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.

Over the last couple of months, I’ve walked through the process for small business risk management with you. I thought it would be a good idea to capture all of the “how to” posts in one place.

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Take a look at the compilation. My hope is that after reading all the posts below you have a general understanding of how to manage risks and opportunities for your small business. More importantly, I hope you see the benefit of incorporating formalized risk management into your daily business life.

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Introduction & (hopefully) Motivation

5 Reasons You Should Care About Managing Risks

I Want to Manage My Risks. Where Do I Start?

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Step 1: Identify Risks

3 Categories of Risks

Easy Money! Manage Your Opportunities

The 5 Coulds Technique

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Step 2: Evaluate Risks

Evaluate Your Risks, Part I – Why?

Evaluate Your Risks, Part II – The First 2 Steps

Evaluate Your Risks, Part III – The Last 2 Steps

The Miracle of the 80-20 Rule

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Step 3: Plan for Risks

Mitigate Risks, Exploit Opportunities!

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I know, risk management sounds scary. Hopefully, what you read in the posts above helps make it less scary. As we continue our discussions you will see that there’s nothing to be afraid of. In reality, you’re already doing it every day – you just don’t realize it.

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Remember, risk management is only two things: working to avoid or minimize the bad things that could happen to your business and working to take advantage of the potential good things.

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Can you think of any management activity that isn’t driven by a risk or opportunity? I can’t.

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How do you feel about the process? What is your impression about what I’ve written – too simplistic? too complex? unclear? How am I doing for you? Let me know.

Let’s take a step back for a minute. Step one of the risk management process is “Identify your risks”. Three little words so it must be pretty easy, right? Not really.

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A risk management plan is only as good as the risks you identify. They need to be specific. They need to be the ‘root risks’ or the root causes of those potential hazards (or opportunities, remember) facing your business. As you start drilling down into all of your assumptions you’ll find that it is hard to get deep enough. It’s hard to go far enough down into the details without getting derailed on meaningless tangents.

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To help out the process, I’ve developed a technique I call the “5 Coulds”. I can’t claim this technique as original work. It’s based on a root cause analysis technique called the “5 Whys” that is used in process improvement and the Toyota Production System.

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Here’s how the 5 Coulds technique works. Start with an assumption you have made about your business. For our example, let’s use the assumption that we will hit our budgeted sales levels. Obviously there are a lot of different risks that could cause us to miss our budget. Now start asking the question “What could cause..?” and keep going until you get to an answer that is beyond your control. In my experience, five levels will usually suffice – sometimes less, sometimes more.

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Here’s a simple example for finding a ‘root risk’:

Assumption: We will hit budgeted sales
1) What could cause falling short on budgeted sales – a loss of customers
2) What could cause loss of customers – a lower priced alternative is available
3) What could cause lower priced alternative – a lack of perceived value of our product by customers
4) What could cause lack of perceived value – poor product packaging
5) What could cause poor packaging – lack of good taste

If we took the questioning down one more level – What could cause a lack of good taste? – you find that the answer is beyond your control, right? Taste either exists or it doesn’t. So the lack of taste is the “root risk”. It is very specific and it’s actionable. If you need to address the risk you can hire someone – with good taste – to design your packaging. Very specific risks generally present very obvious options for how to avoid or minimize their consequences.

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Even better, very specific opportunities generally present very obvious options for how to exploit them. You can use the same technique by just tweaking the questions. For our example, change question 1) to “What could cause exceeding our budgeted sales?”.

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As you use the technique, you’ll find that each questioning level may have multiple answers leading to other potential risks for a single assumption. That’s ok. You’ll also find that some assumptions will share root risks. That’s ok, too. If you did the technique graphically – like on a whiteboard - you’ll see that the end result looks like a tree structure with multiple branches coming off of each assumption. (The technique can also be done with word processing software – contact me for details.)

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The 5 Coulds technique is pretty informal, but I find it to be effective and simple…and that’s the goal for an ideal business risk management process, right? I’m sure there are other methods out there, but I haven’t been exposed to them.

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What techniques do you use for identifying specific risks? Please share.

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P.S. Take a look at the De-Risk blog post Extreme Risk Management – Mountaineers and Project Management for a story about how keeping risks specific applies to climbing a mountain, too.

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P.S.S. I’m putting together a step-by-step example of creating a risk management plan – from brainstorming risks all the way through planning for them. I haven’t quite decided how to best present the results, but I’ll get it out to you somehow.