How to manage risk in a business

Business is a risky vocation and the main objective of the entrepreneur is to effectively reduce this risk while maximizing return. The following list shows the most common risk categories and possible remedies a business owner can consider.

  1. Strategic risk. This risk comes from the strategic choices a business owner makes. For instance what investments to make, which products to make, what goals to pursue. A business owner should be very clear on what they are trying to achieve. Otherwise you may find yourself jumping from business to business with no clear plan. If possible develop a business plan to guide you on your journey.
  2. Economic risk. The economy you operate in will expose you to certain risks like inflation, exchange rate fluctuations and interest rates. The economy may also determine the prices people are willing to pay for your products and services. The business owner should closely monitor the prevailing economic conditions and adjust their business plan appropriately. For example COVID has shut down many sectors and the agile business person has pivoted into new opportunities. The less agile are still reeling from the effects of the shut down.
  3. Market risk. The demand for your products and services can fluctuate. In some seasons people may demand your products more or less. Market risk may also show up in the form of competition. The entrepreneur should be aware of these fluctuations and plan for them. In seasons of prosperity the business owner should save funds to take them through periods of adversity. The business owner should put in place a system to identify and manage their customers proactively. The business owner should also diversify their streams of income to be able to go through tough times. If you are a farmer you can have chicken, goats, maize, matooke, beans, etc. If maize prices drop you can still survive on coffee, etc.
  4. Operational risks. These operational risks show up in the day to day running of the business. Machine breakdowns, theft, power shortages, inventory stock outs, accidents, etc. The business owner should have a clear mechanism for managing their operations. Simple tools like weekly to do lists and team meetings can relay help. Simple weekly and monthly reports can reveal potential problems in the business. If the business is not meeting weekly numbers then there is an underlying problem which need to be dealt with. When problems arise the business owner should focus on resolving the problem and not over dwell on the problem itself.
  5. Financial risk (liquidity, working capital, profitability). This is a very common risk which shows up all the time. There might be problems in revenue billing and collections. Costs may spiral out of control. The business might struggle from low financing. The debt burden maybe too high. Prudent financial management is essential here. The business owner should put in place mechanisms to ensure the business remains financially sustainable. Simple things like separating personal finances from the business can help. Keep proper records and reports. Limit credit. Partner with affordable banks. Manage debt and reduce costs, etc.
  6. Regulatory risk. A change in law can really affect some businesses. Changes in tax laws may increase costs and reduce profitability. You may also be required to comply with certain laws which increases costs. For instance the new coffee act may increase compliance costs as coffee farmers have to maintain a certain standard and register their gardens. The entrepreneur should be aware of their compliance obligations and put in places mechanisms to comply within reasonable costs.
  7. Human resources risk. Working with human beings is always a source of problems. Mismanagement of employees can collapse a business. So the business owner needs to be aware. The business owner should try within their means to make employees happy with their work. She should communicate a compelling vision and treat her employees fairly. When people feel fairly treated they will strive to give their very best. However when bad apples are identified they should be dealt with quickly. Some people are simply not a fit for your mission and it’s often best to go separate ways.
  8. Governance risk. The leadership competence of the business owner and management team can prove catastrophic. Some people simply can’t lead and they will run down even well established businesses. The business owner should work on their own growth and learning. This way they can become better business leaders and not act as their own impediment to growth.

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