www.clearrisk.com

I am honored that Craig and his team at ClearRisk Inc. accepted one of my posts for publication in the ClearRisk blog. The post is titled “10 Steps to a SMB Risk Management Process“.

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The Post’s Backstory

Over the last week or so, I’ve been contemplating the information I’ve seen on the web about business risk management. I’m pleased about the growing knowledge base that can be specifically applied by small and medium sized businesses. There is a downside, though. Most of the information is in snippets – blog posts of 400 to 800 words and tweets of 140 characters or less.  I could see where the seemingly random collection of information might be confusing or overwhelming for a business trying to figure out how to implement risk management. Thus the “10 Steps…” post.

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I’m under no illusion that my one little post will provide all that’s needed to successfully implement a risk management process for your business. I do hope, however, that it provides a sort of checklist or roadmap you can use to step down the path without false starts and distractions. I know the list would have helped me when I started my first business.

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Check Out the Website

If you follow my Twitter @tombragg stream, you will notice a lot of re-tweets of information from Craig. There’s a good reason – he puts out good content. I’d encourage you to follow @ClearRisk if you’re not already. And please take a few minutes to explore the ClearRisk website. It has a huge amount of great information, waiting just for you and that special business owner/manager in your life.

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Disclaimer: I have no financial interest in ClearRisk. I haven’t received any compensation or freebies from them either. I just like the site and they let me play in their sandbox!

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I look forward to reading your comments on the guest post. See you there!

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Image by UnstablePixel via Flickr

It was a lightbulb moment. A few weeks back, a friend and I were talking about  the tendency of some companies to analyze and hold meetings, hold meetings and analyze, discuss, research and discuss again without taking any action. We were interested in the root cause of the perpetual analysis (a.k.a. analysis paralysis). Was it an extreme desire for precision and perfection? Or was it a fear of making mistakes?

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At first thought, it would seem that either approach would be ok for a business, right? We talked about the differences between a company striving for perfection vs. a company striving to avoid mistakes. One is a team working towards a positive result. The other is a group striving to avoid a negative result. It turns out that there is a big difference…

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The first company will have a tendency to pull together as a team of teams and achieve that “synergy” all us managers talk so much about. Efficiencies will be high. Problems will be seen as “challenges” and “opportunities”. Morale will be strong. Conversations will be motivating. People will be having fun at work as they innovate and achieve together. Setbacks will be discussed, learned from and forgotten. The overall energy will be positive and customers will notice.

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The second group will be quite different. Each person will be working for themselves, focused on being blameless for any issues. The team will be inefficient and somewhat dysfuntional. Problems will be seen as “obstacles” and “showstoppers”. Morale will be poor and stress levels will be high. Conversations will be draining and everyone will be counting the minutes until quitting time. Innovation will be non-existent. Setbacks will become crises, dwelled upon and never entirely forgotten, but there will be no lessons learned. The overall energy of the company will be negative – even if the company itself is successful – and customers will notice.

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How many companies out there have evolved into a ‘mistake avoidance’ culture? I bet the number would scare us. I would also bet that you could name two or three examples right off the top of your head. (It’s not hard to pick those companies out when you’re looking.) Is your company one of them? If so, what action can you take right now (and I mean right this minute…) to start to change?

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Might I suggest that you give yourself and your employees permission to make mistakes?

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p.s. Remember, my friend, as I’ve written before: there can be no success if there is no risk. Dare I say there can be no success if there are no mistakes? I dare. Please share your thoughts…

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In my opinion, few business people recognize that risk has a very real (and substantial) value. The lack of recognition is understandable – it’s hard to put a convincing numerical value on a risk that may or may not occur. But every now and then, an event comes along that provides a quantified glimpse of risk’s value. I was a witness to one of those rare events. Here’s the story…

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A high tech manufacturing company, let’s call them “WidgetCo”, won a very large and very challenging contract for a new product. Life was good at WidgetCo. Unfortunately, it didn’t take long for WidgetCo’s product development to fall significantly behind schedule and exceed budget. WidgetCo’s  management decided that they needed to outsource part of the development effort to an outside company.

