At one point in my life, I experienced what all business owners dread – my business went bankrupt. I lost everything and had to start all over again. Rebuilding from scratch taught me some of the most valuable life lessons a business owner can ever learn, and that is managing risk.

In hindsight, I can say that these were lessons necessary in helping me achieve the success that I am enjoying now.

So what does risk mean for a business?

Let’s first have a definition of what risk is. It’s a situation involving exposure to danger, the possibility that something unpleasant or unwelcome could happen, or in business, the possibility of financial loss.

Risk for a business represents any event or circumstance that can lead to unprecedented financial loss. It is very much subjective. Your determination of risk varies greatly from another person’s perception of risk.

Because of risk’s subjective nature, there lies the problem with business owners who naively think to themselves “Oh that’s never going to happen to me!”. Such narratives are deadly to a business.

Business owners would all agree that risks are the greatest threat to their businesses but despite good intentions and best efforts, many business owners still fall short and fail to account for these risks.

Why is Risk Management an Important Part of Your Ideal Business?

Risk is a natural part of the business landscape and can never be completely eliminated. In the first place, entering into business is already a form of risk in itself. Engaging in business puts YOUR finances at risk.

Just ask someone who you know is an entrepreneur and most of them will agree that entrepreneurship is synonymous with risk-taking.

As your business grows and flourishes, so does your exposure to risk. In the case of a multi-million dollar business, stakes can REALLY go sky high, and leaving risk management on the table exponentially heightens your exposure to financial ruin.

How would you react in the event that everything just seems to go from bad to worse and when your debtors come knocking on the door?

Ideal businesses have systems and safeguards in place to avoid such grim instances from happening and in the worst-case scenario they DO face them, they aren’t caught off guard and their business is able to survive.

Strategic risk management moreover helps soften the negative impact of unforeseen events outside your control.

Ideal businesses also have risk preparedness at the core of their business continuity plan, having a risk management plan ensures the survival of your business when the worst-case scenarios hit. 

Sources of Risk 

Now that you have a sobering understanding of what risk REALLY means for your business, the next step is to identify sources of risk.

Risk awareness is crucial, after all, an invisible foe is the most dangerous. If you have identified risk in your business, then half of the battle is already won, the other half is about managing, containing, and mitigating the effects of risk.

Internal Factors

Internal risks arise out of normal business operations. These risks may be forecasted to some degree of reliability and predictability.

– Cash flow risk (E.g negative profit margins, debt)
– Personnel risk (E.g low productivity, absences, union strikes, legal action)
– Asset risk (E.g theft, technological obsolescence, stocks performance)

Not all internal risks are inherently detrimental to your business, debt in the form of a business loan may be used strategically to drive business growth.

Debt facilities are an extremely effective way of injecting capital that could help spur new growth into your business. When debt is managed effectively, it enables businesses to achieve greater financial milestones. What’s not good, on the other hand, is a level of debt that is not sustainable and those that expose you to great liability such as the case of using your property as collateral.

Another often overlooked internal risk is in the form of legal action.

If you’ve been in business as long as I have, you would have encountered some form of legal proceedings between staff, clients, or suppliers. Despite our best intentions to do good, some individuals or entities will still find legal liabilities that they can use against you and your business.

Did you know that 90% of legal cases filed against business owners end up in out-of-court settlements? From a business standpoint, it makes more sense to simply pay for a settlement than to go through a lengthy and expensive legal process, even if their case against you is weak.

External Forces

This type of risk includes events or circumstances that are beyond your control. External forces usually occur with minimal warning and are often unforeseen. The recent Covid-19 pandemic is an excellent example of this kind of risk. 

Other examples include:

• Competitors 
• Regulations 
• Extreme weather 
• Natural disasters
• Economic slowdown 
• Stock market crashes
• War
• Famine

Prevention of such is next to impossible, and it would be foolish to believe that these will never occur because they do. They always do. History repeats itself.

