Risk Management For A Small Business

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Risk Management for a Small BusinessParticipant GuideTable of ContentsWelcome . 3What Do You Know? Risk Management for a Small Business . 4Pre-Test . 5Risk Management . 6Discussion Point #1: Risks from Positive Situations . 6Internal Risks . 6Discussion Point #2: Internal Risks . 8External Risks . 8Discussion Point #3: External Risks . 9Discussion Point #4: Risks to Continued Operations. 10Risk Identification . 10Risk Evaluation . 12Risk Measurement . 13Importance of Risk Management . 13Risk Control Management and Implementation . 13Discussion Point #5: Assets. 16Eight Key Points to Remember. 20For Further Information . 21Post-Test. 22Evaluation Form . 23DISCLAIMERThese training materials are intended as general guidance only and may or may not apply to a particular situationbased on the circumstances. The materials do not create any legal rights or impose any legally binding requirementsor obligations on the Federal Deposit Insurance Corporation (FDIC) and U.S. Small Business Administration (SBA).The FDIC and SBA make no claims or guarantees regarding the accuracy or timeliness of this information andmaterial.The content of this training material is not designed or intended to provide authoritative financial, accounting,investment, legal or other professional advice which may be reasonably relied on by its readers. If expert assistancein any of these areas is required, the services of a qualified professional should be sought.Reference to any specific commercial product, process, or service by trade name, trademark, manufacture, or otherwisedoes not constitute an endorsement, a recommendation, or a preference by the FDIC and SBA or the United Statesgovernment.Money Smart for a Small Business CurriculumPage 2 of 23

Risk Management for a Small BusinessParticipant GuideWelcomeWelcome to the Risk Management for a Small Business training. By taking this training, you are taking an important steptoward building a better business. This guide accompanies the Risk Management for a Small Business PowerPointPresentation.ObjectivesAfter completing this module, you will be able to: Identify the common risks associated with a small businessIdentify the external and internal factors which affect risk for a small business Identify situations that may cause risk for a small businessIdentify the common warning signs of risk for a small business Implement, monitor, and evaluate a risk management plan for a small businessMoney Smart for a Small Business CurriculumPage 3 of 23

Risk Management for a Small BusinessParticipant GuideWhat Do You Know?Risk Management for a Small BusinessInstructor: Date:This form will allow you and your instructor to see what you know about risk management, both before and after thetraining. Please read each statement below. Circle the number that shows how much you agree with each statement.DisagreeAgreeStrongly AgreeStrongly DisagreeDisagreeAgreeStrongly AgreeAfter TrainingStrongly DisagreeBefore Training1. I can identify the common risks associatedwith a small business.123412342. I can identify the external and internal factorswhich affect risk for a small business.123412343. I can identify situations that may cause risk fora small business.123412344. I can identify the common warning signs ofrisk for a small business.123412345. I can implement, monitor, and evaluate a riskmanagement plan for a small business.12341234Money Smart for a Small Business CurriculumPage 4 of 23

Risk Management for a Small BusinessParticipant GuidePre-TestTest your knowledge of risk management before you go through the training.1. Which type of risk can generally be controlled?a. Internal risksb. Systematic risksc. External risksd. Market risks2. It is possible to create a business plan that identifies every risk your business might face.a. Trueb. False3. While reviewing your business plan you identified several risks that could halt, slow, or affect the profit ofyour business. What should you do with these risks?a. List them by nameb. Rank by importancec. Identify the potential costd. All of the above4. If you need help managing risks associated with your business, you should .a. Work the risks by yourselfb. Seek outside assistancec. Ignore the risksd. Market the risks5. Which of the following are common ways to avoid risk? Select all that apply.a. Communicating risks you’ve identified to key employeesb. Making your expectations clear to employeesc. Developing support systems to care for your family needsd. Training staff on the business continuity plane. Purchasing insurancef. Planning emergency contingenciesMoney Smart for a Small Business CurriculumPage 5 of 23

Risk Management for a Small BusinessParticipant GuideRisk ManagementRisk management applies to many aspects of a business. Your business issubject to internal risks (weaknesses) and external risks (threats). Generally,you can control internal risks once you identify them. However, externalrisks may be out of your control.Not all risks come from negative sources. Risks may come from positivesources, or opportunities. Expansion and growth are opportunities, but theyalso bring additional risk.The ultimate goal is to minimize the effects of risks on your business.Discussion Point #1: Risks from Positive SituationsThe purpose of this exercise is to help you identify risks in your business.What positive situations or opportunities can you think of that may be risks?Internal RisksLet’s begin with some internal risks.Human RisksThe human component of your business is a source of risk. Think about these possible human risks to your business: Illness and death. A business owner or employee may be ill for a day or be unable to work for months. Thedeath of a person involved in a business poses a risk to continued operations. Theft and fraud. Most businesses want to have an honest working environment, yet theft by employees andemployee fraud are major risks businesses face. Timecard fraud is a risk. Diverting funds to fictitious accounts areaccounting risks.Money Smart for a Small Business CurriculumPage 6 of 23

