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6 biggest risks to your business

April 22, 2009 08:30 IST

This latest brutal recession has reminded us all that what can happen in business will--and likely when you least expect it. The prepared win--the rest get mauled.

But preparing is hard--especially in heady times when the cash is flowing strong and in the right direction. (Yes, those days will come around again.) The trick to managing risk is not seeing the thunderheads gathering this week or even this month, but anticipating all the nasty weather one, three or even five years from now.

The first step is bothering to look for trouble in the first place. "Small-business owners are trying to do business and make money," says Jay Foley, executive director of San Diego-based Identity Theft Resource Center. Much of the time, "they're simply unaware of the risks."

While no one can consistently predict where the overall economy is going, understanding the drivers (interest rates, inflation, unemployment, consumer indebtedness, currency values) goes a long way toward making sound decisions about how manage your business. Reading a lot helps--ask any professional money manager.

Then there are a host of more specific risks to your company. Here are six very real ones, and some brief prescriptions for how to deal with them.

Credit Risk. The pain of the credit crunch persists. According to the Small Business Association, guaranteed loans were down 30 per cent in 2008.

Prescription: a pristine balance sheet. Just because you're given credit doesn't mean you should gorge on it. "Hold on to it like it's your last dollar," says Tod Coseland, chief executive of Utah-based Interbank FX, an online currency-trading brokerage. If traditional lenders are too skittish, canvass alternative (albeit expensive) financing options, such as factoring.

Legal Risk. Being sued for compromised data, faulty products or hazardous working conditions is a real possibility. In 2008, data breaches were up 69 per cent over the prior year, according to the Identity Theft Resource Center.

Prescription: Establish standards and protocols for everything from manufacturing to record keeping, and bone up on the necessary technology. If you can afford a consultant, hire one. "Our in-house staff uses a multilevel process of software verification and customer service review to verify the credit information for our orders on a daily basis," says Susan Barone, chief executive of AlwaysForMe.com, a New York-based lingerie maker. "Customers tell us they appreciate the extra precautions that we take to keep their credit information secure."

Regulatory Risk. Making products and delivering services while covering costs is hard enough. Anticipating how governments might change the rules of the game--and are they ever changing them now--is virtually impossible. But you have to try.

Prescription: Use the Web. Set up news feeds via Google or your favorite news source, using keywords tailored to your industry and the regulatory bodies that govern it.

Operational Hiccups. These in-the-trenches risks include inventory gluts and shortages, poor quality, unattractive product mix, ballooning overhead, culture clashes, overaggressive expansion, data breaches and fraud.

Prescription: Savvy managers and sound systems are the best defense here, but even the vigilant inevitably miss a few cracks.

Concentration Risk. Many small businesses double down on a few big customers--a dangerous strategy in a bad economy.

Prescription: Diversify. A good rule of thumb is that no one customer should constitute more than 10 per cent of your revenues. Also run credit checks to make sure the customers you do have are in paying shape; tier your credit terms based on credit risk. Beware, too, vendor concentration, lest you be left short on inventory--or stuck paying too much.

You. Entrepreneurs are eternal optimists. This keeps their energy and enthusiasm up, but it also can cloud their vision.

Prescription: Acknowledge and understand the worse-case scenario and prepare for it. For extra perspective, assemble a board of trusted advisers.

Chavon Sutton and Brett Nelson, Forbes
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