Starting a new business is incredibly exciting, but like any new and significant endeavour in life, it requires careful planning and research. Like a vegetable garden, your growing business needs to be carefully tended to, given space to flourish, weeded from time to time and well organised. So what specific risks should you be aware of? Read this blog to find out more.
1. Financial risks
Your growing business needs to make enough money not only to pay its employees and its rent, but also to make the interest payments on any loans that were taken out (eg in the business’ original financing). In any business, there is a risk of financial loss, whether from mismanagement of funds or a sudden and unexpected event. This could end up leading to insolvency and the end of your business. A higher level of debt financing could put you at a higher financial risk.
Types of financial risk include:
Currency risk (or ‘exchange-rate risk’) is about the risk of a change in the price of one currency vis-a-vis the other. For example, imagine that a British business is selling products to an American business for a specific number of dollars, but the value of the dollar rises very suddenly at the time of delivery and payment. In this case, the British business will lose money because buying dollars suddenly takes more pounds than before
Credit risk refers to the potential risk a business faces when it grants credit to customers due to the chance that these customers could stop making payments. Credit risk is also a consideration when a lender provides business credit for purchases. If a business lacks sufficient funds to repay these loans, it could default
Liquidity risk is when a business faces challenges in converting its assets (ie property) into cash – usually when there is an urgent need for large amounts of money for short-term debt obligations. If a real estate business needs to generate cash quickly it could struggle if, for example, there are no interested buyers for its properties
2. Operational risks
Operational risks refer to things that can go wrong with the operational processes within a business, whether these are internal processes and systems, human errors or large-scale external events.
Human error is an example of an operational risk when, for example, an employee makes a mistake, such as inputting the wrong phone number into their contacts platform, giving the wrong change to a customer or arriving late to work.
Other operational risks can include process failures, technology hiccups (such as when your voicemail to email feature goes awry) that can mess up operations and leak sensitive data (eg personal data), and supply chain disruptions. Delays and shortages in the supply chain can easily have a knock-on effect on the rest of the business’ processes and affect client-business relations.
Natural disasters such as floods and fires or external events such as economic collapse are also operational risks. For more information, read Force majeure.
3. Legal risks
With every business comes the need to adhere to certain laws and regulatory standards, and failing to comply with them can expose you to legal risks. If, for example, you don’t adhere to data privacy regulations, such as keeping your customers’ data in a secure place, you could end up facing legal problems. It’s best to begin complying with legal requirements before you even start a business.
Businesses have to comply with all kinds of rules, including taxation, minimum wage, and environmental impact requirements, and financial regulations. As an employer, it is your job to make sure your staff have a safe work environment. You must also comply with equal opportunities laws.
Fines and even imprisonment for executives (eg company directors) can result if laws are broken.
To protect your business from legal risks, you should adopt all relevant employment policies and operational policies. Consider adopting an Employee handbook to help cover your bases. For more information, use Rocket Lawyer’s HR policies checklist.
4. Cybersecurity risks
More businesses than ever have entered the online realm, offering smartphone access to apps and websites and electronic payment options and working almost exclusively with electronically-stored data.
This is all great, but it does come with risks. Customer (and staff) data is more vulnerable to information security incidents such as hacking, and employees can also be targeted, rendering businesses vulnerable. You need to keep personal and financial data safe from breaches, identity theft, payment fraud and more to protect employees, customers and your reputation.
For example, if you’re using an automated receptionist, how is any personal data stored and used? Is this GDPR compliant? If you transfer data outside of the UK, are you complying with all relevant data protection regulations? Make sure you protect both your business and your customers. If you need help with data protection compliance, seek GDPR compliance advice.
It’s crucial to prioritise cyber awareness and implement robust cybersecurity measures to safeguard sensitive information and mitigate the risk of data breaches. By staying vigilant and proactively addressing potential cyber threats, you can maintain the trust of your employees, customers and stakeholders.
For more information, read Information security and cyber security and Data protection for businesses. In all circumstances, you should consider adopting a Data protection policy and an Information security policy.
5. Reputational risks
Finally, reputational risks are a key consideration for a growing business. We already mentioned a few things that could impact your reputation, such as information security incidents that can erode trust from customers and employees alike.
Having any lawsuits on your hands is also bad for business, as is insolvency or being late with delivering products. Other things that can affect your reputation are scandals, such as the unearthing of an old and forgotten tweet from your CEO’s past, or the discovery that child labour was used somewhere in your supply chains.
In this age of information being so easily shared, stored, and discovered, any unethical behaviours inevitably come out to haunt you. The solution? Be careful with who you hire and stick to the most ethical practices possible.
For example, in the food industry, any incidents of food contamination or unsanitary practices can severely damage your reputation, as can negative reviews or publicised incidents of poor customer service.
So do not pollute the waters, mistreat staff, or side with bigots on social media. Do offer training to staff to carefully outline your business’ values and ethics and how these can be upheld in practice.
Keep common business risks at bay with prevention
Risks are inherent to any business, whether they are well-established or just starting up, and at every stage in between. Mitigating those risks is often the only course of action. It’s near impossible to completely circumvent them in an ever-changing and fast-paced economic arena. And like with most things in life, prevention is better than cure.
Luckily there are tools, qualified professionals, best practices and resources available to help your small business keep those common business risks at bay and to give it the boost it needs to succeed.
If you are worried about potential business risks, consider making a Business continuity plan to ensure your business continues to operate even when faced with challenges. Read Business contingency plans to find out more and do not hesitate to Ask a lawyer.