Reducing Risk in Business

Do you remember the first time you climbed on a bicycle? You probably fell down a time or two, before finding your balance and riding off with your friends. Starting and running a business is also a balancing act. You need to understand the risks, and make smart decisions in order to reap the rewards of success. As Marcus Lemonis says, “The definition of an entrepreneur to me is the willingness to fail, and it takes a lot of guts and a lot of heart to take that chance.”

In business, you can’t avoid risks or liabilities. But you can take steps to mitigate their impact and protect yourself against an unexpected surprise or a recurring problem.

A downturn in the local, state, national or global economy could have serious implications for your business. Customers can cut back on their orders or your market could simply dry up. Think about the movie theaters, gyms and restaurants, just to name a few of the businesses that were shut down to reduce the public health risk of COVID-19.

From the time a new employee goes on your payroll to her last day at work (and beyond), you run the risk of a labor-related issue. You need to follow all the employment laws and codes, from overtime to workplace safety to anti-discrimination rules. You also need to train and monitor employees to be sure their actions comply with your business’ policies and procedures.

You might find that a supplier has delivered the wrong materials, leaving you unable to fulfill customer orders. Other risks include a jump in costs or the disappearance of a vendor, leaving you scrambling to find an alternative supplier.

Many things can go wrong in your business’ daily operations, from a supplier’s mistake to a service truck’s breakdown to key production people coming down with the flu.

Your employees may make a mistake, your customers may be unhappy with your performance or a compliance or regulatory issue suddenly makes the headlines. These are some of the ways a hard-won reputation can be damaged, temporarily or permanently.

One of the biggest financial risks in business involves liabilities. Companies need to understand the risks of taking on liabilities and plan a balanced approach. Taking on too many liabilities can cripple a business’ ability to perform. For example, global telecommunications company Avaya filed for Chapter 11 bankruptcy in 2017 to reduce its $6.3 billion in debt. After a restructuring, it emerged in a much stronger financial position.

Whether you have a one-time loan or an ongoing line of credit, you need to be sure your business generates enough cash to meet those repayment obligations. If problems arise, talk with your banker to see if your debt can be renegotiated.

If you are financing a business property, you need to keep making those mortgage payments. Again, meet with your lender if you need to extend the mortgage or change the terms.

At any given time, your business may owe a significant amount of wages or salaries to your employees. Therefore, incoming revenue needs to cover this labor-related liability, before being used for other purposes.

You don’t want to get into trouble with the IRS over this liability. So pay your taxes as required on time. End of story!

Understanding risks and liabilities is one of the fundamental steps you should take before starting a business. It’s easy to get carried away by a great idea or an opportunity to capture a particular market. After all, “If you don’t have emotion and you don’t have passion, then you shouldn’t be in business,” as Marcus says.

But you have to use your head as well as your heart when launching a new business, expanding to new markets or developing a new product or service. Unless you understand risk in business and take appropriate action, your business might go under before you can begin to enjoy the rewards of success.

Before implementing a growth strategy, take the time to develop a written plan. Identify the risks and determine the liabilities in advance. That’s the best way to avoid costly surprises and keep your business on track.

Being able to document your decisions and actions will go a long way to mitigating labor, material and operational risks. Good records are also essential for effective customer relationship management, particularly when handling complaints or other issues.

It can be tempting to borrow a large amount from your bank to pay for a new investment or expansion plan. But remember that your revenue will need to increase as well in order to meet those obligations. Most successful small businesses limit their financial liabilities, including bank loans and mortgage payments.

Don’t let your customers run up large balances that jeopardize your cash flow. Otherwise, you run the risk of running short of funds when it’s time to pay your employees, your suppliers and your tax liabilities.

Maintaining a healthy balance in the bank can help you through times when cash flow is lower than normal, and provide a cushion if unexpected expenses arise.

Success in business – like riding a bike – involves balancing risk and reward. Too much caution and your business can start wobbling and falter. But going too fast leaves you vulnerable to the many potholes and twists in the road ahead. As Marcus says, “Things are always going to go wrong. People make mistakes. I know I do. It’s how you resolve it that matters most. Listen, be open to criticism, resolve it with speed and empathy, and take responsibility.”