I’ve had the pleasure of being a good customer of Nuli Juice and Nuts About Cakes Bakery for couple of months and it was a sad feeling hearing of the demolition of these outlets. I also heard recently of someone who had invested millions in setting up a pig farm in a Lagos suburb, only to be issued a letter by the Lagos state government on the closure of pig farms located in residential areas, very sad indeed. I tried to ponder on what went wrong and why did the authorities not have any compassion on these businesses? However, knowing fully well that the action of the authority is beyond the control of business owners and a common man like me, I took the need to explore how these could have been controlled which brings me to the discussion on managing risks for SMEs.
We are officially in a recession, government at all levels are facing funding challenges and the drive to generate revenue and grow the economy is as intense as searching for water in a desert. It is a season of reforms and policies, it’s a volatile, uncertain, complex and ambiguous terrain out there, we cannot afford to be caught unawares. Unfortunately, while the aftermath of such crises affect all companies, the impact on your business may be particularly harsh because you have smaller buffers to shield your business from the impact of such an economic downturn.
Oh yes, optimism is the fuel that drives entrepreneurs, so it isn’t surprising that being a business owner, you are naturally a risk taker, but taking too many risks can be quite costly. Research has shown that only 44% of small businesses stick around four years or more. One big reason so many go away: Poor risk management. As a small business owner positioned for growth, it’s ideal to be aware of the most common risks facing your business so that you can be better prepared for them when they come your way.
Simple things like doing proper due diligence on a property before renting, taking note of government’s warning signs on or around your business location, finding out how new policies affect your business or business location, ensuring you are operating in legitimate or authorised location, can make a lot of impact in eliminating or managing risk. Risk management is often seen as a waste of time until things go wrong. Starting a business is a big achievement for many entrepreneurs, but maintaining one is the larger challenge.
Risk management is best thought of as the test of how your business would cope when things go wrong. It is as important for your business as it is for multinationals. However, despite the growing awareness of risk management, most of us do not appear to be taking action to enhance our business resiliency. Knowing fully well that we do not have the resources or personnel to address risk in a similarly intensive manner like large corporations do and are therefore more exposed, it only makes sense to have a risk management framework in place.
Ignoring risk management seems acceptable until something big happens, whereupon we’re faced with rebuilding a surprisingly delicate house of cards in a few hours or days as finances and then business continuity evaporates.
Here are practical steps to managing risk in your business:
- Risk Factor. List anything you can think of that could cause substantial harm to your business.
- Define the risks. For each area of weakness, think about what might happen if they continue to go on as it is. Find out the effect of the risks on the following; Financial position, Legal position, Reputation, Client experience and Business Continuity.
- Risk Type: Assign the risk to one of the categories described above, e.g. market risk, competitive risk, technology & operational risk, etc. Assigning a risk type can suggest who might be best qualified to manage that particular risk.
- Assess the impact of the risks. Here, you can use a simple two-pronged rating – Likelihood (how likely is it that this will happen) and Impact (if it does happen, how bad will the impact it be). And for each I use a simple scale of High, Medium, Low. You can also assign a number (1, 2, 3) corresponding to the Likelihood or Impact, and then multiply these numbers to get a risk rating.
- Prioritise and address the risks. Once you have done this for all your risks, you can rank them by Risk Rating, decide on the course of action you will take to mitigate (i.e. reduce that risk happening or reduce the impact if it does happen) and then of course take the action.
- Repeat Periodically. Ideally you should review this risk assessment periodically (monthly or quarterly) and redo the 6-steps every year or when a major change to your business occurs. It doesn’t have to be a big deal. The first risk assessment will involve some detailed work but after that it should be just a quick review of your risk table to ensure you’ve mitigated the medium and high risks (anything with a Risk Rating of 3 and above). Your risk environment is always in a state of flux. Only by periodically reviewing your areas of exposure can you keep up with these changes.
- Stay on top of regulatory changes.
- Leverage technology. Much relevant information can be found on websites of regulatory bodies. Free and paid sites offer advice, articles, white papers, and other guidance.
- Assign responsibility. Divide and conquer by assigning specific individuals the task of updating and maintaining institutional knowledge of new regulations, although everyone should be kept abreast of the general rules.
- Be social. Attend conferences and presentations, or participate in webinars.
- Key periodicals are a good source of new laws.
Finally, although it’s important to develop a risk management plan, you shouldn’t obsess over it. Anticipating every possible risk factor is neither possible nor practical. That’s because no matter how smart we are, and no matter how carefully we assess the situation, we can’t think of everything. Pragmatic risk management isn’t about trying to anticipate and mitigate every possible source of risk. It’s really about two things:
- Engaging common sense to recognize and mitigate the most obvious risks in a cost effective manner, using some of the techniques described earlier.
- Developing a culture of responding to unanticipated developments, that is, putting out fires — in a calm, rational way.
Don’t let risk paralyze you. Entrepreneurs are, by definition, risk takers. Strong risk management is an important source of competitive advantage. You can beat the odds and build a thriving and rewarding venture by learning to recognize and mitigate risks.
I hope you’ve found this article useful and can see now why risk management is so important for all businesses, regardless of size. I look forward to reading your comments on how you’ve implemented this in your business and what impacts that has made for you. Please feel free to share some of the risks you’ve identified in your own business. Nevertheless, should you need help with setting up a customised risk assessment sheet that can help you identify, assess and manage these risks, you can always get in touch.
Reckless leaders take reckless risks; prudent leaders take calculated risks. Risk management is the “calculator.”
Photo Credit: Stephen Coburn | Dreamstime.com