15 Common Business Risks and How Can You Manage Them
Identifying risks in your business is the first step in any risk management effort.
Every business has some risks. That is where the profits come from. But, not knowing the major risks in your business can be damaging.
The simplest way to identify risk is to start off with a list of common business risks.
With over 35 years of experiences, we have helped many clients in managing their risks.
Some of the most common risks that we have seen are:
Your market consists of your customers, competitors, and suppliers. Market risks refer to risks that originate from these group of people.
The source of market risks is not within your control. But you can always expect them. Then you come out with strategies to deal with them.
For example, you expect your customers to like Korean food, so you start a Korean restaurant.
Market risk is the main reason of why you are making profits.
Here are some types of market risk you should expect:
1. Lack of Customers
Every business face this risk. You do not have enough customers for your offerings. Before you start your business, you should take this into consideration.
Your business most likely faces some competitions. Having competitions is not a bad thing. At least it shows that there is a market for your products.
But, intense competitions might affect your business. An example of intense competitions is a price war. Your customers may switch to your competitor because of lower prices.
Disruptions are like competitions but in another form. For example, Uber is disrupting the taxi market.
Just like competitions, there is no way you can prevent disruption. In some cases, we have seen disruptions have bankrupted an otherwise successful company. For example, Netflix has disrupted Blockbuster in providing video entertainment. Blockbuster filed for bankruptcy protection in 2010.
You should always look out for trends that can disrupt your market. Being able to identify these trends early can save your business.
For example, Airbnb is disrupting the hotel industry. Booking.com also started offering homestays in their platform. They recognized the potential of Airbnb’s model and reacted early.
Assess your industry right now. What are some of the potential startups that might disrupt your market? Identify them and decide what you can do about it.
4. Economic Risks
Changes in the economics may also affect your business. This is especially true if your business deals with commodities, financial markets or shipping.
For example, recently (in 2016), the shipping industry is not performing well. Chartering rates have fallen to an all-time low.
If you see this coming, you would have taken some measures. These measures can help you to conserve cash in this period.
Financial risks refer to risks that are cash-flows related. Poor cash management is often cited as causing business failure.
It seems like the age-old tenet “Cash is king” is always true in business.
Here are some risks that might result in you having cash flows problems:
5. Credit Risks
A common practice for B2B businesses is to extend credit to your customers. Extending credit can lead to increase sales.
You are also taking credit risks. Your customers might not pay up after receiving the products.
A customer default can make a huge dent to your cash flows.
One way to manage credit risks is to buy trade credit insurance. With a trade credit insurance, the insurer will indemnify you up to 90% of the sales.
6. Financial Leverage
Financial leverage refers to how much debt you have in your business. The higher your debt, the greater is your leverage.
Leverage will amplify both your profits and losses. In good times, you will earn more. In bad times, you will lose more.
A high financial leverage will make your business vulnerable to interest rate changes. You might have to refinance your debt at a high-interest rate. Higher interest rates mean higher costs to you.
You should think about how can you service your debt in a high-interest rate environment. Are you able to repay them? Or do you need to refinance them?
7. Currency Fluctuations
If you are selling to an overseas customer, you may have to bear exchange rate risks. If the currency moves against your favor, you will incur exchange rate losses.
Exchange rate risks also apply if your suppliers are overseas.
Most small businesses choose to accept the risk as they are not significant. But if you have a huge amount in foreign currency, you may want to consider hedging this risk.
You may need employees for your business to scale. Employees are your greatest assets. But, there are also risks when it comes to managing employees.
8. Theft and Fraud
If your employee handles cash or accounting records, there is a risk that they can commit theft or fraud.
The best way to reduce theft and fraud is to prevent them. You can do that with proper internal controls.
But, you can never reduce the risk to zero. To transfer this risk, you can buy fidelity guarantee insurance.
A fidelity guarantee insurance indemnifies your losses when your employees are dishonest.
9. Employee’s Injuries
Your employee might suffer an injury during his work. When your employee is injured, your business faces 2 expenses:
- You have to compensate for the medical costs if the injury is work-related; and
- Your business will face manpower shortage.
For the first expense, you can buy a Work Injury Compensation Insurance.
As for the second expense, you will have to account for absence employees.
Operational risks refer to mistakes or lapses occur in the day-to-day business operations. It can result from inadequate procedures or policies, or human mistakes.
10. Poor Quality Control
Your customer demands a certain level of quality for your products. You most likely have someone to assess the quality before delivering to your customers.
But, if the procedures are not robust enough, you may not be aware that the product is of poor quality.
Depending on your industry, the result of this can be devastating. If your product causes injury, your customers may sue you for product liability.
One way to transfer this risk is to buy a product liability insurance.
11. Employees’ Mistakes
No matter how good is your training, you should always expect your employees to make mistakes.
Mistakes are also a good way for your employees to learn and grow.
Some mistakes are more damaging than others.
Take the Air France Flight 447 as an example.
In 2009, the Airbus A330 operated by Air France crashed into the Atlantic Ocean. After investigations, the crash was a result from “crew reacted incorrectly”.
It is common for employees to make mistakes. But you may face legal liability if these mistakes cause harm to others.
To transfer this risk, you can buy public liability insurance.
If you are operating a professional firm, you may need professional indemnity insurance instead.
12. Shipping Risks
If you are trading physical products from overseas, you face risks from goods-in-transit.
Some common risk events with goods-in-transit are:
- Damaged goods
To transfer these risks, you can buy marine cargo insurance.
Technology risks refer to the losses related to the failure in information technology.
13. Cyber Security Risks
One of the biggest technology risks is cyber security. Your customers and employees data should be confidential. No one without proper authority should access them.
But, as we have seen from the Ashley Madison scandal, data breaches are common.
Keeping the data secure should be your priority. In the event of data breaches, you may rely on cyber risk insurance to transfer the risk.
14. Architectural risks
Another technology risk is the architectural risk. Your software architecture might not be able to support your operations.
A common example is to use a non-scalable server like shared hosting to host your web platforms. While shared hosting is cheap, it is not designed to accommodate huge traffic.
Huge traffic may break your website. When your platform is down, you suffer lost sales and businesses.
In such situations, you have to use scalable hosting solutions like Amazon Web Services.
15. Compliance Risks
Most businesses have a set of regulations that they will have to follow. All companies have to follow Companies Act in Singapore.
If you are in a specific industry, like banking, you need to follow the Banking Act.
Non-compliance might lead to penalties. Some extreme cases might even lead to license suspension.
You should always consult an expert on compliance.
A business face many risks. Some risks are more significant than others.
In this article, we help you get started by giving you a list of common business risks. We hope that you can use this list to assess your business risks. We also would like to emphasize that this list is not exhaustive.
Every business is unique. If you need help in assessing your business risk, please do not hesitate to contact us for a no-obligation consultation. We love to speak to you!
Or call us at +65 6298-6222.