Small and medium-sized businesses (SMBs) in the United States face a variety of risks. Understanding these risks and how to mitigate them is crucial for business success and sustainability. Let’s delve into seven major types of business risks that SMBs often encounter:
1. Economic Risk
Economic risk refers to the potential impact that changes in the broader economy could have on a business[i]. These changes might include fluctuations in the financial market, shifts in consumer purchasing power, or variations in inflation rates. For instance, during an economic recession, consumers may choose to limit their spending, leading to reduced sales and profits for businesses. In more severe cases, businesses might face increased debt or even bankruptcy.
This type of risk is a significant concern for SMBs in the United States. According to the National Small Business Association, 46% of small businesses express concern about economic uncertainty[ii]. This shows how critical it is for businesses to understand and manage economic risk.
- Regular Monitoring of Economic Indicators: Regularly monitoring economic indicators such as GDP growth rate, unemployment rate, inflation rate, and consumer confidence index can provide valuable insight into the state of the economy. This information can help businesses anticipate changes and adjust their strategies accordingly.
- Diversification: Diversifying product lines or markets can also help to spread risk. If one product line or market is negatively affected by economic conditions, the business may still be able to maintain profitability through its other offerings.
- Financial Management: Sound financial management can help businesses weather economic downturns. This includes maintaining healthy cash reserves, managing debt effectively, and ensuring the business has access to credit if needed.
- Flexible Business Model: Having a flexible business model that can adapt to changes in the economic environment is another important mitigation strategy. This might involve offering different pricing options, exploring new distribution channels, or adjusting marketing strategies based on economic conditions.
- Scenario Planning: Businesses can develop various scenarios based on potential economic conditions. This can help them plan their response in advance and make quicker decisions when conditions change.
2. Compliance Risk
Compliance risk refers to the potential for legal penalties, financial forfeiture, or material loss an organization faces when it fails to act in accordance with industry laws and regulations[iii]. This could be due to changes in laws, such as data protection or employment legislation, or failure to comply with certain standards or codes of practice within an industry. For instance, a restaurant that doesn’t adhere to health and safety regulations may face fines, lawsuits, or even closure.
- Regular Audits: Regular compliance audits can help businesses identify areas where they may be at risk of non-compliance.
- Compliance Training: All employees should understand the importance of compliance and the potential consequences of non-compliance.
- Legal Consultation: It’s crucial to seek legal advice when introducing new processes, entering new markets, or when laws change.
- Compliance Software: There are numerous compliance software solutions available that can streamline the compliance process. These tools can assist in managing and tracking compliance tasks, sending reminders when actions need to be taken, and storing relevant documentation for easy access during audits.
- Create a Culture of Compliance: Encourage a culture of compliance throughout the organization.
3. Security and Fraud Risk
Security and fraud risks are increasingly significant concerns in the digital age, posing threats to a company’s data, intellectual property, and finances. These risks can come in various forms such as data breaches, phishing attacks, fraudulent transactions, and intellectual property theft. For instance, a cybercriminal might infiltrate a company’s network to steal sensitive customer data or disrupt operations.
The prevalence of these risks is alarming. According to a report by Keeper Security, a staggering 66% of SMBs experienced a cyber-attack in the past year[iv]. This statistic underscores the need to take security and fraud risks seriously and implement effective strategies to mitigate them.
- Invest in Robust Security Systems: A robust security system is the first line of defense against security and fraud risks. This includes firewalls, encryption software, antivirus programs, and intrusion detection systems. These tools can help identify and neutralize threats before they can cause significant damage.
- Regular Software Updates: Regularly updating software is crucial in maintaining robust security. Many cyber-attacks exploit vulnerabilities in outdated software, so keeping all systems up to date can significantly reduce risk.
- Employee Training: Human error is one of the leading causes of security breaches. Regular training can ensure that employees understand the importance of cybersecurity, are aware of the latest threats, and know how to respond in case of an incident.
- Strong Access Controls: Implementing strong access controls can help prevent unauthorized access to sensitive data. This includes using complex passwords, multi-factor authentication, and limiting access to sensitive information to only those who need it.
- Regular Data Backups: Regularly backing up data ensures that, in the event of a breach or loss, important information can be recovered. Backups should be stored securely, and restoration processes should be tested regularly.
- Cybersecurity Insurance: Cybersecurity insurance can help mitigate financial losses resulting from cyber incidents. While it doesn’t prevent attacks, it provides financial support to recover from them.
4. Financial Risk
Financial risk encompasses potential problems related to liquidity, credit, and investment. These could include inadequate cash flow, high levels of debt, or poor investment decisions that could adversely impact a company’s financial health.
- Regular Financial Audits: Conducting regular financial audits can help identify potential problems before they escalate. These audits can provide insights into a company’s financial health, identify inefficiencies, and offer recommendations for improvement.
- Maintain Capital Reserves: Maintaining sufficient capital reserves can provide a financial safety net in times of unexpected expenses or revenue shortfalls. It can also enable a business to seize investment opportunities when they arise.
- Responsible Credit Management: Managing credit responsibly involves monitoring debt levels, ensuring timely repayments, and maintaining a good credit score. This can help avoid excessive interest costs and protect a business’s reputation.
