Risky Business

When people think of MBA-style “risk analysis” they are probably not thinking about the sale of unicorn horns,

Unicorn horn from BrooklynOwl, $15

or light switch covers. But why not? At Etsy New York our businesses may be small, but risks to them? Not small at all.

Vintage Barbie light switch, $12 from LuCrafts

As owners of a fashion jewelry company, Wink and Flip undertook a major holiday market last season without performing a risk analysis on the business before the market started. This year we are working smarter. Risk analysis in business is a technique used to identify and assess factors that may jeopardize the success of a project, or achieving a goal.

The best way to go about organizing a risk analysis document for your business is to address one business area at a time, topics similar to those in a business plan. In large businesses, a computer system called a facilitated risk analysis process is often used. But small businesses can grab a basic entrepreneurship book and a pencil to create a list of the systems, applications and segments of their business, and then work on their own shoebox-style risk analysis. (See list of business systems below.)

After identifying and categorizing risks, a business owner must come up with controls that could lessen possible pain, or mitigate a risk, should it occur.

When friends of ours made thousands of ice cream sandwiches for a spectacular multi-day event in the summer, they were prepared for success. When the event was cancelled at the last minute, their risk analysis work saved them. With hundreds of ice cream sandwiches on their hands, they needed to find additional deep-freeze space to preserve their inventory. They’d already spoken to a restaurant with extra freezer space about renting that space if it should ever be necessary. When the event was cancelled, the owner made a phone call to the restaurant and his inventory was safely moved to the restaurant by the end of that day. Over the course of the season, the inventory was placed with wholesale accounts and supplied the business’s other events.

Risk analysis can help define preventive measures that might reduce the probability of risk factors from occurring.  Last September, when we went to purchase our favorite holiday bags – a white organza gift bag with silver stars on it – our usual supplier was sold out. This is the gift bag style we’ve used for ten years at the holidays, and now it was nowhere to be found. This year we will take a preventative measure to buy what we think we’ll need but do it in July, when organza bags are still available in all colors.

In order to avert possible negative effects on the company, risk analysis technique can also identify countermeasures to successfully deal with constraints when they develop. So what if we run out of our signature gift bags and it’s December 10^th? By having the name of a reliable mail order vendor (much larger than the store where we purchase the bags), we can place an order for additional bags and have them mailed overnight to us.  We can also identify three to four other bag colors that work with our color scheme.

The decision as to what controls are needed to avert risk lies with the business owner. She identifies what risks exsist and what controls are needed along with a related action plan for how to put the safety controls into place. 

But owners often overlook the most important risk to the business: what if they themselves cannot run it due to accident or injury? Disability insurance for the business owner, or event insurance that covers the wages of the owner and the cost of inventory, should be investigated for any sizable craft business.

Can we ever eliminate all risk? Probably not, but some forethought can go a long way toward turning a crisis into …whew,  a big save.

Susan 

winkandflip

Here is a list of areas to be covered from a standard business plan outline created by BusinessTown.com LLC. It can be adapted to areas of concern for a risk analysis document.

Summary

Business concept
Current situation
Key success factors
Financial situation/needs

Vision

Vision statement
Milestones

Market analysis

The overall market
Changes in the market
Market segments
Target market and customers
Customer characteristics 
Customer needs
Customer buying decisions

Competitive analysis

Industry overview
Nature of competition
Changes in the industry
Primary competitors
Competitive products/services
Opportunities
Threats and risks

Strategy

Key competitive capabilities
Key competitive weaknesses
Strategy
Implementing strategy

Products/services

Product/service description
Positioning of products/services
Competitive evaluation of products/services
Future products/services

Marketing and sales

Marketing strategy
Sales tactics
Advertising
Promotions/incentives
Publicity
Trade shows

Operations

Key personnel
Organizational structure
Human resources plan
Product/service delivery
Customer service/support
Facilities

Creating the financials of the business plan

Assumptions and comments
Starting balance sheet
Profit-and-loss projection
Cash flow projection
Balance sheet projection
Ratios and analyses