A Small Business Guide to Identifying and Managing Risk


A crisis can occur at any time, and this year has been a difficult reminder of that. In fact, a survey by the Census Bureau last September showed that 31.8% of small businesses are still being negatively affected by the pandemic. However, plenty are slowly getting back up on their feet. As you slowly recover, this may be the perfect time to think about how you can avoid being in a similar situation when your business is put at risk again.

Here’s a brief rundown of how you can identify risks in your business, not just economic ones, and the things you can take to minimize their impact.

Step 1: Identify the risks

Depending on your industry and the nature of your business, some risks may prove to be a more common occurrence than others. For example, travel businesses are at risk of a business interruption loss more than others, especially in times of closed borders and pandemics. Meanwhile, a brick-and-mortar store needs to think about the risks involved in their physical property, like physical damage or the inability to pay rent.

Here are some other initial risks to think about:

• Liability issues
• Sudden inflation
• Operational risks
• Competition risk (especially if many other businesses are offering similar services)
• Security risks

Step 2: Determine how vulnerable you are to the risks

The goal of this step is to determine which risks you’ll need to prioritize. To determine how vulnerable you are to each risk, consider the concept’s two aspects: the probability of it happening and how much the damages will cost you. As a rule of thumb, the more money you’ll potentially lose from it, the greater risk it poses. For instance, if a risk has a low probability of occurring but will cost you a lot, make sure you avoid it as much as possible. If a risk has a high probability of occurring often, even if the costs are manageable, still avoid it.

Step 3: Find out how you can manage these risks

Avoiding the risk

Risks can be avoided by ensuring steady cash flow or continuously adapting to market trends so you never fall behind your competitors. In fact, many of them can be avoided with a proper business structure in place. For instance, BizFluent explains that corporations benefit</ from being able to sell company shares in the stock market. It’s a good way to secure money for growth and survival. Meanwhile, ZenBusiness states that while the main advantage of forming an LLC is its separation of assets similar to a corporation, it has other incentives like a flexible management structure and single taxation. There’s no board of directors so you can become more agile in your business decisions. This is good for times when the market becomes unpredictable, allowing you to adjust operations immediately. Plus, you don’t have to pay two separate taxes like corporate shareholders do.

If you’re stuck as a sole proprietorship or partnership, then it’s recommended that you take extra steps to upgrade. This lets you avail of the incentives bigger business structures have and increase your chances of reducing any risk to your company.

Transferring the risk

Some hazard will happen no matter what you do, like the slowing of the economy today or when you get a lawsuit, so you have to be prepared to face the consequences for those. In this case, the next best step is to transfer the burden of the risk elsewhere, like an insurance company. For instance, in our post ‘What Does Business Interruption Cover?’ we briefly explained how this particular type of insurance could help alleviate some business costs in case things go wrong. On the other hand, personal liability insurance can cover your lawsuits (including the processes of filing one). There are plenty of other insurances out there, so take your time to figure out which ones can cover the risks you can’t avoid.

Risks are present in every business and industry. And if you want to succeed, you need a good risk management plan. Before the next wave of risks arrive, you have to be as prepared as you can. Identify your hazard points, how susceptible you are to them, and what you can do to avoid being hit.

Recent Posts


See all