Few forces in nature can match the zeal of an entrepreneur. The early days of
a new enterprise are filled with boundless energy and faith that the
entrepreneur’s dream will soon become reality. Then reality arrives. Risk is the
Unmanaged or poorly managed risks are why the vast majority of small
businesses fail. According to the
U.S. Small Business Administration figures, approximately 550,000 small U.S.
businesses will disappear each year, resulting in a huge and tragic loss of
private capital and personal dreams. This means up to a 90 percent failure rate
of all new businesses. Although there are a variety of causes, the easiest one
to prevent and the least expensive to implement is a proactive risk management
Small businesses must be innovative in order to prosper. Innovation is
difficult. Brilliant visions of new products or services rarely arrive
serendipitously. Effective businesses use a disciplined process of careful,
constant observation; focusing on changes in customer behavior that reveal new
opportunities for entrepreneurs who can spot the changes, define the new “need”
and fill it quickly. Focus. Focus. Focus.
But every business bumps into trouble, and this disciplined, innovative focus
is nearly impossible to maintain when risk erupts and seriously threatens the
company. Trouble puts limits on focus and progress. The entrepreneur’s best
resources must abandon their real jobs and become firefighters. Of course, the
entrepreneur can’t make money or innovate while fighting fires.
Managing Risk for Minimizing the Downside
The most successful companies avoid firefighting by managing risk. Proactive
risk management is critical to the success of a small business. Small businesses
must identify ways to reduce financial and legal risks; reduce costs of risk
insurance; and deal more effectively with employees, clients and vendors – all
of whom expose a business to risk. A recent study by the Marshall School of
Business at the University of Southern California showed that “crisis prepared”
companies suffered 57 percent fewer emergencies and enjoyed up to 100 percent
higher return on assets (ROA) when compared to “crisis-prone” companies; proof
that you make more money by avoiding firefighting.
Every business faces risk. But being “risky” is a choice. Well-managed small
businesses use professional risk management like a bulletproof vest: preventing
most risks from occurring and minimizing the danger of risks they can't prevent.
With fewer and smaller fires to fight, businesses remain focused on innovation
and improved customer relationships. Because risks are managed, they also enjoy
lower insurance premiums, smaller legal costs and better banking relationships.
Many companies are confused by the seemingly immense complexity of risk and
the broad array of subject matter expertise needed to deal with it. Analysis
paralysis: the bugaboo of companies that overanalyze and overplan and may
cause them instead to mistakenly shrink from engaging and managing risk. They
don’t realize that America’s small businesses have become world-class masters in
the management of complex issues. They handle many complex issues every day by
wrapping a professional business process around complexity; a process that is
simple, measurable, trainable, and profitable and works over the long term. This
process involves the business owner finding tested, common sense business
process models, and tailoring them to the unique needs of his or her company.
Companies That Manage Risk Well
There are two hallmarks of well-managed companies. First, their
owners understand that managing risk is an ongoing process, just like sales or
marketing. Second, their owners understand that risk management isn't part of
their job. They delegate risk management tasks to an effective employee or
partner; perhaps their administrative VP or controller.
Effective risk management isn’t brain surgery. While every company has its
own unique risks, most risks are universal because they are linked to people –
clients, suppliers, employees and financial stakeholders (e.g., banks or venture
capitalists). These people are highly responsive to risk management strategy and
tactics. Most risks can be managed with paper — usually in the form of contracts
— and simple business processes.
The risk manager obtains model contracts from trusted resource books, other
companies or an attorney, and edits them to fit the unique needs of a small
business. Model contracts and templates, among other resources, can be a
lifesaver to the person in charge of risk management. It should cost little to
have an attorney review the edits and add the finishing touches. Once a year,
the risk manager verifies that the contracts are working as expected and updates
them as necessary.
Client risks usually come down to getting paid and limiting client-related
liability to tolerable levels. These risks can be easily managed through a
well-written sales contract. Most clients will accept a sales contract if it is
reasonable and shows sincere respect for their needs. Most client objections can
be overcome and a smooth process can be ensured by establishing a fallback
position prior to the negotiation.
Most supplier risk objectives boil down to getting what you pay for and
shifting liability away from your company. Again, a well-written contract and
preset fallback positions make this effort faster and easier than you might
Employee risks are managed by contracts called the "nons" — nondisclosure
of important information; noncompete against your company; and
nonrecruitment of your employees by those who leave your company. Just the
act of deploying these contracts is a powerful deterrent to trouble.
Banks require entrepreneurs to sign a personal guarantee before receiving a
substantial loan or credit line. This guarantee places their personal wealth,
and often their home, at risk if they default on the loan. This is often an
entrepreneur’s greatest risk and can be a frightening experience. But guarantees
are only contracts and bankers are only human. Guarantees are usually
negotiable; and there are many steps entrepreneurs can take to reduce this
Forecasting cash flow is another major financial risk that is also best
handled with a piece of paper. A cash budget is a simple forecasting tool,
especially suited to entrepreneurs who dislike the complexities of accounting.
It is easy to use and can save your company from reaching the end of the line.
Clients, bankers and insurance companies will reward your efforts at risk
management; the less risk they face, the more they can help you. The recommended
steps in risk reduction can be implemented quickly, cheaply and with surprising
ease. They might cut your total risk in half and save your company when big
trouble comes to visit.
About the Author
Brad Forsythe is founder of Best Practices Advisor, LLC located in
Cincinnati, Ohio, which teaches risk management for companies with less than 500
employees. He is also the author of Bulletproof Your Business – Cutting Risk for
Small Business Owners and Managers. Brad can be reached at
Readers can also visit his web site at