Risks to Plan For When Starting a Business

Risks to Plan For When Starting a Business

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Ready to take your business off the ground after getting approved for a business loan? While exciting, starting a new business is not easy. Aside from the sufficient amount of time, effort, and money to lay the foundation, you also need a great business plan to stay focused and to convince investors to take part in your venture.

When it comes to planning, one of the important factors you should be ready for are the business risks. If not addressed, these risks stop you from achieving success and profitability.

Here are the different types of business risks that you should plan out for:

  • Economic or Market Risk
  • Compliance Risk
  • Security & Fraud Risk
  • Financial Risk
  • People Risk
  • Reputation Risk
  • Operational Risk
  • Competitive & Comfort Risk

Economic or Market Risk

All businesses face the risk of financial loss as markets fluctuate due to price movements and changes in interest and foreign exchange rates. While positive events can promote a booming purchase environment, negative changes can reduce buying activity and decrease sales. Businesses that are just starting to breakthrough are the most negatively affected by unfavourable market fluctuations because they do not significant revenue yet.

  • This is why new businesses need to save as much money from the earnings to maintain a steady cash flow all the time, especially in the time of crisis.
  • It is also smart to plan when to operate with a lean budget and maintain a low overhead to survive through all economic cycles.
  • Following market changes and trends can also help businesses foresee and plan for an impending recession.

Compliance Risk

All businesses need to comply with a lot of laws and regulations before and during its operations, from registering a business name to making sure that strict codes and best practices are followed. Non-compliance will result in significant fines and penalties, which will affect operations and sales.

  • Before setting up a business, it is important to prepare all the necessary compliance requirements from the state and local agencies.
  • Once operating, keep track of when business licenses and permits need to be renewed.
  • It also helps to review government agency information and join industry organisations to be always in the loop on compliance-related issues.

Security and Fraud Risk

As businesses are going digital, the risk is always there for the confidential information and critical infrastructure being hacked and the network system being infected with viruses and malware. This can severely affect the business operation, damage the database, and loss of sensitive data. It can compromise clients’ information, which could lead to identity theft and fraud, which could then result in lawsuit and loss of money for the business.

  • To avoid security and fraud risks, businesses should invest in safety and security systems.
  • Employee awareness and education activities should be planned and regularly implemented.
  • Customers should also be made aware of security and fraud issues and protection.

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Financial Risk

Extending credit to customers or taking out loans can put the company at risk of financial loss. Startups and newly operated businesses are prone to this risk as many strive to attract customers or need more financial backup to sustain the operation.

  • To avoid losing money, businesses should keep debt to a minimum.
  • Those that have acquired several debts must have a plan on how to consolidate debt and lower monthly payments.
  • As for the clients, it is smart to diversify the base instead of relying on only one or two clients. If these clients no longer need the business’s services, the loss will not significantly devastate the company’s bottom line.

People Risk

People can make or break a business—The behaviour of the employees and the overall composition of a company’s workforce can have a significant impact on the business’ success or failure. Losing the company’s best and most experienced employees result in the loss of valuable intellectual capital. It can also damage the morale of the remaining employees.

Meanwhile, an unskilled, lazy, and incompetent workforce causes underproduction and loss of profit. They also negatively affect a company’s credibility.

  • While businesses cannot be avoided and eliminated, businesses can plan and mitigate the impact of People Risk by rewarding high-performing employees while providing trainings and learning resources for employees.
  • Companies, via its human resources department, must also have strategic plans to fill the most critical skill gaps in the organization and reduce employee turnover.

Reputation Risk

Customer reviews can greatly affect a business’s reputation and customers' decisions. While good reviews can promote the business, negative ones—like a malicious report, lawsuit, or even a single negative customer review posted on Facebook—can significantly damage a company’s reputation because of the wide reach of digital media today. If not stopped, the bad press can cause a business’s customer following to drop, which would eventually result in the loss of revenue.

  • To reduce the risk of a bad reputation, businesses must improve their customer experience and service. Providing quality products and services help avoid lawsuits and product failures.
  • Meanwhile, the company should have an efficient staff that proactively handles complaints and helps address customer concerns immediately.
  • Additionally, businesses must have a great PR team that works to build the company’s image while regularly monitoring and listening to what people are saying about the company online and offline.

Operational Risk

Anything can happen along the way that can hamper a business’s operation, which hurts its profits and reputation.

Internally, it could be a union strike or a server outage. Externally, it could be a natural calamity like flooding that destroys business assets and or something like the coronavirus pandemic that forces a business to limit its operation or even temporarily shut down. It can also be a combination of internal and external factors.

  • While some events that stop a business’s operation are unavoidable, many of the potential operational risks can be managed through training and a business continuity plan. These can help business owners identify the root cause of any operational concern, create a backup system, and implement measures to sustain operations.

Competitive and Comfort Risks

Competitive challenges can negatively impact a business, but so is getting too comfortable on its dealings.

A strong competitor that provides a steep discount to its customers or sets up a new location next to a startup can greatly hurt the startup that’s trying to attract customers without lowering prices. Meanwhile, an industry leader that has become too comfortable with its success might loss significant customers and profits if it misses out on the market trends or fails to offer new innovative products or services.

  • To avoid competitive and comfort risks, businesses should always keep an eye on the competition while relentlessly reassessing their performance and refine their strategies to stay relevant and in high-demand in the industry.
  • Additionally, businesses must build and maintain a strong and interactive relationship with their clients and potential customers.

Awareness and Proactiveness

You cannot avoid nor eliminate the risks that come with running a business, but you can proactively plan for it. To protect your company's reputation and customer base that you've worked so hard to achieve and to avoid operational disruption and financial loss, you must always be prepared to respond to business risks.

Having a good plan on how to deal with these anticipated issues, although you don't need to respond to all business risks imaginable, is important to fortify your company against unexpected losses. This way, you can assure your investors that you know how to effectively manage your organisation and lead it towards success and profitability even when things don't go according to plan.

By being proactive to respond to business risks, you can also avoid operational disruption and financial loss, as well as protect your company's reputation and customer base that you've worked so hard to achieve.

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