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WidgetCo put together a very attractive bid package. Many companies submitted aggressive bids in an attempt to win the business. As WidgetCo reviewed the proposals, they soon realized that some of the companies did not fully understand the scope of the project or just plain low-balled the estimate in an attempt to win the business. The company whose proposal was most complete and demonstrated a full understanding of the task at hand was also the most expensive – more than 20% higher than the next lower bid. WidgetCo management had a problem.

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So how does the story end? After much thought and discussion, WidgetCo selected the most expensive proposal. Why? Because they saw that proposal as the lowest risk solution to their problem. WidgetCo paid a 20% premium to reduce their perceived risk. They valued that risk to be worth more than $2,000,000.

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Does that result surprise you? I’ll be the first to admit that it’s unusual in today’s short-sighted, manage-for-quarterly-results business environment. But if you can put aside the pleasant novelty of the management decision, it is a great example of risk’s value. (It’s also a great example of risk awareness playing a big role in a major business decision.)

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My story deals with the value assigned to risk by a corporate customer, but the same principle applies to individual customers like you and me. Think about people that buy Volvos. What about people that buy Macs? Both groups are at least somewhat concerned about risk (personal risk and malware risk) and are willing to pay a premium to minimize that risk. There are lots of examples of products marketed as ‘lower risk’. There are lots of people who gladly pay more to buy those products.

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So let’s accept that there is significant value associated with the risks perceived by your external customer (i.e. external stakeholder). Doesn’t it stand to reason that there is significant value associated with risks perceived by your internal stakeholders – the risks faced by your business? Don’t you think it’s about time you start managing that value?

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OK, I know what you’re thinking… “Great, Tom. My risks have value. But how do I figure out what that value is?” Funny you should ask. You can check out these posts for evaluation methods that you can use to quantify the value of your risks:

• Evaluate Your Risks, Part I – Why?
• Evaluate Your Risks, Part II – The First 2 Steps
• Risk’s Impact on What?
• Evaluate Your Risks, Part III – The Last 2 Steps
• The Miracle of the 80-20 Rule

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I would love to hear some of your stories about value being assigned to risk. Leave me some comments and let’s talk about them.

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I’ve put together a compilation of how-to posts to help guide you through the risk management process (“How To Manage Risk”) . Check it out!

If you’ve been keeping score at home, you’ve noticed that I’ve used the word ‘formal’ quite a bit. In fact, in one poorly worded post I suggested that “the (risk management) process doesn’t have to be formal” and got called to the carpet in a comment by Kristen. She was absolutely correct in stating that the process really does have to be formalized – meaning performed consistently and methodically – but doesn’t have to be complicated, expensive or burdensome (a point I attempted, and failed, to make).

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That exchange was a good example of how the word ‘formal’ can be misused or at least have different meanings to different people. In my last post about cost benefit analysis, I was again throwing around the f-word (no, not that one…) somewhat carelessly. Let’s take a step back and explore what really characterizes a “formal” process.

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What’s the Difference Between Formal and Informal?

If you look up the definition of ‘formal’, you will find phrases like “being in accord with established forms and conventions and requirements” and “characterized by strict or meticulous observation of forms; methodical“. These definitions touch on the concept I’m trying to describe, but they’re still too vague for my purposes. So let’s talk about the “tom” definition of formal and informal.

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When we’re talking about processes, the differences between formal and informal generally can be found in two areas: the extent of the documentation and the consistency of the method. In other words, formal processes or analyses should be performed in a consistent manner (i.e. a standard method on a regular schedule) and captured in writing. A formal process will have a structure and form. It will have a schedule or at least a trigger event. Formal process will happen on a consistent basis.

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As you would imagine, informal would be the opposite of formal. Informal processes tend to be more ad hoc – maybe an impromptu train of thought in your head or a spur-of-the-moment verbal conversation. Informal process or analysis will lack a pre-defined structure and schedule. It might happen when it’s needed or when somebody happens to think about it. It might not happen.

