1. Identify potential risks to your small business success
The first step in small business risk management is figuring out what risks your business might face. Risks come in many forms and can impact your business in different ways. Good business risk management strategies include doing regular risk assessments.
To perform a small business risk assessment, start by writing down the types of risks your business may face. Some common types of risks include:
For example, your small business may face internal risks like losing key people or people becoming injured or sick. Or, your business might be impacted by external risks like natural disasters or market changes.
Take a close look at your business. Review your daily business operations, talk to employees, and consider outside factors like market trends. Ask yourself, “What could go wrong?” and “How would it affect the business?” By spotting potential problems early, you’ll be better prepared to protect your business from surprises down the road.
2. Categorize the impact and likelihood of your risks
Not all risks are equally likely to happen, and they won’t affect your business in the same way. Some might have a negligible effect on your business, while others could be major disruptions.
A good way to think about this is by using a simple matrix: rank the impact of each risk (low, medium, high) and the likelihood of it happening (unlikely, possible, likely).
A simple example for a coffee shop in California:
| Risk | Impact | Likelihood |
|
Equipment breakdown
| High | Likely |
|
Earthquake
|
Medium
|
Likely
|
|
Data breach
|
Medium
|
Low
|
| Coastal flooding | Low |
Low
|
For example, a minor equipment breakdown might have a low impact but is likely to happen. On the other hand, a data breach could have a considerable impact, but it might be less likely if you have strong security measures in place.
By prioritizing risks this way, you can focus your efforts on the most serious threats to your business. Start by addressing the high-impact, likely risks first, then work your way down the list.
3. Get the right business insurance to help mitigate risk
One of the best ways to guard your livelihood against unforeseen events is to get small business insurance.
Insurance transfers the financial risk of certain events from your business to the insurance company. When you pay premiums for an insurance policy, you share the risks’ potential cost with the insurer. This means that if a covered event occurs, the insurance company will handle the financial impact, helping reduce your business’s direct losses and recover more quickly.
There are several types of insurance policies small businesses can use to protect themselves:
- General liability insurance. Offers protection against various accidents and potential lawsuits that can arise in the daily operations of a business, such as bodily injuries to non-employees, damage to another person’s property, reputational harm and associated legal costs.
- Commercial property insurance. This coverage can help protect your business assets, including buildings you own, equipment and inventory, from damage caused by events like fire or theft. It also includes business income insurance (a.k.a. business interruption coverage), which can help replace lost income if your business is forced to close temporarily due to a disaster.
- Workers’ compensation insurance. It can help cover expenses for medical care, lost wages and other costs if an employee suffers a workplace illness or injury.
- Cyber insurance. This can provide coverage to your business for data breaches, cyberattacks and other digital threats.
- Professional liability insurance. Also called errors and omissions coverage (E&O), this insurance can help cover legal costs if your business is sued for negligence or errors in the services you provide.
While insurance won’t prevent risks from occurring, it can significantly reduce the financial burden and help your business recover faster after an unexpected event.
4. Write your business risk management plan
Now that you’ve written down and categorized all the risks your business faces, it’s time to come up with your risk management plan.
Your small business risk management plan should outline specific actions you’ll take for each risk.
Risk mitigation strategies for a small business usually fall into the following categories:
- Avoid the risk. This means changing something in your business so the risk no longer exists. For example, to avoid the effects of a hazardous chemical, you could replace it with a less dangerous substitute.
- Control the risk. This doesn’t remove the risk but reduces its potential impact on your business. An example might be finding more clients so you’re not overly dependent on a single client for your income.
- Accept the risk. Accepting risk means pre-budgeting for it or making a contingency plan; think about how a supermarket includes shoplifting losses in its profit and loss statement.
- Transfer the risk. There are simple ways to shift some of your risk onto a willing third party. This could mean outsourcing some of your work or getting covered by business insurance.
Since you’ve categorized your risks, decide which strategy makes the most sense. Assign responsibilities to team members and create business continuity plans so you’re ready to respond quickly if something happens.
5. Take action to control your small business risk
Once you have a plan, the next step is to put it into action by implementing risk controls. These are the specific measures you take to prevent risks from happening or to reduce their impact if they do occur.
For example, if you’re worried about cybersecurity, you might install firewalls, regularly update software, and train employees on safe online practices. If equipment failure is a concern, regular maintenance and backup systems are key controls.
Monitoring plays a big role here, too. Set up systems that allow you to track risks over time, whether it’s keeping an eye on financial trends or regularly reviewing safety procedures.
By putting these protective measures in place, you create a more resilient business that’s better prepared for unexpected challenges.
6. Monitor and review the plan
Risk management isn’t a one-time task — it requires ongoing attention. After implementing your risk controls, regularly monitor them to ensure they’re working. Here are some key tasks to keep in mind:
- Track key indicators. Watch financial performance, operational efficiency and security incidents to spot potential business risks early.
- Schedule regular reviews. Set a specific time, such as every quarter or year, to assess the effectiveness of your risk controls.
- Identify new risks. Look for any changes in the market, regulations or your business that might introduce fresh risks.
- Update the plan. Revise your risk management plan based on new information or changing conditions to keep it flexible and relevant.
Following these steps ensures your small business risk management plan stays up-to-date and effective.