- Prudent Investment Strategies: Prudent investment strategies involve carefully considering the potential risks and returns of an investment before committing funds. Diversifying investments can also help spread risk and increase the potential for returns.
5. Reputational Risk
Reputational risk is the potential threat to a company’s standing or goodwill in the market, which can lead to significant losses in customers or revenue. Factors such as poor customer service, product failure, negative press coverage, or public scandals can damage a company’s reputation.
According to Deloitte’s 2020 Reputation@Risk survey, a vast majority (87%) of executives rated reputation risk as more important than other strategic risks[v]. This statistic highlights the critical role a strong reputation plays in a company’s success and the devastating impact reputational damage can have.
- Customer Satisfaction: Prioritizing customer satisfaction is crucial in managing reputational risk. Happy customers are more likely to become repeat customers and recommend your business to others. Regularly soliciting feedback and promptly addressing any issues can go a long way in maintaining customer satisfaction.
- Maintain High-Quality Standards: Ensuring that all products or services meet high-quality standards can help enhance a company’s reputation. This includes not only the quality of the products or services themselves but also the customer service and after-sales support.
- Crisis Communication Plan: Having a crisis communication plan in place can help manage reputational risk. This plan should outline how to communicate with stakeholders, including employees, customers, and the media, during a crisis.
- Online Reputation Management: In the digital age, a company’s online reputation is as important as its offline one. Regularly monitoring social media, review sites, and other online platforms for mentions of your business can allow you to address negative feedback promptly and maintain a positive online presence.
- Ethical Business Practices: Adhering to ethical business practices can also protect and enhance a company’s reputation. This includes treating employees fairly, operating in an environmentally sustainable manner, and being transparent in business dealings.
6. Operational Risk
Operational risk encompasses the potential hazards and disruptions that can occur in a company’s daily activities. These risks could stem from a variety of sources such as system failures, process inefficiencies, human errors, or even natural disasters. For instance, a malfunctioning piece of equipment could disrupt production, or an error in record-keeping could lead to financial discrepancies.
- Standard Operating Procedures: Implementing clear and comprehensive standard operating procedures (SOPs) can help reduce operational risk by ensuring tasks are performed consistently and correctly.
- Regular Staff Training: Regular training can ensure that all employees understand their roles and responsibilities, are aware of company policies and procedures, and have the skills necessary to perform their tasks effectively and safely.
- Equipment Maintenance: Regularly maintaining and inspecting equipment can prevent unexpected breakdowns and ensure smooth operations. A well-implemented preventative maintenance schedule can identify potential issues before they become problematic.
- Contingency Planning: Having contingency plans in place for system failures or other disruptions can help minimize downtime and maintain business continuity.
- Risk Assessment: Regular risk assessments, identifying potential hazards, assessing the likelihood and impact of those hazards, and implementing measures to control the risks.
7. Competitive Risk
Competitive risk pertains to the potential challenges a company might face in maintaining its competitive advantage. This could arise due to factors such as the entry of new competitors, changing market trends, or advancements in technology.
- Regular Competitor Analysis: Regularly analyzing competitors can provide valuable insights into their strategies, strengths, and weaknesses. This can help businesses anticipate competitors’ moves, identify market trends, and make strategic decisions to stay ahead.
- Continuous Innovation: Continuous innovation is key to maintaining a competitive edge. This could involve developing new products or services, improving existing ones, or finding more efficient ways to operate.
- Unique Selling Proposition (USP): Focusing on a unique selling proposition can help differentiate a business from its competitors. A strong USP can give customers a compelling reason to choose one product or service over another.
- Customer Retention Strategies: Implementing strategies to retain existing customers can also mitigate competitive risk. This might include providing excellent customer service, offering loyalty programs, or regularly engaging with customers through social media or email marketing.
While it’s impossible to eliminate all risks, recognizing and proactively managing these potential threats can help small and medium-sized businesses navigate uncertainties, ensuring their continued success and longevity in the marketplace.
Need help managing your financial risks? The team at Prime Ledger can support your business with a financial audit, advice, and ongoing financial management support.
[i] Federal Reserve Bank of St. Louis. (n.d.). Economic Risk and Its Effects on Financial Markets. https://www.stlouisfed.org/on-the-economy/2016/july/economic-risk-effects-financial-markets
[ii] National Small Business Association. (2023). Small Business Access to Capital Survey. https://nsba.biz/wp-content/uploads/2023/02/Access-to-Capital-Survey.pdf
[iii] Federal Reserve Bank of San Francisco. (n.d.). Compliance Risk Management: What to Expect in 2020. https://www.frbsf.org/banking/2020/compliance-risk-management-what-to-expect-in-2020/
[iv] Keeper Security. (2023). The 2023 SMB Cyberthreat Study. https://keepersecurity.com/assets/pdf/Keeper-2023-SMB-Cyberthreat-Study.pdf
[v] Deloitte. (2020). Reputation@Risk Survey. https://www2.deloitte.com/global/en/pages/governance-risk-and-compliance/articles/reputation-at-risk.html