Risk Management for a Small Business Participant GuideLow employee morale. Unhappy employees can cost money through negligence or through willful acts. Forexample, an employee who forgets to reorder inventory is a risk to sales because back orders lead to cancellations.Equipment and Information Technology RisksOlder equipment may run slower or require more maintenance than newequipment. New equipment may require adjustments to work with olderequipment.Worn parts may cause damage or cause company vehicles to break down. Whatwould a non-working delivery van cost a business for one day?Downtime from physical damage or outdated systems may slow business profits. Most businesses rely on a computersystem to process credit cards. These systems are risks to continued business when they are not working, especially if nobackup plan exists. Lack of administrative controls may lead to downtime, in addition to fraud and theft.Other Internal RisksAnother source of risk might be the physical plant of your business. Phonelines and other utilities are risks to a business. The appearance of a buildingsuch as its walls, windows, and doors may require maintenance to continuedrawing customers.Injuries and damages may be caused by your business or your business mayreceive damage. For example, a storm may cause damage to a business or abusiness may cause damage by selling a faulty product. Either way, injuriesand damages come with a cost.Cash flow is the lifeline of a business. When unexpected costs affect the ability of a business to meet monthly expenses orwhen credit lines are lost, a business may fail. A plan to maintain cash flow is crucial.Even new financing has its own cost-associated risks. The risks can include the following: Appraisal costs Closing costs Costs for points to buy down rates Deposits placed on hold as collateralAre you prepared?Money Smart for a Small Business CurriculumPage 7 of 23

Risk Management for a Small BusinessParticipant GuideDiscussion Point #2: Internal RisksThe purpose of this exercise is to help you identify risks in your business.What other internal risks can a business owner control?External RisksNow let’s look at some external risks.Competition and Market RisksCompetition can be tough and market changes can make life for your business tougher if you are not prepared. Considerthese risks: Market changes will cause businesses to change. Competitors advertise sales, wholesale costs go up and down,and oil and gasoline prices affect your costs and those of your vendor. Employees may leave to go to a competitor’s shop, taking loyal customers with them. Rent increases may be caused by increased demand for space. For example, you may be able to lease space morecheaply in a building/area under construction, but when the lease is up for renewal, an increased demand for spacein the vicinity may result in your rent increasing.Business Environment RisksYour environment is more than the space you rent or buy. Whathappens around your business affects it. Here are some examples ofenvironmental changes: Federal, state, county, and city laws and ordinances canand will change. Weather and natural disasters can shut down a businessfor a short period or close it.Money Smart for a Small Business CurriculumPage 8 of 23

Risk Management for a Small BusinessParticipant Guide Structural changes in the community may be the result of progress or may be due to empty stores and offices ina declining market. Your community may change as the needs, age groups, spending habits, and incomes of the population change.Discussion Point #3: External RisksThe purpose of this exercise is to help you think about how you would manage and control an external risk.You own a steak house. A tainted meat scare in your area changes demand. Howdo you manage this risk or control its effects?Personal Conflict RisksPersonal conflicts are external risks for both business owners and employees. Families and homes do not cease to exist atthe start of a work day. Children become ill. Medical emergencies, or worse, may happen. Repairs and maintenance willbe required at home.For a small business owner, involvement in the community creates visibility. However, the visibility comes with a cost,mainly time. Employees and their children are involved in outside activities as well. We don’t usually think of outsideactivities as a risk, but consider how you would handle this situation: your most reliable manager wants to attend an outof-town playoff game with her child on the busiest day of the month.Even complacency is a risk. Complacency comes from being comfortable. Your business may be successful and has beenfor a while. You may be comfortable with the hours you are working, but you may miss opportunities for growth becauseyou do not want to expend the extra effort. Now, multiply the effect of complacency because complacency also happensto employees.Money Smart for a Small Business CurriculumPage 9 of 23

