5 Hidden Financial Risks for Small Businesses

The word “risks” can strike fear into the hearts of anyone, especially small business owners who have a lot on the line in their small business enterprise. But in business, as in life, taking prudent risks can be beneficial, even energizing. The reality, as many business leaders have offered, is that taking risks is a key, even inescapable part of business. There are indeed various risks including financial risks for small businesses. Importantly, as Mark Zuckerberg has stated, “The biggest risk is not taking any risk. In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

The Benefits of Taking Risks

Without taking risks, there would be no innovation, no new products, no new services, and no new processes. Experience indicates that taking risks promotes learning. That means finding out what works and what doesn’t and getting better in the discovery process. It is good to know that risk-takers have been found to be happier and have fewer regrets.

The key is to determine what is a good risk and what is a bad risk. That requires creating a thoughtful framework to guide appropriate risk management.

What Are the Types of Risks

There are five primary types or categories of risks for small businesses. First are financial risks for small businesses. Those include liquidity risk or the problem of generating sufficient cash flow to survive and grow along with having enough capital to survive the ups and downs of the economy and your own business peaks and valleys. Another financial risk is market risk coming from changing conditions in the market in which a company operates. Other financial risks are the risks of extending credit to customers or credit risk, and operational risk, or the legal and performance challenges that come from operating a company.

Second, are strategic risks. Those include creating the right business structure, identifying the best target market, developing a reliable and consistent sales flow, creating a production strategy, and devising an effective marketing strategy. Third is the possibility of a major business interruption. That can come from a natural disaster, a major illness to key members of a small business team, or blockages in the supply chain. Fourth, are liability risks. Compared to large businesses, a small business has a smaller financial “umbrella” to shelter itself from liability damages, including reputation damages. And fifth, an increasing area of concern these days is cyber security risk. That includes the impacts of possible financial loss, data compromises, or other damage from its IT systems.

Additional Financial Risks for Small Businesses

It is important to take note of these additional financial risks for small businesses:

Mismanaging accounts receivables.
Getting unnecessary loans.
Relying on limited funding channels.
Hiring without necessary support funds.
Having limited revenue opportunities.
Operating without a proper legal framework.