Starting and growing a business creates success and employment for Americans. Small businesses employ approximately 64% of all American workers. The owners can grow wealth and retire comfortably by operating and growing a successful business. But, there are risks, both internal and external, and success will depend upon avoiding or overcoming them.
Internal Risk
Internal business risk involves operations and employees, and internal risk is under the control of the business. These risks include:
- Human Error – Owners and employees can make errors that depress profits or damage the reputation of the business. Mistakes include pricing mistakes, data entry errors, product damage, inventory errors, and customer interaction errors.
- Employee Theft – While the most common example of this is pilfering product, employee theft can include intellectual property theft. An example would be an employee leaving a company and taking proprietary information or other intellectual property to their new employer.
- Technology Risk – While software glitches or computer failure comes to find first, there is also a much less common but present risk of intentional or accidental employee equipment damage or software and data entry errors.
- Noncompliance – This risk category includes operational noncompliance with local regulations , inspection failures, and safety violations. On the management front, data confidentiality violations and financial/taxation records and reporting problems are all internal risks.
The good news about internal risk is that for the most part, it is under the control of the business ownership and management. Good training for employees can reduce errors in all operations and customer service activities. Product and inventory theft can be controlled to some extent with cameras and other security measures. Proprietary and intellectual property should be protected with current state of the art security measures and constant monitoring of the use of software and data. When it comes to noncompliance, the answer is for ownership and management to know the laws and operational regulations related to their business and to comply in every respect to what is required.
External Risk
External risks are those that are not under the control of the business. They come from outside the business, but this doesn’t mean that there aren’t measures that can be taken to protect the business or mitigate the effects of an external threat. External risks include:
- Economic Downturns – This is timely, as this post was written in mid-2023 when the economy suffered from high inflation and supply problems. Any significant problems with supply or demand for products and services are external risks for the business.
- Regulatory Changes – From local city and county regulations to state and federal, changes by regulators to how a business operates or serves customers can be damaging to profits and even business existence.
- Competitive Risk – Our free market economy and business competition is generally good for both business and the consumer. However, a new competitor with lower prices or innovative products or services can threaten the profitability or survival of the business.
- Technological Evolution = Depending on the type of business, innovations in technology that makes current hardware, software, or equipment obsolete or damages the ability to compete, presents significant risk to the business.
- Political Instability – This risk ties in with the previous three in that political changes from major election to election can result in new laws or regulatory actions. The political climate can also create consumer fear and a drop in sales.
While external risks are outside the control of the business, there are actions that the business can take to avoid disruption as much as possible. Keep abreast of all regulations and competitor activities so you recognize risks early to take action. Have a business operational plan and training to keep employees informed and aware of external risks.
For both internal and external risks, maintaining insurance that is available for operations and any lawsuits is important.
Conclusion
There are significant and ongoing risks of owning and operating a business. Recognizing these risks, keeping up with all events and competitive developments, and taking action when appropriate should mitigate most of these risks.