Risk Management for a Small BusinessParticipant GuideDiscussion Point #4: Risks to Continued OperationsThe purpose of this exercise is to help you to determine what is required for your business to continue operations.What is required for your business to continue operations?Risk IdentificationOne of the most important investments you can make in your business is creating abusiness plan, especially when identifying risks. Creating a business plan will help youassess risk areas, those areas impacting your ability to continue business and to grow.The continuation of your business, in the event of any risk, should be addressed in yourplan. Look at anything that could halt, slow, or affect the profit of your business. List theserisks, rank them in importance, and look at potential costs. Identifying and assessing risksis something that will require time and should be revisited periodically. Be sure toschedule time in your calendar to identify areas of business risk.Get help from outside sources in identifying areas of risk. Many of these sources arebusiness specific. Some sources for help are listed later in this training.A business plan isn’t something to create and set aside, simply to be used later to obtainfinancing. Once completed, the business plan will become your guide, just like a map.Warning SignsOwning a business means keeping alert to potential risks. Pay attention to risk warning signs.Excessive Debt in Relation to Owner’s EquityUse the following formula to calculate a company’s debt-to-equity ratio. First, determine total liabilities by adding yourshort-term and long-term obligations. Then, divide total liabilities by the owner’s equity (found on the company’s balancesheet). Generally, the debt-to-equity ratio for a business should not be above 40 percent or 50 percent. However, you canMoney Smart for a Small Business CurriculumPage 10 of 23

Risk Management for a Small BusinessParticipant Guidecheck similar types of businesses through a business reporting service or consult an accountant to obtain the normal rangefor your industry.Reliance on Small Numbers of Customers, Products and VendorsRelying on a small number of customers will cause a business to fail quickly if those customers are lost. Your businesswill need to always reach out to new types of customers with new products. Reliance on one product will limit yourbusiness when that reliance fails to allow for changes in customer needs, as well as changes in the market. Similarly, whenyour business relies on one or a small number of vendors, your business continuity plan is only as solid as your vendor’sbusiness. You are not in control.Cash Flow ProblemsA very basic calculation of your cash flow starts with your business’s cash balance at the beginning of the month. Cashreceipts from all sources are added to this beginning balance and then all cash payments are subtracted from this total. Theresult is your ending cash balance. If your expenses are greater than your income, adjustments should be made. In general,you want your business to have a positive cash flow. Is your business able to pay monthly payments with no overdrafts? Ifyou are having a hard time covering checks, your business has a cash flow problem.Irregularities in Accounting, Bank or Timecard RecordsAudits or spot checks of your accounting system may uncover errors or fraud. Some questions to answer as you movethrough audits: Do project or job sheets match what has been submitted for payroll?Do time sheets match what has been submitted for payroll? Does the payroll ledger reconcile with bank account statements? Are there outstanding checks to former employees?Are former employees still in the accounting system?Irregularities in Computer System Administrative ReportsWhen reports from your computer system are generated, verify user access and system changes by considering thesequestions: Has any user access been changed since the last review?Is access for all users ordinary for their job functions?Do users who are no longer employed still have access to the system? Have changes been documented and approved?Are any transactions or changes out of the ordinary?Employee Turnover RateConsider these questions when thinking about employee turnover: Does your business have a high rate of employee turnover?Is this a result of poor hiring decisions, lack of training, or the work environment?Money Smart for a Small Business CurriculumPage 11 of 23

Risk Management for a Small BusinessParticipant GuideRisk EvaluationOnce risks have been identified, consider next the impact each risk has on business operations and continuity. Alsoevaluate risks with regard to potential expansion or future growth. On a day-to-day basis, consult with your operationsmanagers, as they may be more alert to possible risks. In fact, consult with all your key people to enlist their input andcommunicate to them the risks that you see.Strengths, Weaknesses, Opportunities, Threats (SWOT)AnalysisPerforming an analysis of your business’s internal strengths and weaknessesand your business’s external opportunities and threats may uncoveroverlooked risks. To be effective, a strengths, weaknesses, opportunities,threats (SWOT) analysis should be a very candid and honest assessment ofthe business. Remember, some risks can also be opportunities.Other ResourcesSeek outside help when assessing your business risks. The Small Business Administration (SBA) can provide manyhelpful resources. If funds permit, consider an auditing firm or certified public accountant (CPA). Talk with your bank orcommercial lender about risks for your type of business. You may also want to consult a risk insurance provider. You cancheck the internet to find similar businesses or professional organizations which may share information on risks specificto your business.Money Smart for a Small Business CurriculumPage 12 of 23

Risk Management for a Small BusinessParticipant GuideRisk MeasurementOnce risks are identified a

Risk Management for a Small Business Participant Guide Money Smart for a Small Business Curriculum Page 3 of 23 Welcome Welcome to the Risk Management for a Small Business training. By taking this training, you are taking an important step toward building a better business. This guide accompanies the Risk Management for a Small Business PowerPoint