Business Risk Re-defined
As a small business owner an important factor in managing the affairs of your company is not only the complexities of the external environment and its potential impacts - favorable or harmful - on the profitability of your firm but also endogenous factors to the entity. Your company must constantly assess of all the elements which are part of your "quality chain", including all supply chains, distribution channels and your market share; or in laymen’s terms – what is your risk, exposure and what is your comfort level. During this time, the supply chain for most is challenged and the challenge to filling the supply chain requirements are going to become even more difficult due to the pandemic affecting all countries and their import/export business.
Uncertainty remains at the heart of any business idea and as business owner you are not the exception. The randomness factor is the highlight of any company wishing to make profit. As your own policy maker, you need to be quick to seek not only the best ingredients of strategic success but also systemically being able to find modes of operation at the best value in a sustainable manner. All which will intensify the financial value and the overall competitiveness of your company.
The uncertainty most small business owners deal with can be seen as a dichotomy inherent in daily decisions related to the usefulness at random, in other words, uncertainty is the sword of Damocles hanging over your head as you keep asking yourself if you are making the right decisions and whether those decisions will generate the best results. Right now, it's all a best guess scenario as there is so much uncertainty.
Having good results is essential to the economic success of your company in the short term. However, good decision making is essential for a successful long-term strategy. During this world 'shut down' your decision making is not shut down. We've discussed it in our Facebook live conversations that as a small business owner need to be looking to the future of your clients decisions making regarding purchasing while also making present day decisions that are based on being able to stimulate structurally sound ideas with the most effective procedures to create an advantage in the competitive balance. How are you going to come out of shut-down successfully?
The risk associated with short term versus long term decision making focus can be broken in two ways: random and epistemic. The random risk refers to a situation of pure chance, while the pure epistemic risk is a conflict whose resolution depends on the level of experience of the decision maker. The latter risk is usually found in the relations between economic agents as the first result is more than likely.
Uncertainty is an integral piece of your business, so your risk can never be fully deleted. The economy today is the most uncertain it's ever been so it is the perfect opportunity to flex this business muscle. This makes the presence of safe procedures that gives preeminence to the detection, analysis and reduction of all risks in the business incredibly important.
One risk management framework is suitable for any type of risk. It meets today in a variety of risky business, both internally and externally, by economic sector, market conditions and competitive position (monopoly or oligopoly, monopsony or oligopsony or perfect competition) and the strategic direction the leaders of the firm are willing to operate.
For many entrepreneurs like you, the type of conventional risk comes in three main areas that are quintessential business processes, i.e. operational, market and credit.
Operational risk is in the execution of business processes of a company and covers an incredibly wide scope of functions of internal processes to human resources through computer systems.
Credit risk is the risk that the borrower defaults on a loan or line of credit due to bankruptcy or credit problems temporarily (the epithet "country risk" is preferred when the borrower is a country or sovereign entity).
Market risk is the risk of loss that may result from fluctuations in financial instruments (equity prices, interest rates, foreign exchange and commodity prices), which may individually or collectively have adverse financial effect on a social investment or portfolio brokerage.
In addition to the three named risks is another risk - political risk – which is present in the external environment of a company which may or may not be relevant to your specific situation emerges when engaged in international business. The risk of financial loss resulting from a change in the political landscape of a country explains in part why many underdeveloped countries receive a reduced amount of foreign direct investment. Sounding familiar? Today's federal decisions are directly impacting your business. Politics are playing a part, so the big question for you is how are you going to push the politics, read the business impact and adjust your risk aversion policy?
Manage New Risks
Whether you admit it or not risk is the Achilles heel of your company. Thus, proposition of an effective risk management is essential to avoid financial or reputation loss. Within your organization the individual(s) that would support you in managing risk must bring effective tools to detect, analyze and mitigate or eliminate the potential risks at all levels of your company. Risk modeling and computer simulation has been proven to draw the "cloud of risk" of the company. Chapman and Ward (1997, page 169, English) also identified eight phases in more detail in the risk management process: define, focus, identify, structure, ownership, assess, evaluate and plan.
There is a string of complex methods and systems for risk control and is associated with the importance of certain events. As a small business owner it is important when making decision, whether it is within your business plan, launching a new project or product, you take into consideration these eight phases to support proper planning while reducing your exposure to risk. Remember you are in business for yourself to earn an income, profit and make a difference to your customers/clients. Knowing where your risks lay will allow you to better serve not only your customer but earn more. The current pandemic is scary and can throw even the largest companies into a tail spin. Reviewing your risks, addressing them and creating a plan to avert them will be your key to coming out of the shut down intact and thriving.