” is crucial. This point should be made clear to entrepreneurs who fail to consistently assess risks. I think your point in emphasizing the importance of conducting risk assessments is well-made. I do think, however, you can further strengthen your point by providing more tools, methods, or alternative options which entrepreneurs can use to conduct risk assessments. The pictures are a nice touch, especially the Risk Matrix, perhaps this is how methods should be mapped out? In sum, I enjoyed reading your content!
I really appreciated your approach to risk assessment! I like how you broke it down for the reader. I thought it was really intriguing about how you encouraged pessimistic thinking. I would probably replace the word “pessimistic” with “skeptical” thinking – however you do a really good job at following up by saying that pessimists have a skeptical outlook. A successful entrepreneur will be able to think about things from multiple angles and be able to entertain a variety of perspectives/possibilities. Risk assessment is something entrepreneurs must commit to for as long as they have their business. Overall, I thought this was really well-written. Great job!