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Imagine for a minute this scenario. You have spent your family’s savings, gone into debt with your friends to open your dream business – a coffee shop in Vancouver when you notice the lease sign from the corner store has been removed from the window. Hmmm.
In the next week, you realize that Starbucks (
What could you do? I guess you could immediately close up shop and hide or you could pivot quickly with a new unique selling proposition or benefit that may mitigate the impact of your new neighbor.
It’s called risk management and most newbies don’t really take risk as a serious problem when setting up their enterprise.
There’s roughly eight types of risks that may befall your business at any given time so you need to be prepared. The process to manage risk is simple yet all too often done poorly or not done at all.
The Process
You need to methodically identify the possible risks that could face your start-up. You might want to think outside the box for this one because anything could, and will, happen so you better have an answer for any risks you have identified.
Next you need to assess the likelihood that the risks will happen and understand how to respond. You might want to put them in a list from most likely to almost impossible. Unless you live in Tornado Alley you may consider a natural disaster as a long shot. Arlene Dickinson, the Canadian Dragon’s Den maven may disagree. She went to work one day after a brutal storm to find that the basement in her tony Toronto office had water damage. No, this wasn’t a leaky roof, her entire basement where she stored client records, computers, taxes and more was filled to the ceiling with smelly, dirty water. Everything was ruined but she did have insurance. When you see the types of risks you will have to come up with your own way to mitigate them.
You will need systems in place so a financial risk like overdue accounts and suppliers going out of business is handled. This goes hand in hand with the last part of the process – monitoring. By tracking and reviewing your existing risks you can keep on top of the process and be ready when it occurs.
The Types
There are at least eight types of risks in the marketplace.
1. Strategic – One may consider the opening of a competitor in your niche a typical risk. Like the example above you can reduce it’s impact, as you would deal with any other competitor, by offering better service, product and experience. I had a client, unlike the previous example, that was negotiating a lease for a great space on a busy Vancouver street for his coffee shop. All the equipment was purchased, interior designer and staff in place but the leasing agent kept raising the asking price per foot. I took over the negotiations and realized there was an ominous problem – there had to be another bidder for the space. There was competition and it was none other than Starbucks. Needless to say they won over the spot. My client settled for the first space he could find that turned out to be inferior to the detriment of his start-up. He opened and closed within a year.
2. Compliance – You may not see this coming. This is often new regulations or legislation that will change the way you must do business. Vancouver cab owners are bracing for legislation that will allow Uber to move to Vancouver this fall. It could be a game-changer for the industry. Cab owners responded by automating their antiquated call systems.
3. Financial – There’s nothing worse than having completed that huge order and hoping that the client will pay you before the 30 day payment option you gave them. A start-up is not often funded properly to handle multiple accounts that take their time paying or not paying at all. A contingency fund will come in handy.
4. Operational – It sounds silly but my landscaper called the other day to tell me his mower broke down and could he use a weed eater to do my lawn – what? I’m not particularly loyal to this guy so found a company on Google that took care of me within an hour. Using broken equipment like this will take a business down without some backup plan. Imagine what could happen if your partner or key employee dies suddenly, an operational calamity.
5. Environmental – Besides the disaster scenario, there are many environmental issues that could put a hole in your wallet. In a climate change minded world people will shop around for environmentally friendly business owners. You must adapt or go broke.
6. Employee – A former car repair business I once used went out of business after the owner’s accountant absconded to Brazil with most of the money in his business. Ludicrous? Well it’s a true story and one that happens more than you think. A more typical scenario is a critical employee being injured at work without a backup to run his specialty program or machinery.
7. Political – This is a bit different than the compliance issue. Imagine your business is in a border state and NAFTA is being renegotiated. The fate of your entire operation could be tied to whether the agreement is ratified or not. I know many business owners in Canada who are biting fingernails hoping to keep the status quo.
8. Society – The societal landscape is constantly changing and one must adapt and have a plan in place when change knocks at your door. My wife only buys free-range eggs from our grocer. The thought of cramped chickens bred in boxes even has me cringing. Gluten free, organic and non-GMO are buzzwords that are changing the way we do business and shop.
There are ways risk management can mitigate your exposure to real-life business issues. Some risks will quickly snowball into full-blown emergencies. Insurance can allow you to breathe easier to cover you, your customer and your assets. Key man insurance can even protect your partner or key employees and a contingency fund will help with other risks.
You need to ask yourself – are you prepared to handle emergencies?
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