Guide: Risk Analysis and Management for Startups

Why Most Startups Fail

According to Investopedia, around 95,000 new businesses are started in Canada annually, but only a fraction of these will succeed. Why? Most enter the market unprepared.

Some of the top reasons they fail include lack of funding, misreading market demand, managing cash flow, intense competition, flawed business models, regulatory challenges, high supplier pricing, poor marketing, and bad timing. Now think about how many of these issues could have been anticipated and avoided with proper research and planning. You will start to understand how vital a risk assessment is to give your new business a fighting chance of beating the odds.

What Is a Risk Assessment?

Think of a risk assessment for startups as a reality check. So take those rose-coloured glasses off and do a thorough and pragmatic checklist of everything that can go wrong.

You need to evaluate your business plan, your target market, finances, team, regulatory bodies, competition, cybersecurity, and the overall environment for risks.

The main goal of risk assessment is to identify and eliminate (or at least minimize) these risks by increasing control measures, changing direction, strengthening your finances, and doing more research. You should take an approach that is both qualitative (what they are) and quantitative (how they affect the numbers) to identify and grade the risks. There are tools and companies that can help conduct these measures if needed. 

What Are the Benefits of Doing a Risk Assessment?

Starting a business will always have some risk attached to it. It is inevitable. However, a good entrepreneur who does a comprehensive risk assessment will be informed enough to know which risks to accept as necessary or inevitable while taking steps to mitigate those that can be controlled.

Being armed with as much knowledge as possible is key to understanding the risk landscape of your business. It will help you identify the threats and learn how to protect your business against them. This approach will help protect the interests of all stakeholders, including customers, investors, and employees, and provide credibility and reassurance to any new potential financiers and investors.

What’s the Difference Between Risk Analysis and Risk Assessment?

You will often hear the terms “risk assessment” and “risk analysis” used interchangeably, but they are different things that work together to develop your overall risk profile and strategy.

A risk assessment is the process of identifying and classifying hazards and risks, and defining what the impacts are for each one. Risk analysis is the process of measuring and evaluating identified risks and the impacts they may have on your business. 

Taking this two-pronged approach will help protect the interests of all stakeholders, including customers, investors, and employees, and provide credibility and reassurance to any new potential financiers and investors.

Common Risk Strategies: What Action Should You Take?

Identifying risk is only one piece of the puzzle. One only has to think of the Titanic to see how ignoring red flags can have disastrous consequences. It’s important to analyze the risks you have identified and then decide what action to take about each one. Some strategies for dealing with risk include:

• Avoidance: The best way to avoid risk is to avoid the situation that will put you at risk in the first place. That will often not be possible, as there are risks to any business, but deciding which ones are deal breakers is important. Your analysis may help you decide to avoid selling a certain product, or selling internationally, or dealing with a particular supplier, for example.

• Mitigation: Some risks are unavoidable. Have straightforward processes for dealing with them. Mitigating these risks is the best solution. Business insurance fits into this category, as well as installing cybersecurity controls, drafting legal contracts, ensuring compliance requirements are met, etc.

• Risk transfer: Some risks can best be handled by others or organizations with specialized knowledge instead of handing them yourself. These can be anything from accounting and legal, technology, marketing, and customer service. Offset the cost of outsourcing with the risk of taking everything on yourself and potentially getting in so over your head that you are no longer running your business effectively.

• Choosing to ignore the risk: Some risks are too minor to make a significant impact and are therefore worth ignoring. But being aware of them is still important in case their status changes and they become a more significant risk than first thought.

What’s Involved in the Risk Management Process?

Your risk landscape is constantly changing. Risk management for startups means having an ongoing plan to mitigate risk for all aspects of your business and making sure any new threats are identified.

That should include everything from managing financial risk to ensuring you have tools and insurance for protection from cybercrime, keeping up with regulatory compliance, managing reputational risk and engaging with experts such as accountants and legal counsel when needed.

Identify when things need to be updated and put them in your calendar. Things get busy, and it’s easy to miss deadlines for compliance unless you make them a priority. If you have staff or have outsourced some of your business tasks, delegate some of these tasks to them as part of your contractual agreements and ask for regular reports. Check in regularly with your legal, financial, and insurance broker to ensure things are covered, and there are no red flags. 

How Does Business Insurance Factor Into Your Risk Analysis and Management?

Having the right insurance and coverage plays a crucial role in reducing risk by protecting your business in the event of unforeseen issues.

There are many types of insurance to consider when starting a business, and a lot will depend on your unique circumstances. For example:

• Commercial general liability insurance will help protect you from third-party bodily injury or property damage claims.
• Commercial property insurance protects your office or business property and its contents from fire, flood, damage from severe weather, vandalism, and theft.
• Business interruption insurance can pay wages and expenses if your business needs to close temporarily due to an insured loss.
• Cyber liability insurance protects you from the costs associated with cybercrime, such as a cyber-attack or data breach.

Make insurance coverage a central part of your risk management strategy. Talk to a Zensurance licensed broker to understand your specific needs and develop a coverage plan to mitigate your risks.

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