What Are the Causes of Business Risk?

by Kyle Martin; Updated September 26, 2017
There are numerous risks to operating a business.

There are many benefits to opening a business, from the freedom of being your own boss to having control of the money you make. But there are significant risks that accompany operating a business. There is a large amount of capital invested in a business and it can take years to start turning a profit; one major downfall can derail a business for good.

Cash Flow

Running out of operating cash is always a hazard. If a business owner does not keep close tabs of his expenses and accounting, then the money flow will dry up. The same can happen if customers are not investing in the business and purchasing products. A lack of planning ahead for these contingencies adds to the business risk. A business owner should have three to six months of operating expenses tucked away in savings to keep her business afloat in lean times.

Insurance

A lack of proper insurance boosts the risk to a business. Basic insurance protection from flood, fire and theft are a given. But a business owner should also be thinking ahead about insurance specific to his line of work. The tools for an auto mechanic business, for example, should be insured, as should the ovens and stoves of a restaurant. Online businesses are not immune to insurance, either. A lawsuit can stem from an online shopper who catches a computer virus planted on business's website by a hacker.

Similarly, the insurance for a business should cover the eventuality of a key person leaving or getting sick. If that person cannot run the business, then it's at risk of failing. The insurance policy should be frequently checked to make sure that it's still relevant to the way a business is being run and that it covers any new components to the business.

One-Dimensional Thinking

Business owners risk sinking their operation with one-dimensional thinking. Competition is fierce, especially among small businesses, so the business owner should be thinking of creative ways to attract customers. Meeting the bottom line isn't enough. The business owner should grow his business by offering unique products or competitive pricing. He should also be anticipating any risks that could come along and sink the business.

About the Author

Kyle Martin has been a newspaper reporter in Florida for over three years, and was a reporter in Mississippi before that. He is fluent in Spanish, having lived overseas during his formative years. He has a Bachelor of Arts in communications, with a concentration in journalism from Mississippi College.

Photo Credits

  • business image by peter Hires Images from Fotolia.com