How to mitigate external risks when running a small business

Running a business, regardless of its location and sector, implies several risks. These risks can be both internal, stemming from your own organization, or external, arising from economic, political or social events that you can’t control. Of these two, internal risks are clearly the easiest to manage. Since they occur in your organization, factors such as ineffective management, human error, manufacturing malfunctions or data loss are easier to keep track of and therefore prevent. But what can you do when your business is running smoothly, but a political crisis or extreme weather event shakes it from the ground up?

At first sight, it might seem like all of these factors are unpredictable and out of your control. And that makes them even scarier. According to the Global Risks 2019 Report, 9 out of 10 business owners fear that the worsening economic and political tensions could take a toll on their organizations. In the long run, additional concerns such as cyber-attacks, extreme weather and poor climate change policies are expected to intensify too.

Source: The Global Risks Report 2019, 14th Edition

This backdrop might sound confusing, scary, and overwhelming when you’re a small business owner struggling to make an impact on the market, but things aren’t completely out of your control. Starting from your local market, you can learn to understand all the external factors that might influence your business, and how to mitigate their potentially harmful impact.

Identification is the first step to prevention

A business doesn’t exist on its own. Even if it’s just you and a few family members starting a small business from your home, your business is interconnected with other businesses, which rely on a sector of the economy, which in turn depends on a series of economic and political factors and so on. 

This domino-effect may seem difficult to understand, but you need to have at least a general idea of the social, economic, and political factors that can influence the progress of your business. This will redefine your perception of risk so that it will no longer seem like a vague threat that could come out of nowhere. Instead, you’ll know exactly what risks could come your way and prepare for them:

  • Micro risks – these only influence certain industries
  • Macro risks – they influence all sectors of the economy and are often due to major crisis such as civil unrest or a change in the political regime

Looking at relevant stats and graphs, analyzing industry reports, and talking to consultants are all great ways of identifying external business risks.

Know your market (or hire managers who do)

This mitigation method refers especially to business owners who decide to expand internationally. As amazing as the prospect of expansion might sound, you have to understand that the new market has other particularities and therefore other risks. And while it may look perfectly safe from the outside, only a local consultant can give you insights into the risks you face by opening offices there. This is not to say that you shouldn’t expand at all.

Source: Business Insider

You should, probably, but before doing that, you have to understand the social, economic, and political context of the country:

  • Is it undergoing civil or military conflicts that could cripple the economy?
  • Are there many strikes in your sector?
  • What is the current state of the economy and how is it expected to evolve in the next 10 years?
  • Are there any controversial policies that could affect the expansion of your business?
  • Could there be a political or territorial transition that might increase taxation (i.e. Catalunya gaining independence from Spain, the UK leaving the EU, etc.)

It’s perfectly fine if you don’t know how to answer these questions or conduct a PESTEL analysis yourself, which is why the most successful overseas expansions were made by hiring local managers and business development consultants.

Don’t ignore the news!

Running a business is hard work in itself. With so many internal processes to oversee, you might not even have time to tune in to the news, but you definitely should, because they’re the best way to stay up to date with the local and global events that could affect you too.

A savvy entrepreneur should always be informed, first of all in regards to their own industry, and then the economy in general. Apart from force majeure events, such as earthquakes or tsunamis, most events can be predicted and, if you read about them in advance, you’re less likely to be surprised by them and react in a panic. Several connected fields can actually give you a good idea of a country’s economy. For example, Forex uses fundamental analysis to estimate an asset’s real value, and that includes keeping track of all these economic and political events we spoke of. Traders even have accurate economic calendars that record the smallest events that could cause ripples into the market, so gaining intel on different types of Forex brokers is a great way to analyze currencies and market growth.

A limit needs to be drawn, however. Not all news will be relevant and, in general, only 50% of it will directly affect your business. How do you know the difference? By taking in all the information, developing an analytical spirit, and discussing these events with other entrepreneurs from your extended business network.

Have a plan B

In business, you should have a plan B for everything. You might not always use it, but when you do, you’ll be happy you took the time to think of a backup plan. Supply chain and logistics are perhaps the most important area where you should have a plan B. This way, if internal events in one country affect your supplier’s ability to deliver, your own processes won’t be affected. Try to build relationships with multiple vendors from multiple countries. This will create more stability and, even if a crisis doesn’t strike, at least you’ll have the peace of mind that your business isn’t a victim at the whims of the economy.

Source: IG.com

Insurance

When you started your business, you probably invested in an extensive coverage plan to protect you in case of loss, theft, or destruction of your company property, but, if you operate on a market that’s particularly prone to instability, you might want to expand this plan and seek additional political risk insurance. Some insurance companies also allow you to customize your policy to cover other things, such as international cargo insurance, for instance. By following these basic strategies, you will be able to enter the market with more confidence and stay one step ahead of potential risks. However, keep in mind that sometimes risk is inevitable and if your business is affected, it’s important to react calmly and avoid making panicked decisions. Becoming a member of institutions such as The Finance, Credit & International Business Association and Globe Risk International can help you mitigate the impact of external risk factors and deploy strategic solutions

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