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How Do You Know When To Use Formal Process?

There are occasions when the situation simply doesn’t warrant the overhead of a formal process or analysis, but sometimes a formal approach is definitely recommended. A formal approach is particularly helpful when you may need to revisit the rationale behind a particular decision or if you want to communicate the reasoning for a decision to others (think decision justification or training purposes). A formal process is also necessary when you have a task that needs to be performed consistently in method and schedule.

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Many times you may have both a “formal” and “informal” version of the same process. Cost benefit analysis (CBA) is a perfect example. A formal cost benefit analysis will be triggered by a specific event or criteria. It will involve documentation of the facts (costs, benefits, assumptions) and the conclusion. An informal cost benefit analysis will probably be done in your head. Both are valid approaches as long as they are applied in the appropriate circumstances. You probably won’t want to use a formal CBA for deciding between a Big Mac and a McChicken sandwich at the local McDonalds. However, a formal CBA will be very justified if you are thinking about buying a $250,000 piece of equipment.

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Risk management is one of those processes that always warrants the use of formal process. Financial record-keeping is another one. While it’s important to know the distiction between formal and informal process, it’s much more important to know when to select the right type of approach.

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One closing thought… Don’t get caught in the trap of thinking that ‘formal’ equals ‘expensive’ or ‘complicated’. That is a complete myth. Formal processes can be very simple and cost effective. If you don’t believe me, watch what’s going on behind the counter at your local McDonalds. Their process is extraordinarily formal, but you can bet it’s optimized for cost and simplicity.

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For some reason I have a craving for fast food so let’s wrap this up. What are your thoughts on formal vs. informal? What are your concerns? Leave me a comment and let’s talk about it.

Here’s a Quiz For You

What do these decisions have in common?

• Is it wise for me to invest in new equipment for my business?
• Should I respond to the irate customer’s email or just let it go?
• Is the best route turning left, turning right or going straight?
• Should I have beef or chicken for dinner tonight?
• Should I wear the blue shirt or the green shirt today?

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Give up?

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The answer is that each decision’s solution will be based on the costs and benefits as perceived by the decisionmaker. The decision will be driven by a cost benefit analysis.

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(OK. I’ll come clean. It’s a trick question. Why? Because the solution to every decision is based on a cost benefit analysis.)

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What is Cost Benefit Analysis?

Simply put, cost benefit analysis is evaluating the costs required to carry out a particular decision with respect to the benefits derived from that decision. It’s not a difficult concept. (But as with all simple concepts we can apply great complexity, so if you’re interested in the complex description, check out the Wikipedia page here.)

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Cost benefit analysis consists of three simple steps:

1. Calculate the expected costs over some time frame
2. Calculate the expected benefits over the same time frame
3. Compare them to each other

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Obviously the great majority of decisions are made using a unconscious cost benefit analysis, but there are times when consciously evaluating the costs and benefits may be helpful. One of those times is when you are planning how to mitigate your risks and exploit your opportunities.

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Cost Benefit Analysis and Risk Management Connected How?

Cost benefit analysis (CBA) is a great tool for evaluating mitigation alternatives during step three of the risk management process – plan for your risks. We’ve all heard the saying “There’s more than one way to skin a cat.” It was uttered by a very wise, albeit somewhat troubled (or very hungry) individual. There are always alternatives. There are always decisions to be made. Cost benefit analysis provides the method for making the best decision.

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Tips for Effective CBA

Analyzing costs and benefits is not difficult. In fact we all do it many times each day. There is a key to doing “effective” CBA, however – considering the “hidden” costs and benefits. Let’s look at a simple example…

Fred (of Fred’s Coffee Shop, introduced here) has identified fire risk as a key risk for his business. Working with his insurance broker, Fred has identified several different alternatives that will reduce his risk. A key part of every solution is insurance, but he could also purchase extra fire extinguishers, install a monitored fire detection system or install a sprinkler system. Fred recognizes that each alternative has a very obvious cost - installation cost. But Fred also realizes that there are hidden costs and benefits involved.

