Risk management plan for small business owners: 6 tasks for success

Unexpected expenses, a sudden drop in sales, a data breach: These are just a few examples of business risks. And knowing how to manage these potential interruptions is essential for any risk management plan.

To keep a small business afloat, a predetermined blueprint must be in place to identify risks, protect the business from unnecessary losses, and prepare for the unknown. 

To get a grip on what could hurt a small business's growth, NEXT shares six essential steps to create a risk management plan that works.

1. Identify Potential Risks to Small Business Success

The first step in small business risk management is figuring out what risks the business might face. Risks come in many forms and can impact a 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 the business may face. Some common types of risks include:

• Financial risks: Cash flow issues, unexpected expenses, or debt problems
• Operational risks: Supply chain disruptions, equipment breakdowns, or staff shortages
• Compliance risks: Failing to follow laws, regulations, or industry standards
• Reputational risks: Negative reviews, bad publicity, or customer complaints
• Cybersecurity risks: Data breaches, hacking, or other digital threats

For example, a small business may face internal risks like losing key people or people becoming injured or sick. Or, it might be impacted by external risks like natural disasters or market changes.

Small business owners should take a close look at their business, review daily business operations, talk to employees, and consider outside factors like market trends. Ask, "What could go wrong?" and "How would it affect the business?" By spotting potential problems early, owners will be better prepared to protect their business from surprises down the road.

2. Categorize the Impact and Likelihood of Risks

Not all risks are equally likely to happen, and they won't affect a business in the same way. Some might have a negligible effect on a 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: Equipment breakdown
• Impact: High
• Likelihood: Likely

   

• Risk: Earthquake
• Impact: Medium
• Likelihood: Likely

   

• Risk: Data breach
• Impact: Medium
• Likelihood: Low

   

• Risk: Coastal flooding
• Impact: Low
• Likelihood: 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 there are strong security measures in place.

By prioritizing risks this way, owners can focus their efforts on the most serious threats to their business. Start by addressing the high-impact, likely risks first, then work down the list.

3. Get the Right Business Insurance to Help Mitigate Risk

One of the best ways to guard livelihood against unforeseen events is to get small business insurance.

Insurance transfers the financial risk of certain events from a business to the insurance company. When premiums are paid for an insurance policy, the risks' potential cost is shared with the insurer. This means that if a covered event occurs, the insurance company will handle the financial impact, helping reduce a 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 a business's assets, including owned buildings, 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 a 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, this insurance can help cover legal costs if a business is sued for negligence or errors in the services it provides.

While insurance won't prevent risks from occurring, it can significantly reduce the financial burden and help a business recover faster after an unexpected event.

4. Write a 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 a risk management plan.

A small business risk management plan should outline specific actions to be taken for each risk.

Risk mitigation strategies for a small business usually fall into the following categories:

• Avoid the risk. This means changing something in a 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 a 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 risk onto a willing third party. This could mean outsourcing some of 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 Small Business Risk

The next step is to put the plan into action by implementing risk controls. These are the specific measures taken 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, business owners can 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 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 risk controls.
• Identify new risks. Look for any changes in the market, regulations, or the  business that might introduce fresh risks.
• Update the plan. Revise the 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.