Starting a business comes with a number of risks. Heck, opening a business is a risk within itself. According to one source, one out of five business fail in their first year. And, 50% of small businesses fail after the first five years.

These statistics might be a little discouraging. But, taking risks can pay off with time, patience, and hard work. To avoid letting risks jeopardize your business, you have to identify and manage potential threats.

Identifying different types of risk

Before you can begin managing potential risks, you need to know what kind of scenarios can threaten your business’s well-being. Here are a few risks that startups can be susceptible to.

1. Financial risks

Financial risks are probably one of the first risks you think about when starting your business. After all, money doesn’t grow on trees. You can’t assume money will appear out of thin air when you open your doors.

Financial risks won’t disappear once your business is up and running. If you don’t identify and prepare for financial threats, your startup could sink.

Many things can affect your business’s influx of cash flow. When you become a business owner, you take on financial risks like customers not paying invoices or spikes in interest rates. Before you open shop, look at financial risks that can impact your business.

2. Physical risks

When you start your company, you will likely rent or buy office space and purchase other assets. And when you have physical assets, you also take on additional risks.

Physical risks consist of damage to your property or other assets, such as floods or fires. To manage these types of risk, create a plan for you and your employees to follow.

Instead of standing by and ignoring potential physical risks, prepare for the worst. Craft a plan, such as a business emergency preparedness plan, and prep employees.

3. Operational risks

Operational risks, or human risks, are the risks you take on when hiring employees. These type of risks are due to human error or misjudgment.

Although operational risks are a possibility, they’re much easier to anticipate. And, you can set up safeguards to prevent operational risks from occurring.

But keep in mind that you can’t possibly prepare for everything. When I started my accounting and payroll company, Patriot Software, I was completely unprepared when one of my employees burnt down a laundromat. I definitely didn’t see that one coming. But as my business grew, I learned how to prepare and protect my company from the worst.

To help squash operational threats before they come up, take precautions. Protect yourself from threats by doing things like forming a hiring committee to screen applicants or providing extensive training to your employees.

Steps for managing risks in small business

Now that you’ve had the opportunity to learn about various types of risks, it’s time to learn how you can mitigate them.

Use the steps below to improve your risk management process and catch risks before they become a problem.

1. Anticipate possible risks

Chances are, you probably can’t predict the future. Because you can’t foresee your business’s fate, you must learn how to anticipate and avoid risky situations.

Anticipation is key for avoiding small business risks. If you learn how to detect threats, you can respond to them before they hit your business.

To anticipate threats, analyze your business. When you look at your business, take time to think about threats. Which types of risks are more likely to affect your business? Which kinds of internal and external threats does your business have?

2. Prioritize risks

After you determine which types of threats can potentially take out your business, prioritize them.

First, organize your risks by type (e.g., physical risks). Then, begin sorting them by likelihood (i.e., what are the chances of the risk occurring?).

I prefer labeling my risks as high, medium, and low. You can also list or number them from most to least likely to occur or vice versa.

Your risk management list may look something like this:

  • Having money stolen from an untrustworthy employee (Low)
  • Losing payroll records in a disaster (Medium)
  • Having property damaged due to a storm (High)

Keep in mind the levels of risk can vary from business to business. Some companies have different risks than others. For example, your business might experience more weather-related threats than other businesses due to your location (e.g., Florida and hurricanes).

3. Communicate risks with others

If you want to prevent risks, spread the word about them in your business. What good does all your research do if you try to tackle all the risks by yourself? After you compile and rate your business’s risks, communicate them within your company.

Discuss potential risks with other individuals in your business. That way, your employees are also aware of risks and know how to protect your business.

Consider creating a risk analysis team or assigning a risk manager to review potential threats on a regular basis. Hold meetings to determine whether the likeliness of risks has shifted. And, talk about ways you can prevent current risks from becoming larger threats in the future.