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Common Small Business Risks and How to Prevent Them

Small businesses face many of the same risks as larger enterprises. The primary difference between the two involves a lack of resources for smaller businesses which can make mitigation a difficult task. Larger businesses often have more staff, funds, and supplies to accommodate when risks become reality. Even without those additional resources, small business owners can put themselves in a better position in case they find themselves in a tricky spot.

Here are some specific risks that small businesses commonly encounter:

  • Cash flow problems: Small businesses know the struggle of irregular cash flow. Oftentimes, late payments from clients, unexpected expenses, or seasonal fluctuations in revenue can make financial management a bit of a struggle.
    • Prevention strategy: Keep a constant eye on your case flow and implement strategies to improve revenue where possible. This may involve prompt invoicing, offering discounts for early payments, or negotiating more favorable payment terms with suppliers.

  • Dependency on key personnel: With only a handful of employees, small businesses may heavily rely on the skills and expertise of a few key employees or the owner. If those individuals leave or are unable to work, you may be faced with huge shortages—in the worse case scenario, you may even have to halt operations.
    • Prevention strategy: Build a strong team. If you have good people, make sure you incentivize them to stick around. Show your gratitude when possible and offer benefits and good pay when possible. Invest in training and development to enhance their skills and capabilities.

  • Market competition: Small businesses may face stiff competition from larger corporations or other small businesses. Other enterprises may be able to acquire supplies at a much cheaper rate or have the resources to reach a wider audience which may be difficult to compete with over time.
    • Prevention strategy: Reduce dependency on a single source of revenue by diversifying your product or service offerings, targeting new customer segments, or exploring different distribution channels. This can help you keep the doors open if your offering suddenly hits steep competition.

  • Regulatory compliance:Compliance with regulations and licensing requirements can be challenging for small businesses, especially if they lack dedicated legal or regulatory expertise. Larger businesses often have staff dedicated to this very goal whereas many small business owners are juggling those same compliance regulations while managing their business.
    • Prevention strategy: Stay informed about relevant laws and regulations that affect your industry and geographic location. Mark your calendar with key dates and engage your people to help keep you accountable with compliance.

  • Technology risks: Small businesses may lack the IT resources, expertise, or cybersecurity measures necessary to safeguard against threats such as data breaches, malware, or other cyberattacks. Additionally, small business owners often find themselves managing much of their IT load which creates time inefficiencies and technology gaps.
    • Prevention strategy: If there’s one investment definitely worth it, it’s technology. No business, small or large, can escape repercussions in the event of loss of personal data. Make sure you are taking measures to protect sensitive data, prevent cyber threats, and ensure business continuity. Many companies offer software targeted toward small businesses that have these safeguards baked in so that you don’t have to concern yourself with the smaller details.

  • Supply chain disruptions: Small businesses that rely on a few suppliers or distributors are particularly vulnerable to disruptions in the supply chain, such as delays, shortages, or quality issues.
    • Prevention strategy: Build strong relationships with suppliers to ensure reliable and timely delivery of goods and services. If necessary, diversify your suppliers to find optimal prices. If you can’t avoid disruption, make sure you have built customer loyalty so that your customers are more likely to stick around if times get tough.

  • Customer concentration: Your customers are the lifeblood of your business. Dependence on a small number of customers can pose a risk if one or more of them reduce orders or switch to a competitor.
    • Prevention strategy: It’s been documented time and time again. Customer retention keeps people in business. Make sure you keep loyal customers by providing exceptional customer service, addressing feedback promptly, and maintaining open lines of communication. To expand your customer base, you can also open new locations or try find a wider audience base with new marketing or advertising tactics.

  • Owner burnout: Small business owners often wear multiple hats and work long hours, leading to burnout, stress, or health issues that can impact the success of the business.
    • Prevention strategy: Don’t be afraid to delegate. If you have a solid and reliable team, you should be able to count on them to take some of the load to avoid burnout. Take that vacation, take a shorter day—do what you need to do to ensure you can be a good boss and owner.

  • Overall prevention strategy: Manage risks with insurance. Even with proper planning, the unpredictable still happens. Make sure you have the right coverage and you’ll be able to push through an unexpected situation. Consider options such as general liability insurance, property insurance, professional liability insurance, and cyber liability insurance.

We know small businesses can be particularly challenging to run. Don’t let these risks put you in a difficult spot. Stay prepared and you’ll be able to weather any storm.