Assessing and managing risk has always been a moving target for small businesses. One's perception of risk, after all, is based entirely on what you think is likely to happen — an assessment that can change over time.
Perhaps nothing has changed small business owners' perception of risk more than the COVID-19 crisis, which caught the entire economy by surprise.
"People ran out of cash so quickly," says Chris Sica of Austin, Texas-based financial consulting firm The Ronin Society. "Even though I knew businesses didn't save a lot, it was still surprising to see."
The big question now is how small businesses can avoid being surprised in the future. Here's how experts say small business owners should rethink their risk management going forward.
Engage in Business Cycle Planning
When a crisis hits, one of the biggest threats is uncertainty. Without a clear idea of how long a small business can function under different conditions, it's impossible to take strategic actions to protect it when things suddenly change.
To create more clarity, Sica says small businesses should engage in business cycle planning. That involves measuring and setting targets for everything in the business on a monthly and annual basis, including revenue, direct costs, gross profit, operating expenses, net operating income, interest expenses and cash-on-hand goals.
"If you have business cycle planning done, you can see quickly what the ramifications are if all of a sudden revenue dries up or goes to 50 percent," Sica explains.
The most important element of this type of planning is a rolling forecast. When you can forecast what will happen normally, you can then tinker with the numbers to forecast different outcomes in a crisis. Then it's easy to see how long you can continue to operate under current conditions.
Be Prepared to Work Virtually
When stay-at-home orders rolled out across the United States, some small businesses moved (or kept) their operations online, and others came to a screeching halt followed by a slow rollout to remote work.
"Successful companies had internal processes that allowed them to work away from the office," says Andrew Contiguglia, a business risk management consultant and owner of the Contiguglia Law Firm in Denver. "They knew how to utilize things like Slack and Zoom before any of the rest of us were doing it, and they were able to have these processes in place that brick-and-mortar companies never knew they needed."
Though not every business is suited to remote work, those that can will be better prepared for an array of crises, from a hurricane to a construction project that blocks a storefront. Wherever possible, small business owners should implement policies and practices to support the management of employees, projects, vendors and customers from anywhere before they need to.
“Successful companies had internal processes that allowed them to work away from the office. They knew how to utilize things like Slack and Zoom before any of the rest were doing it...”
- Andrew Contiguglia
Business Risk Management Consultant and Owner, the Contiguglia Law Firm
Take a New Approach to Employee Health
Another risk factor to businesses that became pronounced during the COVID-19 crisis but truly always existed is employee health. While Pew Research finds that only 24% of civilian American workers have paid sick leave, the Centers for Disease Control and Prevention says up to 11% of Americans get the flu each year, and most adults get two to three colds annually. Even in a normal year, an illness outbreak within a small business can hamper productivity either because workers have to stay home or because they come to work sick and less productive.
Even if paid leave isn't possible, small businesses should consider how they can lower the financial and job-security risk employees face when calling in sick for work. Make sure employees don't feel penalized for telling management when they're ill and taking time off when they need it.
Diversify Revenue Streams and Supply Chains
The financial effect of a crisis can vary widely depending on the nature of the crisis and the type of revenue streams and supply chains it disrupts. To strengthen protections against the widest possible range of issues, business owners should think through new options for both.
For example, during the COVID-19 crisis, Sica saw significant resilience from small businesses that had both business-to-business and business-to-consumer revenue streams. "The B2B component didn't dry up as quickly as B2C did because the corporations had a little more time, and then some were essential services," he says.
A restaurant, Sica suggests, might consider offering corporate lunches and catering, or even producing packaged goods like a signature sauce or beloved dessert and selling it through local retailers.
Likewise, it's smart to find alternative supply chain options that can act as a back-up for the just-in-time supply chains that have been proved to be vulnerable during crises.
Boost Cybersecurity Efforts
As a crisis pushes more businesses to move operations online, one unfortunate consequence is an increased potential for data breaches and malware attacks.
According to the U.S. Department of Homeland Security's Cybersecurity and Infrastructure Security Agency (CISA), phishing attacks — a cybercrime committed through fraudulent emails — increase during times of natural disasters, epidemics and health scares, times of economic concern, and major political elections.
"We can't overlook intellectual property and data issues now that a lot is going to be happening online," says Contiguglia. "Companies need to start taking their data protection seriously."
There are plenty of low-cost ways to boost cybersecurity. According to CISA, best practices include keeping software up to date, running updated antivirus software, regularly backing up data, utilizing strong passwords and training staff to be suspicious of all unexpected emails.
Sock Away Both Cash and Credit
Having ample cash reserves is an "oldie but goodie" of small business risk management. But given how quickly Sica saw clients run out of cash during the COVID-19 crisis, the practice of stashing away cash is more important than ever.
Another underappreciated means of accessing cash during a crisis, says Sica, is having an established line of credit. "Most small businesses are under-capitalized," he says. "They don't often take advantage of the lines of credit that allow bigger companies to weather things. It costs you almost nothing to have one. It just sits there."
Cash is hard to beat. But establishing a healthy line of credit during the good times can extend the power of your cash reserves to give a small business the extra capital it needs to survive the bad times.
It's a new era for small businesses, and it comes with new risks. But these risk management practices can help business owners make their operations more resilient going forward.
"Now, it's just what you have to do," says Sica. "I don't know how you can sleep well as a small business owner without doing these things."