Your main priority as a business owner is to ensure that you can absorb the impact that external forces may have on your business. Thus, shifting your mindset as a business owner from “if it happens” to “when it happens” will go a long way in helping you prepare for these eventualities.

Best Practices to Help Reduce Risk and Avoid Significant Losses

I’ve been through some very tough times in business and these risk management tools have saved me a great fortune. These are my tried-and-tested advice for securing your business.

Find a Good Insurance Broker

I cannot stress this enough. An insurance policy is the single most important tool in a business owner’s arsenal that helps to significantly reduce your exposure to risk whether internal or external. A thorough review of your business with an insurance broker will help you identify potential risk areas and the best policy for it.

Finding a good broker can be tedious and you may need to spend time researching and vetting the best options but trust me, it will PAY off. A good broker is worth their weight in GOLD!

Get a Loan When You Don’t Need It

Conventional wisdom dictates that cash is king but I would say that cash ON HAND is the real king. One thing I also learned is that during the “rainy days” when I desperately need cash the most is also the time I find it most difficult to obtain. Having your back against the wall and needing to immediately settle an obligation can lead to costly business expenses such as grabbing very high loan interest rates when no other options exist.

I’ve learned from experience that the best practice here is to build up a cash reserve that can cover all my business expenses for at least 12 months.

A steady stream of cash flow gives you peace of mind and the ability to adapt to any financial “curveballs”. 

Make Sure that Your Business is Structured Strategically

Setting up your business structure from a risk perspective should be carefully planned together with a good accountant. Here are some of the key structuring principles I used in setting up my Ideal Business.

• If you own a trading business, to protect your assets from liquidation during a legal proceeding against your business, avoid declaring valuable assets under this entity to minimize your business capital’s exposure to legal risk. 
• Create a separate entity that houses all your Intellectual Properties such as trademarks, copyrights, processes and databases. Doing so protects your valuable IP from risk and helps you retain access to the IPs in the event of a closure.
• Separate all personal assets from your business. Infusing personal assets into your business may help increase your leverage but it comes at an increased risk exposure.

I strongly suggest that you seek professional counsel to help you set this up since your financial and business circumstances are different from mine.

Risk Reduction Tools

Over the years, these are some of the business practices that helped me reduce my exposure to liabilities and lower my risk significantly.  

Outsourcing Manpower

Hiring a new employee for your business can be painstaking and costly. To make matters worse, there is no guarantee that a new recruit will be able to perform to your satisfaction. 

That is why I prefer to engage new team members through part-time or contract-based roles. As a result, I have been able to reduce risk and filter out the good ones who eventually become full-time employees.

Outsourcing also has the following benefits:

• Cost advantages

• Reduces operational risk
• Access to top talent

Diligently Monitor Key Business Data

“You can’t improve what you don’t measure” is a business mantra that has helped me create ideal businesses, and it is a true game-changer.

A lot of internal risks are the result of poor business monitoring. For example, problems in cash flow often go unnoticed for long periods of time, and you will only be able to see it when the fires start to come out. Financial reports, when monitored carefully, act like smoke detector that helps you identify small problems before they blow out of proportion.

Diligent monitoring and review of key business reports will save you from a lot of preventable risks, especially when done as part of a strategic business plan.

Here are a few overarching examples of important business data you absolutely must measure and review:

• Financial Reports 
• People & Productivity 
• Sales
• Marketing
  
  A well-established reporting framework helps you stay on top of your business and will allow you to respond quickly and proactively before problems arise. 

Summary

Risk is the biggest threat to an ideal business, often reduced to an afterthought, something that some business owners think can be dealt with as they arise. Today we’ve learned that failure to address risk items and an imprudent mindset can and WILL result in the eventual downfall of a business.

Take a look at your business through the lens of risk management and don’t let your hard-earned business suffer because of a lack of planning.

Preparing for the worst and addressing risk early on will give you the peace of mind that a true ideal business gives.

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