Running a small business is not without its complexities. It often comes with liabilities affecting many aspects, including revenue and reputation. Even if you’re the most optimistic of entrepreneurs around, it makes sense to prepare for worst-case scenarios.
A survey showed that about 40% of small to medium businesses don’t recover from a natural disaster. And if they reopen, about 25% fail within the same year. If you think about it, about 67% of SMBs affected by fire, earthquake, or other natural disasters disappear 12 months later.
You surely do not want to be a part of that unfortunate statistic, and that’s why it is significant that you are aware of what you’re up against. We’re talking about small business risks which you can face. As a savvy business owner, you should have a comprehensive action plan to keep everything running smoothly.
Here are the top six small business risks that you should know about and plan for:
1. Financial Risks
A business must manage its debt to fulfil financial obligations. Financial risks often arise due to instabilities, losses, and unfavourable movements in the financial market. When your business is in financial trouble, you could lose money, as the situation will affect your cash flow directly.
Although avoidable, financial risks can affect all types of businesses. That’s why a good risk management plan is needed to reduce the impact and prevent any adverse outcome.
Financial risks can involve credit, liquidity and leverage, and foreign investments. They also include other risks relevant to your cash flow. For example, a number of your customers refuse to pay their invoices. This financial risk can significantly impact your income and business stability. Financial troubles also arise when the industry suffers an economic contraction, regardless if it lasts for a particular period.
Some portion of financial risk can be avoided, but others, such as interest and exchange rates, are beyond your control. That’s why it is essential to have a financial risk management strategy that lets you understand and plan for risks that can directly affect your business’ finances.
Part of your strategy includes protecting your business with insurance, such as the following:
- Building and Contents to protect your assets and profit loss due to business interruption
- Liability to cover legal expenses in case of a third-party injury or death
- Workers’ Compensation to safeguard your business if an employee lodges a claim
If your business advises clients, you should have Professional Indemnity Insurance to avoid lawsuit-related risks.
2. Operational Risks
Operational risks affect a small business’ everyday operations, causing disruptions that lead to financial losses and lower productivity. When unmanaged, it can eventually impact your company’s reputation. Although prevalent, operational risks can be prevented or at least controlled. Some examples of operational risks to watch out for are:
- Troubles in the supply chain include shipping delays and supplier bankruptcy. If this disruption continues, it can impact your products’ availability, which, in turn, leads to financial losses.
- Equipment failure causes production delays, increased expenses, and lost revenues.
- Employee errors, including data entry mistakes, can result in customer dissatisfaction and even reputation damage.
Like financial risks, you should mitigate operational risks by obtaining specific insurance policies, including business interruption insurance. This type of insurance can help you with your lost income and expenses if ever your operations are disrupted due to one or more of the causes listed above.
3. Legal and Compliance Risks
Also called integrity risk, compliance risk is the potential damage your small business can face if you fail to comply with industry laws, regulations, and standards. Regardless of the organisation’s size, it must identify all applicable rules and locate the areas where it might fail to meet those specified laws. Some examples of legal and compliance risks include:
- Employee and third-party injuries
- Illnesses developed whilst carrying out employment duties
- Accidents leading to death
- Fraud and theft
- Bribery and money laundering
- Poor air quality
- Mould and asbestos
Failure to comply with industry best practices and standards can lead to legal actions that your company or employees may face. This, of course, can result in hefty penalties, fees, and even imprisonment. Some Australian businesses that are unable to handle the financial burden are forced to shut down their company.
More than likely, you already have a compliance program in effect. If you don’t, now is an excellent time to create one. Have a clear outline of the appropriate behaviours by reading established manuals and guidelines. Ensure that you communicate the information to your workforce.
Errors and omissions insurance or professional liability insurance is a good type of insurance to cover legal and compliance risks. It can help you transfer some of the financial burdens to your insurance company so that you can continue your business operations.
4. Reputational Risks
These risks can occur in different ways, including as a result of your company’s actions (direct risk), employees’ actions (indirect risk), and peripheral parties like suppliers and joint venture partners (tangential risk).
To mitigate reputational risks, you must have good governance practices and transparency, along with being socially responsible and environmentally conscious.
Reputational risks are hidden dangers that can have an immense impact on your good name or standing. Often, they erupt out of nowhere without any warning. That’s why you should be prepared. One way to be ready is to have suitable insurance coverage, such as Directors’ and Officers’ Liability Insurance, Media Liability Insurance, and Product Liability Insurance.
5. Cybersecurity Risks
Contrary to popular belief, small businesses are vulnerable to cyber attacks, just like large companies. Cybercriminals are attracted to SMBs because they typically lack cybersecurity precautions. If successful, these breaches can be costly, causing lost productivity and reputation damage, among others.
According to a 2021 IBM report, the average data breach cost has risen 10%, now around AU$ 6.35 million. Organisations with more robust ones pay lower when restoring their operations after a cyberattack.
As a small business owner, you must invest time and money to strengthen your cybersecurity. You can easily be a victim of social engineering scams, including phishing, baiting, and website spoofing. Malware, SQL injections, and Denial of Service attacks can also occur.
Even if you have a cybersecurity protocol, you still need insurance focusing on cyberattacks. An example is cyber liability insurance which can protect your business from the financial impacts of data breaches and cyberattacks. It can cover losses from expenses after you have responded to an attack, as well as legal fees.
6. Human Resource Risks
Your human resource department faces daily concerns that can have a considerable impact on your overall reputation. This department primarily fulfils the recruitment of talent. Each new hire is a big investment, which adds pressure to the HR employees to ensure this person is the best fit for the job. HR is also in charge of employee retention, which can be a problem for small businesses. That’s because they often have to compete with larger companies that have the resources to keep top talents.
To mitigate human resource risks, your business must have a comprehensive HR strategy that addresses not only recruitment and retention but also training, workplace safety, and compliance. Always stay current on federal and state employment laws and regulations to avoid compliance issues. Stay insured with the proper insurance cover, such as workers’ compensation insurance, to protect your business.
Small businesses face various risks that can, directly and indirectly, impact their operations, reputation, and financial stability. After identifying the risks your business may encounter, you should have a strategy to mitigate the risks. And don’t forget about insuring your small business. This one tool can manage risks so you can continue running your business despite the challenges. For more information, contact Grace Insurance to see how we can help.