Small business risk: What it is, and how to manage it

Small business risk: What it is, and how to manage it

Jessica Crosby
By Jessica Crosby
Aug 19, 2024
1 min read
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One of the biggest downsides to being a small business owner is that the liability of ownership and business risk is your sole responsibility. But don’t let the fear deter your entrepreneurship. With business risk management, you can anticipate and plan for possible risks and get some help when you need it most.

Jump ahead to learn:

What’s the definition of business risk and risk management?

A business risk is any factor outside of your control that can negatively affect the growth or viability of your small business. Examples of business risks may include (but aren’t limited to):

  • Fire
  • Flooding
  • Economic downturn
  • Supply chain issues
  • Global health crisis
  • Undercutting from a competitor
  • Theft

You probably won’t have a risk management plan in place for all potential risks (we’re looking at you, COVID!), but part of the responsibility of owning and operating your own business is to mitigate as much business risk as possible for every possible contingency.

A business risk can affect your finances, cash flow, longevity or viability as a business owner. And in some cases, small businesses can’t always recover. Every small business owner should analyze the vulnerabilities of their business and take action to manage their business risk. 

One key step is to create a small business disaster recovery plan. Another is to protect your business with the right business insurance.

4 common types of business risk

This is not a complete list, but these five vulnerabilities are among the most common in affecting small businesses.

1. Strategic risk

Strategic risk relates to problems with your business strategy. These are changes related to your customers, market demand or your business model. If your business no longer operates according to its business plan, you’re not implementing your original business strategy.

For example: You market yourself as a traditional bakery. But the neighborhood’s demographics change. Your customers like your products, but you’d see more business if you baked new products for your changing customers.

2. Compliance risk

A compliance risk involves not following rules, laws or regulations set by the city, county, state or federal mandate. Even if the violation is a result of ignorance and not malice, this can still result in a large fine. Examples of compliance risks include:

  • Harassment
  • Discrimination
  • Corruption
  • Health and safety violations
  • Environmental regulations
  • Personal data storage breaches
  • Permits and licenses

Sometimes employees can cause compliance risks out of your control. For example, if you run a restaurant that violates local health department guidelines, it’s your job as a business owner to train your staff and enforce the rules.

Some business insurance policies can help protect your business from compliance risks, including professional liability insurance, errors and omissions insurance (also called E&O) to offer some protection if you make a professional error that causes damages, product liability insurance if one of your products causes injury or damage, and cyber insurance if you suffer cybersecurity attacks or data leaks. 

3. Financial risk

Also called economic risk, financial risk affects your bottom line. Many small businesses are often challenged to manage their expenses and cash flow well.

Financial risks can be mitigated by keeping your business debts low and by keeping an emergency fund on hand. In addition, business income insurance, also known as business interruption insurance, can help cover the loss of your business goods, gear and inventory if you experience covered damage or destruction to your business property.

4. Operational risk

Operational risks are events that cause your business to stop running permanently or temporarily. Examples of operational risks include tech failures, labor disputes, natural disasters and changes in regulations that force you to suspend business. 

Many operational risks are out of your control. The right business insurance could help you pay bills, loans and payroll while you reopen your business.

For example, if you own the space where your business operates, commercial property insurance could help replace some of the goods, gear and inventory you need for your business, as well as some covered structural damages to the building itself.

How to mitigate your small business risk in 5 steps

These tips can help you mitigate risk to your small business:

1. Identify risks and make a plan

Create a good risk defense for your business by identifying risks that could take you down. Risks can be from internal factors and external factors, and you should evaluate risks at every level. Here are a few questions to ask yourself to identify your level of risk:

  • Is the risk fast or slow-moving, seasonal or present?
  • How can you handle risks that may seem permanent?
  • What risks are on the horizon for the future? (i.e., upcoming legislation)
  • Is your company willing and able to take on risk?

2. Calculate risk using financial statements

Many small business risks are financial. If you take out a loan, for example, payments plus interest can eat your cash flow. And it can leave you vulnerable to unexpected financial risk if you don’t have the cash to address an unexpected expense.

A financial services provider, like a CPA or bookkeeper, can help you evaluate your financial risk assessment. They can also help to find a loan that won’t cash strap your business.

3. Buy small business insurance for protection

Small business insurance can help protect your business from risk. Many small business insurance policies cover business interruptions from some natural disaster risks like flood, fire, technology failures and more.

And you can bundle insurance policies for more full protection at a cost savings. For instance, a business owner’s policy, also called a BOP, combines general liability and commercial property insurance coverages together in one convenient package.

4. Develop and implement a risk management strategy

Grow your business to be agile and adapt to risk. Develop a business continuity plan in your shop to help develop and implement a risk management plan.

If you have employees, it can help to bring your whole team together to discuss risk management. The variety of perspectives is invaluable. 

5. Document how you prevent risk so you can do it again

Business disruptions may evolve over time, but as soon as you’ve conquered one, the next wave is coming in right behind it. After you weather a storm, document which business activities you did that worked (and didn’t). Track this knowledge to jar your memory and train employees when you face your next risk factors in the future.

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How NEXT helps protect small businesses from risk

NEXT is committed to serving small business owners with custom, tailored small business insurance. We serve over 1,300 types of business environments nationwide.

Get an instant free quote online, compare your coverage options and buy the right policy for you. You’ll have your certificate of insurance (proof of insurance) in minutes. And you can access your policy 24/7 via web or app.

If you have questions, our licensed, U.S.-based insurance professionals are available to help.

Start a free quote with NEXT.

Jessica Crosby
About the author

Jessica spent over a decade working in education before moving into content marketing. She has worked on content marketing campaigns in the edtech, real estate, and personal finance sectors. She has a passion for working with companies that take the time to educate their customers. When she’s not working, she’s probably outside with her two kids.

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