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 reality.

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 program.

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 expect.

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 financial risk.

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 brad@bestpracticeadvisors.com. Readers can also visit his web site at www.bradforsythe.com.