Are you controlling for these 10 small business risks?

Editorial Team

5 min read
People in a cafe

Roughly 20% of small businesses fail in their first year of operation, and about 50% fail within five years, according to the Small Business Administration. If you want your business to beat those odds, you’ve got to manage risk. Here are 10 common risks small businesses face, and what to do about them:

1. Theft and security breaches

“Shrink”—the industry term for losses due to theft—costs retailers about 1.33% of sales, on average, according to the National Retail Federation. But a growing number of retailers report that shrink costs them more than 2% of sales, and, in 2018, one-third of reported robberies resulted in losses of $10,000 or more. Keep your business on the good side of these statistics by carefully monitoring your inventory, tweaking the design of your store to ensure employees can keep an eye on shoppers, and following some other simple loss-prevention strategies.

Cyber security is another huge risk for small businesses: 43% of cyber-attacks target small businesses. Human error can be a huge factor in cyber-security incidents, so make sure your whole team knows how to create a strong password, avoid phishing attacks, and follow other cyber-security best practices.

2. Lawsuits and liability

A fired employee sues you for wrongful termination. An employee gets hurt on the job—or a customer gets injured in your store. Lawsuits are one of the biggest risks small businesses face. Make sure you have the insurance you need to protect against these risks. Workers’ compensation requirements vary state to state, but general business liability insurance is always a good bet. You can also consider a business owner policy, which combines property, liability, and other useful types of insurance into one package.

3. Natural disasters

What if a hurricane forces you to shut your shop down for a week? What if your store catches fire, or an extended power outage makes it impossible to run your business normally? Business interruption insurance can help cover these types of risk. This type of policy should cover not just physical damage, but lost profits as well.

4. Recession

The state of the economy is out of your control, of course. But there are some things you can do to recession-proof your business. Focus on cash flow—make sure you have enough cash on hand to get through a lean period. Manage your inventory carefully, because storing a lot of unused inventory costs you money. If you think a downturn may be on the way, avoid making big cash commitments. If you need to cut costs, try cutting employees’ hours before you lay people off—that way, you can be quick to respond when the economy starts to improve.

5. Changing competition

You can’t control what your competitors do, either, but you can respond quickly when the competitive landscape changes. If a new competitor opens nearby, figure out what’s unique about your offering and focus on that, rather than rushing to cut costs. Use a rewards program to reward your best customers for sticking with you.

6. Operational risk

Operational risk is basically the risk that your business isn’t functioning as well as it could be—for example, that you’re managing inventory poorly or running out of cash every month. You control for this type of risk by making sure you implement strong systems to run your business and train your employees to follow these systems. For example, an app like Time Clock by Homebase can streamline scheduling staff and make running payroll easier. DAVO can automate the process of collecting and paying sales tax, so you never miss a deadline. Automating business processes like these is a great way to reduce human error.

7. Changes in your customer base

What happens if the demographics in your neighborhood shift, and your foot traffic starts to slow down as a result? What if your biggest customer decides to cut costs or take their business elsewhere? What if a bad online review starts to turn customers off? The best strategy for controlling for this type of risk is to diversify your customer base as much as possible. Ramp up your marketing, and make sure you’re active on social media. Use apps like Yelp for Business to monitor your reviews online, and give customers a way to connect with you directly through an app like Feedback, so they won’t feel they have to take their concerns to social media.

8. Subpar employees

Attracting and retaining great talent is another concern for small businesses. If you’re looking to hire, an app like JazzHR can help simplify the process. Keep in mind that employee satisfaction depends on more than just salary—look for some low-cost perks you can offer to keep your staff happy.

9. Growing pains

Growth is great—except when you sell out of your most popular product, take on too much debt to fuel your growth, or you add a second location and it struggles to make its targets. Grow smart by keeping an eye on your debt-to-equity ratio. Consider testing a new location with a pop-up before you fully commit. Use a customer relations management app like CRM to let your best customers know about your plans to grow and recruit them to try a new product or location.

10. You

Many small business owners try to do it all. Maybe you were your business’s only employee for a while, or maybe you just worry that nobody else can meet your standards. But relying too much on any one person—even if that person is you—creates risk for your business. You could get sick, or simply burn out. Learn to delegate so that you can take regular breaks. Create a succession plan so you know your business will be in good hands when it’s time for you to retire or move on. And protect yourself, and your business, against a worst-case scenario with disability insurance.

Featured image by Rod Long via Unsplash.

Popular Topics

Recent Stories

Please share your contact information
to access our premium content.