Managing risk when starting up
Starting a new business involves some uncertainty and taking a few risks. While it can be tempting to remain positive and ignore these risks, you need to know how to handle them if they occur.
A risk is defined as possible harm and damage to you or your business. When you identify risks, you can create a plan for managing them.
Risks when starting a business come in many forms. Some are not as obvious as the risk of a fire or flood.
To manage risks when starting a business, you'll need to:
- identify potential risks
- understand where risks are within your business and why they may happen
- analyse and evaluate risks
- take steps to mitigate or prevent risks
- develop and review plans to manage risks.
Business readiness health check
Use the business readiness health check to review how prepared you are to start your business. Your answers, and identified areas for improvement, may help you identify where risks are present as you start your business journey.
Risks in your business
Review these examples of different types of risks, and identify which ones could affect your business.
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- Unable to raise enough capital—loans from a bank or investors have not been approved or the amount has been reduced
- Limited or no cash flow—you do not have enough money coming into the business to pay expenses
- Loans—interest rate rises may mean you struggle to make repayments
- Changing prices from suppliers
- Penalties from not completing financial legal obligations with your finances—e.g. Australian Taxation Office reporting, super and payroll obligations
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- Lack of legal knowledge for understanding contracts and lease agreements
- Not handling customer information correctly to ensure you're meeting privacy obligations
- Not being aware of your workplace health and safety obligations
- Failure to get the right business licences and comply with requirements
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- Supply chain issues mean the products you need aren't available when you need them
- Shipping and delivery services are delayed due to flooded roads
- Not having documented processes, procedures and standards create confusion for staff, inconsistent products and service, and unsafe work environments
- Breakdown of resources and equipment without having adequate insurance
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- Staff aren't properly trained for their position
- Staff not being trained in how to solve problems when they arise
- Staff lack management or leadership skills and are unable to manage other staff
- Skill shortages in your industry mean you can't get the specialist skills you need
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- Impacts of natural disasters in your local area leave you unable to trade
- Customers are more environmentally-aware and demand sustainable products
- Chemical spill pollutes the local creek, resulting in negative media coverage and government penalties
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- Your business concept does not match the market at the time you want to start trading
- Your business model does not suit the needs of the market and will not be financially feasible
- Your structure isn't appropriate for the type of business you are running and will likely prevent you from getting grants and winning tenders, and carries too much risk for your own assets
- Lack of knowledge about business operations means you make mistakes and your processes are inefficient, time-consuming and costly
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- Not protecting customer details from unauthorised access by staff
- Staff aren't trained in privacy obligations
- No computer virus or malware protection means key business information can be stolen.
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- Products don't meet market needs
- Poor quality assurance and inconsistencies in products
- Competitors can meet the needs of your customers better
- Staff don't have enough sales training and can't explain the benefits of your products and services
- Customers aren't being served according to their needs, leading to no repeat business or referrals
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- Too many competitors in your location
- Your market share is too low
- Customers can't easily access your location
- No point of difference from your competitors
- Your brand and reputation are not well known
- Hard to get customers to change to your products and services when they are satisfied with your competitors
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- You are taking the risk financially through overheads (e.g. rent, stock holding, cash flow incomings not meeting the outgoings)
- You may not have the skills to operate and run the business efficiently and effectively
- You haven't taken out insurance for your business
- You don't have any business advisers, and try and work on areas of your business you're not knowledgeable in
Case study: cash flow
You received a loan from the bank for equipment needed to run your business. You opened your business, but don't have many customers purchasing your products yet. You ran a small advertising campaign, but this didn't achieve the outcome you had expected.
You are now in a situation where the money coming in doesn't match the money going out, and you have insufficient cash on hand to buy supplies to help boost sales.
By identifying this risk in advance, your risk management strategy may have directed you to talk to your bank earlier about your options. In doing this, your bank was able to consider the possibility of additional financing when assessing your loan application.
Read more about cash flow management.
Analysing and evaluating risks
Once you have identified risks within your business, the next step is to analyse and evaluate. Analysis and evaluation provide you with a guide to prioritising these risks and to help you determine where to focus your energy.
This process is done using a range of methods to look at each risk and determine the probability of the risk occurring.
To analyse the risk, with each threat identified estimate:
- the likelihood of the threat happening
- the impact on business activities
- the level of risk.
Once you have a list together a clearer picture—of where your vulnerabilities are and where to focus your attention—will emerge.
More information about likelihood, impact and level of risk can be found at identifying and managing business risk.
Managing and mitigating risks
Methods for managing and mitigating risks are part of business contingency planning. Having a contingency plan—or 'Plan B'—in place, can help deal with any identified risks as they occur.
Use the following resources to assist in identifying and managing risks:
Developing and reviewing plans to manage risk
A business continuity plan ensures the continuation of your business during and following any incident that results in disruption to normal operation.
Download the business continuity plan template
This template includes a:
- Risk management plan section
- Business impact analysis section
- Incident response plan section.
Use this page to consider your risk of critical start-up events and complete these 3 sections of the template.
Download the business continuity planning template.
Risks have the potential to change over time. By monitoring risks and updating your business continuity plan periodically, your business stands the best chance of withstanding or managing a disruption.
Also consider...
- Find tips and advice on writing a business continuity plan.
- Explore running a business.
- Learn more about helping your business adapt to change.