Small Business and Risk Management

Small Business and Risk Management

Most small businesses think they understand their risks but do they really? Furthermore, if you ask some small business owners how they manage their risks, they are to respond with “We’ve got Insurance”.

Insurance is but one solution to mitigating risks. There are many others that a small business can implement at little or no additional costs other than time and effort. To understand the strategies and solutions available a small business or any business for that matter should identify and understand the risks they face. However before they do this we strongly suggest the small business take a leaf out of Corporate Australia by developing a risk management plan.

  • Here are our 5 steps to developing, implementing and reviewing a risk management plan.

 

  • Firstly every business should determine their risk appetite. That is how much risk are you comfortable taking on. If an event happened that would cause your business to lose money how much could you tolerate to lose. Once you know this, you will understand what strategies to put in place to mitigate risk if any.

 

  • We recommend that every business identify their top ten risks by sitting down and asking themselves a series of “what if” questions;-

For example; What if

  1.  We lost our biggest customer?
  2.  Our Customers didn’t pay on time?
  3.  Our Premises burnt down?
  4.  Our employees left, got injured, etc?
  5.  Government laws changed?
  6.  Our IT systems failed?
  7.  Our suppliers went out of business?
  8.  Our Machinery broke down?
  9. Our Inventory is stolen?

 

By doing this you will soon build an inventory of risks that you will need to manage. This is done by implementing mitigation strategies. Some of those mitigation strategies will be Insurance however some need not be, some may also be do nothing.

  • We then recommend that once your risks are identified you look at current strategies in place to mitigate. If there are none then you need to look at what strategies you can implement. Let’s look at the risk arising from our first question, i.e.; Key customer risk. If your largest customer was say 5 -10% of your revenue you may choose to do nothing as you can survive. with the loss of one customer of that type. However, what if the key customer generated 40-50% of your revenues then it is likely that you would struggle and survival is then at risk. Here your strategy may be to actively look to ensure that no customer is that large. We are not suggesting you get rid of the customer but rather continue to look for other revenue generating sources thereby reducing the reliance on a key customer.

 

  • Once Strategies are identified then you should implement them as soon as practical.

 

  • Finally, Review your risks at a minimum annually if not more frequently. Large businesses often do this on a quarterly or half yearly time-frame.

If you need any assistance in developing a risk management plan then ask your accountant to help.


Michael Prior

Principal at PB Advisory Group

I am the principal of PB Advisory Group Certified Practising Accountants. We are cloud based accounting & tax specialist for small businesses, their owners and self managed super funds. I am also currently a director of Private Health Insurer RT Health Fund Ltd where I chair the Audit & Risk Committee and are a member of the Business Development Committee.


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