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Fred learned from his insurance broker that each of his alternatives will have some ongoing expenses. The fire extinguishers will require employee training and need to be inspected every year. The monitoring system will have a monthly service charge. Even the sprinkler system will require regular inspections and testing. Fred makes a point to capture the hidden costs.

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Fred’s insurance broker also told him that the insurance company will give Fred a discount on the insurance premium if he installs a fire detection system and an even bigger discount if he installs sprinklers. Fred adds these discounts to the “benefits” list so he can have a true picture of his net cost for each alternative. 

In the example Fred could have done the cost benefit analysis and made a decision without the hidden costs and benefits information, but the decision may not have been the best solution. Some of the hidden costs and benefits could be substantial.

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It’s also important to remember to include qualitative costs and benefits in your analysis. Your alternative might have benefits like increasing employee morale or just plain making you more comfortable. Don’t forget to include that information in the analysis – it’s important.

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Do you see how including hidden and qualitative costs and benefits could make an apparently obvious decision not so obvious?

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We all do cost benefit analysis every day of our lives. It is an extremely effective way to make a good decision IF all of the costs and benefits are included in the analysis. Keep the formal CBA in your risk management toolbox. Once you start using it and getting comfortable with it, you’ll find that you come back to the technique over and over again.

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How are you doing? Starting to get the idea about how to manage risk in your small business? Give me an example of when you’ve consciously done a cost benefit analysis. It doesn’t have to be business related. Feedback, please!

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p.s. Check out the complete listing of “How To Manage Business Risk” for small business risk management tips, tricks and details.

If you will allow me to indulge, I want to take a step away from the uber-tight focus on risk management for a minute. I was on a tele-conference today. During the conversation I shared that my dream is for my company to evolve into a “sales organization” that does engineering services rather than an “engineering organization” that does sales.

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On the other end of the call, Paul asked me what I meant. I’ve been thinking about the topic ever since and I’d like to share my thoughts with you. The distinction isn’t limited to only engineering services companies. It applies to every type of business out there.

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So what is the difference between a “sales organization” that does engineering and an “engineering organization” that does sales? The biggest difference is attitude. Think about it for a minute. We have 150 software engineers that work on projects for our customers. Most of them have some type of customer interaction every day. Currently, that interaction is engineer to engineer, because we are an engineering company.

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But what if our software engineers considered themselves technical sales people? Now we would have 150 sales people interacting with the customers every day. The interaction would be between sales and engineering, because we would be a sales organization that does engineering.

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“But how would that interaction be different?”, you might ask. Good question – thanks for asking! The difference would be in the conversations. An engineer is going to ask engineering questions, leading to a very technical, detailed and specific exchange of information. The conversation will be objective, logical and unemotional. Engineers have implied limits on the expression of “warm and fuzzy” so there will be no enthusiasm (other than geeky excitement over a novel technical approach), no empathy or caring conveyed. The relationship will be one dimensional. (Disclaimer: I’m a degreed engineer who’s come over to the dark side of management.)

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A sales person doing the same call (same agenda, objective, etc.) is also going to ask engineering questions, but they will ask more. They will ask about customer satisfaction, upcoming potential projects, personal impressions of our company and of our competitors. The conversation will be more qualitative, subjective and emotional. There will be no implied limits preventing our employee from expressing enthusiasm, empathy or caring. The relationship will be multi-dimensional and (more importantly) personal.

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Do you own a manufacturing business? Do your production people ever interact with customers? Do you own a retail business? Is there anybody in your company who doesn’t interact with customers at least a few times? What about restaurants? Get my point? Every employee of every business will probably interact with customers at some point. How do you want that interaction to play out? What type of attitude do you want your employee to exhibit?

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Customers buy products and services because of emotions and relationships. Sure there is some logic and quantitative analysis involved, but the primary driver is emotion. So given that fact, what you would rather be running: a sales organization that is comfortable in the realm of subjectivity, emotion and relationship building; or an engineering organization that is limited to the objective and quantifiable?

