Knowing how to identify and manage risk is essential for a small business to survive, operate and prosper amid competition and uncertainty.
“Tell me about the biggest risk you’ve taken in your life.”
If you were to ask this question to small business owners, chances are you would hear them all talking about taking risks to launch their respective business.
Entrepreneurs tend to embrace risk, and successful business owners also know how to identify and skillfully manage both internal and external risks that their business is facing. In this article, our small business accountants look to explore a few common types of risk and discuss how small business owners can benefit from a risk management plan that works for them.
Common types of risk
While it is obvious that every company faces its unique set of risks, there are a few common types that most of us face, given that we operate in a well-connected world. These risks include:
- Financial, such as managing rising costs, depreciation of assets, cash flow issues, bad debts, repayment of loans, problems associated with erroneous company accounts and paying an incorrect amount of taxes.
- Legal, such as not filing the appropriate documents with Companies House and HMRC, not applying for or renewing appropriate licences, and failure to carry out contractual obligations.
- Health and safety, such as dealing with workplace accidents and equipment failure.
- Global events, such as a sudden political deposition in another country and a global pandemic that restricts travel movement.
- Market, such as changes in consumer behaviours and purchasing habits.
- Reputation, such as damage to your brand.
- Security, such as theft and fraud.
- Staffing, such as the challenge of finding the right people for the right jobs and conflict management.
- Technology, such as network interruption, email server failure and a breach in cyber security.
- Natural disasters, such as floods, heat waves and earthquakes.
Some of the risks mentioned above might seem indirect or even unlikely to some businesses. For example, if you have no suppliers or customers outside of a town or a city, then it is easy to assume that what goes on elsewhere isn’t going to affect your business. The truth is all businesses are actually more connected than ever, and consumers today can be personally affected by world events that seem far away. Consequently, it is better to prepare for indirect risks than to ignore them.
Risk management is the process of identifying risks specific to your business and coming up with strategies to deal with the risks and recover from the impacts should the unfortunate happen. You can develop an effective risk management plan by following these steps:
- Identify the risk
- Assess the risk
- Manage the risk
- Review and update
You can certainly get assistance from various specialists to help with your risk management plan. For example, when assessing financial risks, involve your accountant or speak to a small business accountant like us. Our team of chartered accountants can work with you to review financial risks related to your company, including but not limited to:
- Risks from how your company is structured
- Risks from incorrect financial transactions
- Risks from cash-flow shortage and how to overcome them
- Risks from changing customer trends
- Risks from inaccurate tax calculations
Essentially, what a risk management plan does is to help you identify issues in various business situations and from there, you develop practical ways to protect your business. To guide you through the process, here are the four steps involved.
Identify the risk
A good risk management plan starts by asking a series of ‘what if’ questions that could affect your business. A few examples are:
- What if my key supplier went out of business?
- What if my website was hacked?
- What if a new competitor opens on the same street?
- What if I add eCommerce to the website?
- What if a customer sue me?
Assess the risk
Assessing the risk is about the likelihood of any particular risk happening and the consequences it would have on your business.
Here’s an example: let’s say you run an e-commerce site so you need your website to be available 24×7. You have a good hosting contract and the risk of your website going down is low. However, should the unfortunate happen, your costumers cannot reach you nor buy from you. Consequently, you may suffer a financial loss during the period when your site becomes unavailable.
Now you have thought about the risk and the consequence, the next step is to manage the risk.
Manage the risk
The common ways to manage risks are:
- Accept them – if the risks are very unlikely to happen, too expensive to mitigate, or impractical, you may choose to accept them and have a recovery plan to manage the consequences should they happen.
- Avoid them – you could avoid the risks by not proceeding with an activity or by using an alternative method to achieve the same outcome.
- Reduce them – you could reduce the likelihood of the risk occurring or you could reduce the impact if the risk occurs.
- Transferring them – you shift the responsibility to another party, such as your insurance provider, through outsourcing or new partnerships.
In the UK, you must get Employers’ Liability insurance from an authorised insurer as soon as you become an employer. Your policy must cover you for at least £5 million. Apart from this statutory obligation, you may consider other types of insurance that are useful to small businesses. They can include content and stock insurance, business interruption insurance, cyber cover, and audit insurance.
Review and update
Just like other business processes, your risk management plan should be reviewed and tested as risks can change, as your business and the environment you operate in.
Developing a recovery plan
Going hand-in-hand with a risk management plan is a recovery plan. The idea here is about how your business can recover and minimise losses should an unfortunate incident happen.
Cyber security is a good example to illustrate this. Small business owners are often targeted by ransomware, malware and malicious emails. The risk is real and it may even occur regularly. To mitigate the risk, you may already have established strict procedures like installing the latest security software to keep your network and devices secure, regularly backing up your data and educating your employees. Despite the best effort, hackers and cyber criminals may still gain unauthorised access to your system. Accordingly, you need to have a recovery plan, detailing anything from stopping the incident from getting worse, calling up experts who can help you resolve the incident, informing the authority if necessary, and considering what legal advice you should take if the incident causes a significant impact on your business or customers.
Tax Agility can help you mitigate risks related to company finances
As leading chartered accountants for small businesses in London, Putney and Richmond-upon-Thames, we tend to involve risk management as part of our daily activities and discussions with our clients.
An obvious activity is that we can help to reduce your financial and compliance risks by managing your company accounts accurately and making sure that your business is tax-efficient.
We are also the person you can bounce ideas with, as we can help to evaluate risks and opportunities that are drawn upon financial data so you can make informed decisions accordingly.
If you are thinking of buying another business or selling an existing one, you can also count on us to assess the value by reviewing the business’s assets, operations, financial performance and tax compliance, to name but a few.
In short, by incorporating risk management, our goal is to make sure that your business is financially sustainable. You will also receive qualified insights that can help in your decision-making process and meet financial compliance.
- Accounting & Bookkeeping: leave your day-to-day finances to us. We will also provide monthly management accounts, prepare statements and help you set-up cloud accounting.
- Tax: if you are tax-efficient, you will have more money to invest, expand and create jobs in your community. Let us help you with tax planning, tax computation and tax returns.
- VAT: from VAT returns to manging VAT on import and export goods, we take care of them so you don’t have to.
- Payroll: as your team grows, outsource your payroll administration to us so that you and your team can continue to enjoy accurate and on-time payslips every month.
- Management consultancy: take your business forward with practical advice based on financial data and benchmark analysis.
Call our small business accountants today on 020 8108 0090.
Alternatively, you can use the contact us form to get in touch.
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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.