The Importance of Risk Management for Small Businesses

Starting a business has its ups and downs and it is a risky endeavor in which few things are guaranteed. No matter big or small, they all face a large variety of potential risks. Every risk is amplified for small business owners because when something goes wrong, it can affect a small company which is not true with large corporations. This is why it is important that one puts a risk management plan together and be one of the first steps that any small business owner takes.

What Is Risk Management?

Risk management is a process that includes identifying your business risks, evaluating them, and deciding how to deal with them. Most businesses start out without performing market research and this is needed to make sure that there is market demand for the product or service they are trying to sell. It might sound that it is obvious you need to do some research beforehand but there are many businesses that do not and that is why they end up failing.

The process of putting together a risk management plan should result in a creation of a plan that your business will follow in order to have the least amount of risk as possible. This plan enables your company to set up procedures that will help you avoid risks that are avoidable and minimize the impact of risks that are not.

Risk management is never ending. Risk needs to be constantly reevaluated as your business changes and grows.

How to Write a Risk Management Plan

There are three main steps that need to be taken to put together a solid risk management plan for your small business which include identification, evaluation, and mitigation.


This part of the process asks business owners to put together a list of potential risks that can affect their businesses as exhaustive as possible. The risks can be related to the business strategies you have and how effective they are, risks related to your day-to-day business operations, regulatory risks related to laws and compliance, reputational risks, financial risks, and more.


Once you have identified your risks, it is time to analyze them. What is more important to take into consideration during this phase is the likelihood these risks will occur and how severe the consequences will be if they do occur. Knowing the possible impact of your risks helps you make decision on how you can mitigate them.


At this stage you are recommending actions that need to be taken in relation to each risk that you have identified.

Common Risk Management Tactics

Once you have identified your risks and analyzed their potential impact for your small business, the mitigation part of the process requires you to make a decision on how to face and tackle each of the risks that you have identified and evaluated.

Risk Avoidance

If you have evaluated a risk as being volatile and see a chance of doing financial damage to your business if you take the risk and does not work out, then it is probably a risk that should be avoided.

There are cases where at one point in the time an idea might be risky but another time it might not be as risky, for example if your business is growing steadily and are seeing increases in annual revenue.

Risk Reduction

Reduction means that you do everything you can to make a risk less risky. For example, if you are not ready to experiment within your business with a new product or service, you can opt for choosing something else that is not as risky.

Risk Acceptance

Acceptance is the best way to deal with risks that cannot cause you much damage, even in worst-case scenarios.

Transference of Risk

Buying business insurance means risk transference. When your small business buys a policy from an insurer, they are essentially paying to transfer risk to a third party. No matter the size of your business, purchasing insurance to mitigate various business risks is unavoidable.

The Role of Insurance in Risk Management

Once you have identified and evaluated your risks you will also understand which risks should be transferred to an insurer. Many small businesses start with buying a Business Owner’s Policy (BOP) which includes three policies: general liability insurance, property insurance, and business interruption insurance. They give businesses a good amount of coverage while paying less than they would be if they wanted to buy those three policies separately.

The Benefits of Proper Risk Management

The most obvious benefit of putting together a risk management plan is that it helps you to avoid risks that can negatively impact your business. The following are additional benefits of risk management:

  • Better finances: you are more likely to get loan offers if you are managing and transferring their risk.
  • A stronger brand: a business that manages its risk properly is a successful, stable, and prosperous one. When a small business is proactive about managing its risk, its sending a clear message about the brand including employees, partners, and customers they deal with.
  • Increased efficiency: risk management can uncover processes where you might be spending money unnecessarily.

The Bottom Line

Performing risk analysis and putting together a risk management plan for your small business helps you learn more about your business and getting to know yourself, partners, and customers a lot better.

These benefits are important so that you manage the risks that can affect your business and putting that plan into action as your business grows throughout the years.