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My dream is to work for a sales organization that does engineering (or retail, or manufacturing, or professional services). I want every person in the organization to believe in our product and speak with passion about it. I want every person to feel like a salesperson.

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Do you work for a sales organization that produces product/services or do you work for a product/services company that does sales?

To be honest, I’ve debated about whether I should write about financial modeling. If you’re anything like my girlfriend Amy, the mere thought of financial modeling causes great anxiety and a profound desire to change the topic. And I’m pretty sure that a post on creating spreadsheet representations of your business may not go viral.

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But the simple truth is that financial models are incredibly powerful tools and they’re not that hard to create. Models are also required to do certain types of risk evaluation (as I talk about here, here and here..) In fact, models of the financial kind can be kind of sexy – at least to the engineering types like me.

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Well, now that I think about it the models really aren’t that sexy…did I mention that financial models are incredibly powerful?

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So what is a financial model?

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It’s a numerical representation of your business. It shows revenues, expenses and cash flow and all of their components. A model lists all of the assumptions (and there are a lot of them) with the assumed value for each. If you use formulas when you create the model, it’s possible to test different scenarios by changing the assumed values.

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Here’s a simple example. Fred owns a coffee shop. In his model, he calculates revenue by assuming the number of cups of coffee he will sell each month and multiplying that number by an average price per cup.

Sales = # of cups x $/cup

In this example there are two assumptions. That means there are two risks and two opportunities, right? The actual result for each assumption could turn out to be wrong in a negative way (a risk) or wrong in a positive way (an opportunity). By changing the assumed values, you can see the financial impact of risks and opportunities directly from the model.

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You can apply the same technique to the direct expenses, the overhead expenses and even cash flow factors like how quickly you pay your invoices and how quickly you get paid by your customers. I arrange the numbers in a column for each month. The end result looks very similar to an income statement (a.k.a. P&L report).

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I’ve done a lot of financial models in my time – for business planning, budgeting and forecasting. I continue to be amazed by the amount of information a good model will give you.

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I’m going to continue this series and give you some more detail on financial modeling over the coming weeks. I’ve also created a public sample financial model for Fred’s Coffee Shop. You can check it out here (I’m using Google documents since they are easy to share. I typically do my modeling in MS Excel). Feel free to make a copy and play with it. So far I’ve only created the income statement portion of the model, but I’ll be adding some cash flow components to it.

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Don’t hesitate to contact me with any questions. This type of modeling has become an area of expertise for me (in MS Excel spreadsheets) and I’m happy to help.

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Do you use any sort of financial modeling in your business? I’d love to hear about your experiences.

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Let’s drill down a bit into risk evaluation – step 2 in the risk management process. It’s standard practice to evaluate a risk or opportunity’s impact and rank it. You can rank the impact on a scale of 1 to 5, with 5 being the highest impact. Or you can rank the impact “high”, “medium”, or “low”. Or if you’re utilizing financial models you can calculate the risk’s impact and represent it in terms of your local currency.

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Seems very straight forward, right? It is, but let’s take a step back and ask “Impact on what?” Risks and opportunities can impact your business in multiple ways, right? They can impact:

• Revenue (sales or money coming in)
• Expenses (costs or money going out)
• Profits (the net difference of money coming in and money going out)
• Cash flow (cash on hand or the rate of cash accumulation)
• Quality (tangible product quality and customer-perceived service quality)
• Schedule (progress towards a milestone date)

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Sidebar: I know that there are other types of risk impacts that could be added to the list – IT/data security, regulatory, reputation, etc. – but in my opinion all of them should boil down to one or more of the six impacts above.

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In order to properly rank and prioritize the risks and opportunities, they should all be evaluated with respect to a single impact so they can be directly compared to each other. Does that make sense? Let me give you a quick example:

Fred has evaluated his risk inventory and identified the risk with the biggest impact on quality, the risk with the biggest impact on cash flow and the risk with the biggest impact on schedule. Fred looks at all three and scratches his head. “Which one do I work on first? They are all important.”

