So you have successfully brought your business from a germinated seed to a fledgling tree and are starting to feel the warm glow of the sun as you burst above your ‘clompetition.’
Enjoy but be careful. Just as everything is looking great, this is the time when you are most likely to fail, when a strong gust will blow you away. Why? Because you might be starting to feel invincible, that everything you touch turns to gold, that you know more than everyone else about what you do in your market. This is called hubris. You become less attuned to your environment and the subtle signals that previously helped guide you. Stop listening to professional advice and surround yourself with sycophants. Start making very risky business decisions.
Small Businesses Risk Management
Small businesses are just as vulnerable as large corporations to risk. And it is the lack of risk management that causes most businesses, big and small, to fail.
Let’s remember why most people are in business in the first place. They want to grow the business so they can sell it at a profit. In other words, financially speaking, they want to increase their shareholder value, because that is a large part of what they are finally selling. Poorly managed risk – risks that turn into calamitous reality are the destroyers of shareholder value. Everything you have worked for over years can quickly disappear. It’s a hard word for many entrepreneurs to put their tongues around, but you need to learn to be Prudent.
Smart risks are what give your business the opportunities to take big leaps forward, and more on that below.
What types of risk does your business face, and which is the key culprit in business failure?
There are four broad categories:
- strategic risk
- operational risk
- failures in regulatory and financial compliance
- external catastrophic events
And the Winner is:
by a long stretch, strategic risk mismanagement. That’s by you. Most businesses typically worry more about staff theft issues than their own decisions, but a global study by management consultants Booz and Allen found that 80% of large business failures they studied were caused by strategic risk mismanagement. And in my experience, exactly the same situations apply to small businesses here in Bali.
1. Strategic Risks
These are risks typically made by the owner or, in larger organizations, the top executive team.
- What business are you really in – what is your core, and have you strayed from it? How well thought through is your business model?
- What products and service to offer – risks leading to a major product or new market failures, or failing to react to new initiatives such as digitization of content or online shopping.
- What operating margin you need to function – risks leading to the insufficient working capital.
- Outsourcing or in-house operations – potentially giving away strategic value-adding capabilities.
- New business acquisitions or initiates – over-reaching in cash flow and core capabilities.
- Faster and faster adoption of new products and services – Inadequate processes to meet the demand
- Increasing vulnerability to information theft and loss.
- Social network connectivity – broadcasting your errors instantly and forever.
- Natural, political or regulatory shocks. For example, not preparing for new taxation and social security operating costs. New tax compliance hits around 30% of your current sales value.
2. Operational Risks
This category includes major operation problems:
- Dysfunctional managers. How well are your managers and supervisor salaries and bonuses aligned to the risk to the business? In other words, do they also suffer substantially if they take risks that can send you bankrupt? Food hygiene, safety issues are two examples. So get yourself a plan where everyone knows what will happen if any of the operational failures below happen in their areas of responsibility.
- Staff capabilities replacement. If anyone staff member suddenly leaves do you have backup capabilities for those functions and knowledge set? I always have a policy of never promoting anyone unless they have someone ready to take their place to at least 80% capability.
- Data loss. Is your computer data backed up? Is it secure from internal or external theft? How difficult are your passwords? Do you have your key business documents secure in a fire-proof safe, with a backup copy at home? Are your passwords effective and changed often?
- Customer service breakdowns. Do you have a plan to effectively manage a viral campaign against you? Do you know the relative effectiveness of email versus responding via social media to customer complaints?
- Supply chain disruptions. Do you have alternative suppliers identified? Have you validated the operating practices of your suppliers? Remember the British horse meat scandal and its effect on brands.
- Are your manufacturing blueprints or clothing patterns duplicated and secure?
- Operational accidents. How will you handle a major injury or death on your premises? How quickly, from where and at what cost can you replace that critical piece of manufacturing equipment?
In your own business, check where your major operational risks are and assess how long it would take you to recover, at what cost.
3. Regulatory Risks
This category includes risks resulting from either ignorance or feeling god-like and being above governing laws, standards, or ethics. Fraud and fines (and possibly jail or expulsion) are the risks faced here. Take advice from professional advisors.
4. External Catastrophic Events
Booz and Allen describe these as natural, political, or regulatory risks where the external event could not be controlled or easily anticipated. An example is the Japanese Tsunami and resulting nuclear fallout. But note there are opportunities that can come from these events; following that explosion there were many Japanese families bringing their young children to Bali away from the contamination risk. They needed good, affordable education for their children. Unfortunately, many returned to Japan because they couldn’t find some business to meet that need. But if the need had been met then quite likely much more would have followed and made such a business very viable.
Do You Have a Risk Management Plan?
The first essential is not isolating yourself from your business environment. You need to be talking regularly with your customers, suppliers, supporting professionals and workers, getting feedback and sensing the environment taste, buzz and feel. If you aren’t spending time in each of these areas weekly then you will lose touch and be vulnerable. A fancy name for this is market intelligence. The Secret Boss series on TV shows the advantages of being on the front line occasionally, to see what really happens operationally, but also to know which way the real world is heading.
Once you are in touch, you can properly contribute to a realistic SWOT Analysis. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Strengths and weaknesses are assessed in relation to your competitors – there is no strength involved if you and any of your competitors have the same capability. Opportunities and Threats relate to potential events in your external business environment.
In risk analysis, we look to see how we can reduce the possible impact of weaknesses and threats – if possible, find a way to turn any problem into an opportunity.
The analysis is a waste of time if you don’t act on it, so follow up regularly.
Smart Risk Taking
Please don’t think I am against taking risks – entrepreneurship is all about taking risks. But what you need to focus on are Smart Risks. And strategic risks are usually what make or break your business.
So how to ensure you are making smart risks? Smart risk-taking involves sustainable innovation, which means a policy for constant (not occasional one-off) improvement and breakthroughs in products and services. You are the driver of sustainable innovation because, more than any other factor it is your approach, your behaviors and culture (and Prudence) that encourage your team to provide those innovative sparks. They often know better than you what needs fixing, what can be improved, what the customer feedback is. Do you encourage and harness this talent and knowledge, or do you insist it all has to come from you?
Is there is any aspect of developing a successful business you would like me to write about?