The Biggest Risks to a Business
Nov 19, 2024Running a successful business goes beyond offering good products or services; it's also about navigating and mitigating various risks. In the latest episode of "Keep What You Earn," Shannon discusses three major risks that can significantly impact businesses: overreliance on the owner, concentration on key clients, and industry or market-related risks. Understanding and addressing these risks is crucial for any business owner aiming to build value and ensure long-term sustainability.
Shannon starts by highlighting the first major risk: overreliance on the business owner, particularly evident in service-based businesses where the owner's skills are integral to operations. It's problematic for an owner who can't take even a two-week vacation without things falling apart. This overreliance is detrimental not only to the owner's well-being but also to the business's scalability and value.
To mitigate this risk, Shannon advises business owners to scrutinize where their time is being spent and identify tasks that can be delegated. Prioritize tasks that only the owner can do and delegate the rest. This approach frees up the owner's time and provides opportunities to train and elevate other team members. Developing Standard Operating Procedures (SOPs) is also crucial; SOPs ensure that the business can run smoothly even in the owner's absence. By reducing this reliance, owners can position their business for growth and make it more attractive to potential buyers or partners.
The second critical risk discussed is the concentration on particular clients. Having a few clients representing a significant portion of your revenue is extremely risky. Ideally, no single client should represent more than 10% of your revenue. This dependency can lead to dire consequences if a major client leaves, putting your revenue at risk. To mitigate this, diversify your client base by continually encouraging business development. Always keep the pipeline full to ensure that the company is less vulnerable to revenue shocks. Foster a sales culture and never stop selling. Being persistent in sales efforts makes your business more resilient and able to adapt to changes without significant disruption.
The third area of risk involves external factors such as industry, market, or socioeconomic conditions. These are largely out of the business owner's control but can significantly impact operations. For example, political changes can affect the oil and gas industry, or weather conditions can impact a waterproofing business. Recognizing and preparing for these external risks is key. Be aware of political, economic, and social factors that can impact your business. Develop contingency plans for scenarios where these risks materialize, such as financial reserves or securing diverse supply lines. Implement safety measures like robust cybersecurity for businesses with access to sensitive client data.
Navigating these risks effectively can determine the survival and growth of your business. As Shannon discussed, recognizing these pitfalls and implementing structured risk management strategies can safeguard your business. By reducing reliance on the owner, diversifying the client base, and preparing for external risks, business owners can build more resilient and valuable enterprises. These steps not only help in day-to-day operations but also enhance the overall value and attractiveness of the business in the long run.
Take a moment to evaluate your business. Identify which of these risks are most pertinent to you and start implementing measures to mitigate them today.
What you'll hear in this episode:
03:33 Owner dependence reduces business value drastically.
09:18 Assess external factors; identify risks and patterns.
10:26 Prepare for risks with contingency plans in business.
14:28 Identify main risks; take steps to mitigate.
If you like this episode, check out:
What Can a Balance Sheet Reveal About Your Business?
Navigating Tax Rules for Digital Sales
What Should You Track in Your Books?
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