Risk-taking is an essential part of starting and growing a business, but successful entrepreneurs know to monitor their exposure to different risks and plan for the day trouble does strike.
Risk in a small business can be broken down into three broad categories: financial risk, market risk and operational risk. Entrepreneurs have to keep their eye on potential problems in each of these areas.
"As an entrepreneur, I want to think about what can derail my company," said Edmée Métivier, Executive Vice President, Integrated Risk and Technology Management at the Business Development Bank of Canada (BDC).
"I need to at least ask the question. If I don't, there may be surprises I'm not ready to handle."
Financial risk can be broadly defined as the money a company is owed or owes to others. On one hand, a company has to ensure it is able to collect its accounts receivable. On the other, it has to honour its commitments to suppliers and financial partners including financial institutions.
Market risk encompasses both macro-economic factors such as the business cycle and currency fluctuations as well as business-specific factors like the appearance of new competitors or disruptive technologies.
Operational risk can be broken down into three sub-categories: human resources, key processes and assets.
In human resources, there is the risk of losing, or being unable to find qualified employees. The lack of skilled employees sometimes causes entrepreneurs to try to do everything themselves, taking precious time away from their focus on other important business issues.
Take, for example, a large capital investment aimed at fueling a company's growth. Such a project can quickly turn into a disaster if it takes up so much of an entrepreneur's time and energy that the rest of the business suffers.
In key processes, there are the risks of inefficiencies that make the firm vulnerable to competitors. A good example is a supply-chain problem that cripples production.
In asset risk, there's the danger of plant or equipment failure due to breakdown, obsolescence or disaster.
It often takes adversity and even failure to teach business owners to properly manage business risk, said Eugene Luczkiw, director of the Institute for Enterprise Education in St. Catharines, Ont. who has profiled more than 2,700 entrepreneurs.
To avoid having to learn through failure, it's important for entrepreneurs to surround themselves with experienced team members.
"You've got to get the right people in the right seats on your bus," Luczkiw said. "Each person has their own talents and you've got to know what the business needs – it needs innovation, management and technical competence and expertise."
Métivier recommends that companies plan ahead for potential difficulties even though not all risks can be foreseen and contingencies planned ahead.
"Every company should make an inventory of risks," she said. Then ask questions: 'How much of this risk do I want to take? Do I need a plan – i.e. process, people or equipment – to manage those risks?'"
Gesner Blenkhorn, president of Groupe Gaston Côté, said his construction-materials supply company is constantly on the lookout for emerging risks.
The Sherbrooke, Que. firm manufactures prefab housing; supplies residential contractors and commercial builders; and operates six retail stores and a manufacturing and distribution centre.
To reduce financial risk, Blenkhorn said the company maintains a conservative capital structure. It has also worked hard to diversify its business in recent years, in part to reduce its dependence on residential contractors where it traditionally experiences higher rates of bad debt.
Currently, the firm is anticipating an economic slowdown. As a result, it's reducing the time it allows some customers to pay invoices and has been modernizing its manufacturing equipment.
"My job is to be a year to a year-and-a-half in advance so that we're prepared for what's coming," Blenkhorn said.
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