Fred’s dilemma was caused by evaluating his risks in terms of multiple impacts. If he had evaluated all of them with respect to only cash flow (or only quality or only schedule), the risks would all be ranked together and he could clearly see which one should be worked on first. Understand?

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An interesting point: the ranked order of Fred’s risks if he evaluated them in terms of cash flow would probably be different than if he had evaluated them in terms of quality. Do you see why? It’s important to give some thought to the basis of your evaluation before you start.

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So which impact is the right impact to use for risk evaluation?

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The real answer is “It depends”, but personally I think 99% of the time the answer should be cash flow. Let me tell you why. First off, in a business setting – and especially in a small business setting – cash is king. Cash flow is the best litmus test for a successful business, even the mega-corporations. That’s because cash flow is a measure of the combined effects of the other five impacts. Businesses with exceptional revenue can easily fail (have you heard of ‘growing yourself out of business’?). Businesses with outstanding cost control and low expenses can fail if they don’t have the necessary revenues. Even businesses with solid profits can fail if the profits are primarily driven by depreciation, amortization, balance sheet transactions or other non-cash accounting treatments. But a business with great cash flow can only succeed. They have more cash coming in than is going out, and that’s the name of the game, folks.

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I do have to tell you, there is a downside to evaluating in terms of cash flow. It pretty much requires some sort of financial model. Don’t let that scare you, though. Models don’t have to be complicated. I will be writing about how to set up financial models in a spreadsheet in future posts. You can do it.

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So my advice to you is evaluate your risks in terms of cash flow. I know, I know. It will involve a bit more work and judgment on your part, but it is the most direct way to tie your risk management effort to your business success. Remember you’re not doing risk management just to go through the motions. Spend some time and do it right. You won’t regret it. I promise.

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How are you doing so far? Still with me? I could use some feedback.

My girlfriend Amy has a home-based, small business, working as a professional wedding and portrait photographer (one of the best in my very-biased opinion, but check out her site and judge for yourself.) I work with Amy as a PT photographer on weekends and also help her out on the business side of things. As I’ve learned the in’s and out’s of a home-based, single person business, I’ve been paying attention to its similarities and differences in terms of risk management.

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Amy’s small business has many of the risks faced by traditional brick and mortar businesses. She has equipment related risks. She has market related risks. There are the normal insurable risks. But Amy also faces some interesting risks that are unique to a home-based business. If school is canceled due to a snow storm, the kids are now around the “office” all day presenting a formidable distraction. There are always risks of getting diverted from the work activities to home chores. As the sole employee, Amy’s business grinds to a halt if she gets sick. There are also risks associated with the isolation that comes from being a sole proprietor.

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Amy’s business also has many of the same opportunities that are available to “traditional” businesses. Marketing, production efficiencies, technology, strategic partnerships, etc. all present areas that could be exploited for improved revenue or profitability. But a home-based business offers unique opportunities as well. There are lifestyle opportunities like being able to be there when the kids get home from school and having the ability to make instant adjustments to work/life balance (you know, like adjusting from 100/0 to 98/2). There are tax opportunities for home improvement related business expenses. Amy also has an opportunity to tap into a contingent workforce of small people that are willing to work in exchange for a only little extra computer time.

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Home-based businesses don’t have a free pass that exempts them from the need for risk management. In fact, I would argue that they have a more urgent need because each risk that becomes reality has a much larger relative impact on a sole proprietorship than it does on a larger business. (100% of a sole proprietor’s employees will be involved in dealing with a crisis, while only a portion of a larger business’ employees will probably be affected by a similar crisis.)

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I can already hear the chorus of sole proprietors: “We don’t have time to manage risks!”. I know you think you don’t. But I would suggest that every decision you make is driven by some type of risk or opportunity. I would also suggest that you are already managing risks, but call it something different – like running a business. The only difference I’m suggesting is take the time to jot down the potential risks as you think of them. Spend a little time thinking about which risks and opportunities would have the biggest impact on your life and then sketch out what you would do to exploit the opportunities and minimize the risks.

