A startup guide to risk management

The idea that successful entrepreneurs are crazy risk takers is an out of date cliche. Of course there are exceptions, but without good startup risk management they tend not to last long. The most successful entrepreneurs, in the long-term, are people who combine the ability to spot opportunities, with the skills to calculate and balance risk.

Starting any new business will involve taking a leap of faith at some stage. But the more ground-work and market testing that's been done the safer that leap will be.

During a startup, you should be continually finding ways to adjust to risks. The only way to ensure the future of your startup is by proactive risk management. Let’s delve into detail.

What is startup risk management?

Risk management is the process of identifying and assessing risks. It also involves strategising on ways of mitigating, or reducing, those risks. Every business plan should include a risk assessment section; startup funders won't take you seriously without it. You’ll give your business a much better chance of success if you understand the risks involved and ways of minimising their impacts.

Although startups face a myriad of risks, they all employ a common process of risk management. Keep reading to understand how to go about managing risks.

Identifying risks

This should be your first step. Examine your startup and identify potential risks. You must know the scope of all possible threats to develop a cost-effective, realistic strategy to counter them. This stage aims to create a database of all potential risks.

The following are practical methods of identifying risks.

  • Review your business plan keenly and ask as many 'what if?' questions as you can. 
  • Brainstorm with your staff, financial advisers, and accountant among other interested parties
  • Analyse future events, including potential changes in the economy, technology, politics and society.
  • Use checklists, flow charts, and inspections to analyse risks

Types of risk

The types of risks any new business faces depend on its objectives and nature of operations. Generally, risk can be broken down into six categories: cybersecurity, financial risks, physical danger, operational risk, reputational risk, and regulatory risks. Learn more about these risks below.

1. Financial Risk

A top priority for any startup is a financial risk. It’s perhaps the first thing that comes to mind. Some examples of financial risks are cash flow management, fluctuating exchange rates, defaulting on loans, depreciation of assets, customer debts, and stock price movement. Remember that financial risks grow as your business expands.

2. Operational risks

Not all risks are external. Operational risks arise from misjudgment or human error within your business. Fortunately, it’s easy to anticipate and create safeguards against internal risks. Managing external risks is more complicated.

One of the best ways of managing this type of risk is training employees in public relations. If you are on a tight budget, and can't outsource a training company, free guides with helpful media training tips are available. It’s also essential to have appropriate apps and tools to monitor your reputation on social media platforms. Also, craft a robust digital presence that connects positively with customers.

3. Regulatory Risks

These risks refer to threats caused by changes in laws and regulations that hurt business. Missing or ignoring such changes can reduce the attractiveness of your business, increase operational costs, or change competition.

In severe cases, it can lead to criminal proceedings or severe penalties. So it’s crucial to stay updated on new rules that indirectly or directly affect your business.

4. Cyber Security

Hackers are attacking small and international companies everywhere. This booming risk area should be a significant point of concern to any business regardless of turnover, industry, or size. If your company uses internet connections, you need to take stricter risk management measures.

Hackers are mainly focusing on infrastructure and cloud-based systems, which most organisations use. Educate your employees on safe methods of protecting customer information, protection of company data, and safe use of the internet.

5. Reputational risks

When you lose the reputation of your company, you’ll realise its actual value! But you don’t want to find yourself in such a situation. Reputational risks involve determining how a company’s reputation can be damaged by changes in security, sustainability, safety, and ethics. Some extreme cases lead to bankruptcy.

6. Physical Risks

These risks involve property, buildings, and physical assets. Some of the most common risks to buildings are explosions or fire. With suitable emergency procedures and planning, you can overcome physical risks.

Businesses operate in different environments and deal with various products and services. The measures taken should be unique to your business. For instance, transportation companies should consider the impact of material spills.

Don’t allow risks to paralyse your business. Excellent startup risk management is a sure way of gaining a competitive advantage and creating a longer-lasting, more sustainable business. 

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