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Owning and operating a business presents many challenges and opportunities for any owner. Risk management is one of the most challenging aspects of running a business, especially for small business owners. Large companies who understand the value of proper risk management can afford to have a separate department, whose full-time role is to analyze, evaluate, and react to the various risk factors. Small business owners do not have this luxury, but that doesn’t mean the role is any less important.

There are five separate areas of risk that need constant monitoring, so let’s take a closer look at each in order to explain and demonstrate the differences.

Strategic Risk

At the concept stage of every business, there should always be a plan with targets and goals in mind. In an ideal world, these plans would never change, and your original strategy would work as planned. Unfortunately, life is not that easy, and there are always variables which come along and demand change. On a positive note, these changes could be something like quicker than expected growth, or it could be the unforeseen move of a large competitor away from you.

Assessing the risks and then deciding how best to deal with them can be the difference between success and failure.

One of the most spectacular examples in recent years is that of Blackberry. When Steve Jobs announced the initial iPhone, the CEOs of Blackberry, which was then the dominant force in the cell phone market, were more concerned with the preferential deal Apple seemed to have been given by AT&T rather than any perceived risk to their company. Five years later, there was a very real risk that Blackberry could go bankrupt. They simply didn’t assess the risk properly or take any alternative action. Hindsight is a wonderful thing, but the point is if it can happen to a huge multimillion dollar company such as Blackberry, it can happen to anyone.

Compliance Risk

With so many different things screaming for your attention, it can be easy to miss certain aspects. One of the most critical parts of any business is to ensure that you always follow every law that applies to your company.

This may have been simple when you were first creating your company, but as your business grows, the number of staff increases and other issues raise their head. This makes it easier to miss some legal infringement that could later on get you and your company into trouble. Laws are constantly changing, new rules are being introduced, and ignorance is not an excuse. Every new product line you launch needs to be thoroughly checked; does it have any legal ramifications that didn’t apply to your previous products?

The cost of monitoring and complying to all of the different laws can become very expensive, but the alternative can be fatal.

Operational Risk

Whenever you are running a company, there are an unlimited number of things that could go wrong. Your website could get hacked, a vital piece of machinery could break down and take weeks to repair, or you could be dealing with an inefficient process. This, in turn, would then have a huge impact on both your company and its reputation.

There should always be contingency plans in place for every eventuality, and although this might sound impossible, most major risks can be risk assessed so that they do not become future problem areas. Good operational risk management anticipates these problems before they arrive and creates a strategy to cope with them.

Reputational Risk

It takes many years of hard work and dedication to build up a positive reputation. Unfortunately, it takes mere seconds to destroy that reputation. Once tarnished, it can be extremely challenging to repair the initial damage.

The Hoover washing machine promotion in 1992 was one of the biggest marketing disasters of all time, and it still affects the company’s reputation today. That is why it is essential to have procedures in place to prevent such an obvious catastrophe from happening and to save your company’s reputation.

Looking back on this case, surely it wasn’t too difficult to foresee that the marketing promotion would tempt a lot of people. By purchasing a £100 washing machine, you could get free airline tickets to the United States worth many times that value. For most consumers, it was simply an offer that was too good to be true, and so it proved. A simple bit of reputational risk management would have prevented this promotion from ever running, by properly analyzing the risk or at the very least putting in place some safeguards.

A company’s ability to react appropriately when things go wrong can sometimes create better publicity than when there weren’t any problems in the first place.

Financial Risk

This is probably the one risk that companies are the most aware of, but it can still cause a lot of problems even after keeping a close eye on every dollar. One of the most common issues is when a small business signs a deal with a large company. The large company demands a lot of product, time, and dedication. Sometimes the smaller company may be forced to divert resources from other jobs to fulfill the big order. They may have to agree to longer payment terms. This can then cause cash flow problems, and if the bigger company doesn’t pay, then the small company can be forced into bankruptcy. The higher a company’s debt, the bigger their exposure to risk. That is why it is essential that all companies have a financial risk strategy in place, that does not put the company’s future at risk, should things go wrong.

Running a successful business is a challenge that requires a multitude of skills. As your business grows, it is important to delegate some of the risks to other people within the company. When people try to do too much, that’s when mistakes happen, and risks are exposed. Here at Level Office, we are always looking for ways to help businesses succeed. Come back regularly to keep abreast of entrepreneurial trends and information.

Read more about risk and what it means for your business.