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Risk management does not need to be burdensome. The process can be scaled down – it just shouldn’t be scaled down to zero. Check out my other blog posts for step-by-step instructions. Here is a good place to start. Although most of my writing is written in terms of “traditional” businesses, you can apply the same principles to your home-based business.

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What type of assistance would be most helpful in getting you started, small business owner? Leave me a comment and let’s make it happen.

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p.s. Amy doesn’t know it yet, but a risk management plan is in her future

It’s been difficult to come up with topics this week.  The situation in Haiti seems to consume the majority of my thoughts when I’m outside the office. Make a difference. Please donate cash to the relief agency of your choice.

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I thought I’d take a look at my Google Analytics page and see what people are searching for when they find my website. There is a definite trend. Many of the searches involve the word “example” or are geared toward identifying potential risks for businesses. Let’s talk about that…

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Businesses face many types of risks. Some of those risks can be managed with insurance. I’m not going to address those here, but I’ll point you to a great site with tons of free information. Check out www.ClearRisk.com for a comprehensive list of business risks that can be managed by insurance. I would also strongly recommend that you download and read their free e-book. It’s an easy read and provides a great education on insurance for small and medium businesses. (Disclaimer: My recommendation is not sponsored and I’m not being paid in any way. In fact, Craig Rowe and the ClearRisk team don’t even know I’m doing it.)

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So let’s talk about the risks you can’t buy insurance for. Obviously every business is going to have risks that are unique to that business, but they will always fall into three broad categories – budget risk, quality risk and schedule risk. (Check out my post here for details.) Starting with those categories, you can drill down by using the “5 Coulds Technique” (detailed here).

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As you do the brainstorming, you’ll find that you come up with a wide range of risks. Here are just a few that come to mind as I’m writing. I’m in a manufacturing and retail mindset this morning so the risks are geared to those kinds of businesses, but many of them apply to service businesses, too. Some risks are repeated in multiple categories purposely.

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Make sure you read the IMPORTANT NOTE at the bottom of the post!

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Employee Related Risks

• Theft
• Departure of a key employee
• Lack of training
• High turnover
• Sabotage/intentional misbehavior
• Employee disputes
• Poor customer service

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Revenue Related Risks

• Competitor enters market
• Market size shrinks (local population shrinks, demographics change)
• Economic pressure (reduces money available to be spent on your product)
• Substitute product becomes available
• Customer access disrupted (e.g. road construction in front of your business)
• Pricing doesn’t match value perceived by customers

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Expense Related Risks

• Material costs increase
• High rework expense
• High warranty expense
• Loss of key supplier
• Increased wage expense (tight labor market)
• Increased benefit costs
• Loss of lease/increased rent
• Increased utility rates
• Increased bank charges (interest rates, credit card fees)

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Quality Related Risks

• Poor production process
• High rework expense
• High warranty expense
• Poor customer service
• Low quality materials
• Poor employee morale
• Inadequate equipment/tools
• Poor/unattractive packaging
• Equipment/tool breakdown

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Schedule Related Risks

• Customers are slow paying
• Unfavorable terms from suppliers (e.g. cash in advance)
• Late delivery of materials
• Lost/misdirected shipments of your product
• Slow response of bank, government agency (e.g. loan proceeds, permits, etc.)
• Delayed construction/remodel
• Slow response to marketing campaign
• Equipment/tool breakdown (e.g. internet down, computer virus)

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Are you getting the idea? This list just scratches the surface. Your business will have many more risks that are unique to your situation.

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IMPORTANT NOTE: I’ve focused the examples above on risks, but don’t forget about your opportunities. Many of the risks listed above will have corresponding opportunities you can exploit. For example: The risk “Customers are slow paying” has an opportunity “Customers pay quicker than expected”. Don’t get caught in the trap of focusing only on the negative. Identifying and exploiting opportunities can pay for your risk management program. Check out this post for more info.

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Please share some examples of risks facing your business. Leave a comment.