Navigating External Factors in Small Business Risk Management
If you’re thinking of starting a new business, learning how to start a t-shirt business or a marketing business is not going to be enough. You can perfect your business plan and have an up-to-date marketing strategy, yet there could be an event or situation that may loom on your business as an uncalled risk.
Internal risk factors are those that are under a company’s control, while external risk variables are those that are beyond its control. It’s common for businesses to prioritize internal factors in goal-setting and day-to-day operations because they believe they have the most say over such factors. However, it’s essential to keep in mind the influence of external, uncontrolled risk factors too. You’ll have to be prepared for such uncontrollable situations that can affect your business through business risk management.
Learn how to analyze and respond to the external elements that might derail your strategic business planning or present you with exciting new chances. We’ll discuss in detail the process to identify, evaluate, and lower risks.
External Factors in Small Business Risk Management
Business risk factors are elements, situations, or causes that pose a threat to a company’s ability to:
- carry out its day-to-day operations,
- to achieve its long-term goals and objectives,
- and win buyers’ confidence in the company’s ability to deliver on its promises.
- External risk factors are the sources of danger coming from outside a business organization. Some of the sources of such risks can be:
- the market,
- the environment,
- the economy,
- or the government policies.
The unpredictable nature of external risks makes it hard to prepare for them, and the consequences of failing to do so may be devastating for even a small business like a new t-shirt printing company. Every small business has to be ready for these three typical external risk sources:
Economic Factors
When the economy as a whole is faltering, it may be difficult for businesses to remain profitable. It can also present businesses with opportunities to make substantial growth. Regardless, there’s a risk involved. This happens due to volatile changes in the market.
For instance, a rapid and unexpected drop in income may occur if the economy as a whole were to experience a downturn. Consumption will drop for even a print on demand business that targets the American market during a recession or when the unemployment rate rises.
Political Factors
Changes in politics or government policies that might have an impact on the economy are examples of political risk. When politicians are elected and then replaced, the policies they enact may have a lasting impact on the businesses in which their predecessors worked. A company might suffer the consequences or gain advantages from new:
- tariffs,
- taxation laws,
- employment laws,
- intellectual property laws,
- and other rules governing imports and exports.
Natural Factors
Natural risks can also be significant and hard to forecast. Multiple aspects of the company might be impacted, due to natural disasters, and so on, including:
- operations,
- damage to physical assets,
- and retail closures.
If a store is unable to operate for many days or weeks due to an earthquake, for instance, the business’s monthly sales might drop significantly. There’s a chance it may mess up the store’s infrastructure itself and the goods within.
How to Work With External Risks
Every business, regardless of its size will face one or the other external risk factors in the course of its business. It’s important that every business implements a planned risk management strategy to minimize the risk and manage any problems it may face. Here are the basic steps of risk management for a small business to combat different types of external risks:
Identify the Risk
The first stage of risk management is the identification of the risks to which the company is exposed. Determine which of the aforementioned threats or any other really affect the business you run.
Finding as many of these potential risks and their causes as feasible is crucial. These risks are recorded by hand in a manual setting. Or all of this data may be entered into the company’s risk management systems without any further work.
For keeping your head above the water — 30 top-rated product management tools for businesses
Evaluate the Risk and Do an Analysis
After you’ve established the existence of certain risks, the possibility of their realization and the potential damage they may do must be determined. The connection between the risks and the various internal elements must also be understood. The number of business processes that are vulnerable to the risks is a good indicator of how severe and widespread it is. Some risks if realized, may cause the company to cease operations entirely, while others would cause only minor disruptions.
You can use tools to investigate potential future dangers, like:
- SWOT Analysis,
- FMEA,
- PMESII-PT,
- PEST Analysis,
- or Scenario Analysis.
Strategies to Lower Risks
Once you’ve evaluated and analyzed the risks, it’s time to treat them to be prevented, eliminated, mitigated, or limited. Try to find solutions that won’t break the bank; it’s usually not a good idea to allocate more to preventing a problem than it would cost if it had happened. Accepting the risk might save a lot of time and effort compared to trying to completely get rid of it. However, this should not be done irresponsibly, particularly if your morals or safety are at stake.
We’ve listed three strategies that you may choose based on the nature of the risk. They are:
- Avoiding it: Sometimes, it’s best to take no action at all. This may include giving up on a commercial opportunity, a project, or a risky action. This may be a sensible choice when there is no benefit to your company from taking the risk, or the consequences of addressing it would cost too much.
- Sharing it: You might also choose to collaborate with other individuals, groups, businesses, or entities to split the risk and increase your chances of success. For example, you share risk when you are:
- insuring your commercial space, equipment, or inventor with some insurance business,
- or if you collaborate with someone else on a collaborative product development endeavor.
3. Accepting and controlling it: The only other choice you have is to face the risk and accept it. This course of action is recommended when you have no control over a risk’s outcome, the risk’s possible loss is anticipated to be either:
- less than the expense of insurance, or
- the risk’s possible profit is greater than not taking it.
If you decide to take the chance, you may lessen any negative consequences in two key ways:
- By doing detective work in identifying potential failure areas in a process and setting up contingencies to address them as soon as they arise, and
- taking preventative action to try to stop something bad from occurring.
Adapt and Monitor
The key to successful risk management for small businesses is a combination of adaptability and surveillance. It is essential to maintain flexibility and adaptability in the face of a constantly shifting external environment. Here are two of the most important approaches:
Risk monitoring: Keep an eye on any potential hazards to the business from external influences by conducting regular risk assessments. Keep abreast of what’s happening in the economy, politics, and the environment. Set up procedures and systems to gather the right information and evaluate it for signs of potential danger. You may lessen the severity of any damage caused by any impending dangers if you maintain a state of constant vigilance and preparedness.
Agile Decision Making: Being able to adapt quickly and make sound judgments is essential in today’s work environment. Create an environment where employees are encouraged to think proactively about how to solve problems as they arise and provide them with ProofHub if they need to do so. Foster an atmosphere of open dialogue and cooperation where ideas may be freely exchanged and quickly assessed. To successfully deal with external threats, choose a strategy that allows for rapid modifications in both tactics and procedures.
By keeping an eye on possible dangers and making quick decisions, your small business can adapt to new situations, exploit opportunities, and reduce risks. It’s important to evaluate your risk management tactics on a regular basis and make modifications as needed in response to shifting internal and external variables and market circumstances.
Get a headstart and rise continuously — 8 Workforce Management Software that all small business owners must know
Conclusion
Planning for external risk factors that may have a material effect on the performance of your small business is essential for effective risk management. There are dangers that must be avoided in the face of economic circumstances, political shifts, and natural disasters. You may reduce the risks your company confronts by first identifying them, then assessing their potential effect, and then using ways to mitigate them.
A new business may only succeed in today’s ever-changing economic environment by taking a proactive stance, monitoring risks, and making snap decisions. Keep in mind that risk management is a continuing activity that requires constant reevaluation and strategy adjustments in response to changing external conditions.
Small businesses may improve their chances of long-term success by adopting these techniques and keeping themselves abreast of external circumstances that may impact their operations.
If you enjoyed reading this article:
Clap: So others can find it
Comment: If you have a question/suggestion you’d like to ask
Follow: ProofHub to read all the articles
If you liked reading this post, you are surely going to love this as well -
