A surprisingly large number of small businesses in the United States fail every year. There are many reasons why a business fails: financial mismanagement, lack of planning, and the economic climate. In this article, we’ll look at why they fail and the solutions that can help alleviate failure.
According to one source, one in every five businesses fails within the first year of operation, but it doesn’t stop there. Nearly half are projected to fail within five years of inception. Some regions seem to experience an unusually high number of business flops, with the District of Columbia topping the list for many years. California, Washington, and Nevada enjoy a higher success rate for new businesses, but their failure rates are not much lower than the national average.
Almost all failure is attributed to risk and a lack of planning. Many small business owners don’t understand the landscape or the kinds of risks that they should plan for.
According to the latest poll by Statista, the biggest risk is supply chain interruption, followed by cyber incidents, and then monetary policies like inflation and deflation. Others include shortages of skilled workers, natural catastrophes, the energy crisis, changes in legislation, and new market developments.
Climate change has also started to play a significant role in business failure, with many businesses unable to cope with the financial burden of becoming and staying compliant, as well as evolving fast enough to stay ahead of all the changes that have come about because of the changing climate.
How to begin helping businesses
Compliance and risk management might be bad news for businesses, but great for MBA students. One of the courses they cover is risk and how to assess it, plan for it, and mitigate it. MBAs are an excellent option for professionals who want to take on more senior roles and become decision-makers within organizations when it comes to risk management.
Apart from risk assessment and mitigation, other courses offered include business analytics, finance and marketing, as well as business ethics and legislation. Students can choose to specialize in any of these areas, or they can get a general MBA that allows them to work in various capacities within businesses.
Many professionals, before they commit to an MBA, ask themselves, “How long to get an MBA online?” At St. Bonaventure University, it takes a little under two years for students to complete a master’s course, but this depends on the type of course they opt for. Students can opt for full-time or part-time courses when studying for an online MBA, which is ideal as it offers flexibility for the working professional.
It is crucial to check whether or not their university of choice is accredited, and St. Bonaventure is accredited, which means that their courses have been assessed independently and found to be an excellent choice for students. Taking courses from unaccredited universities is risky because some employers do not recognize them as offering valid degrees.
If you are thinking of taking a risk-focused MBA, it is important to familiarize yourself with the relevant issues in this area. One of the first things you should familiarize yourself with are the different methods businesses use to identify, assess, and mitigate risk. You should also have a good understanding of the different types of risks and how they affect businesses.
What are the different types of business risks?
Risks change depending on the industry, but some are felt right across the business environment, and they include the following:
Security and fraud risks
The statistics on data breaches and cyberattacks should worry every business owner or manager. A recent report shows that there will be around 33 billion breaches in 2023 and that an illegal hacking attempt is carried out every 39 seconds.
Experienced hackers don’t go after individual accounts because there is not much to be gained. Instead, they focus their efforts on hacking businesses that have troves of consumer data. With one breach, they can get enough data to make the hack profitable.
It doesn’t matter how strong a business’s defenses are; hackers continually refine their methods to keep up with the latest in encryption. Similarly, risk managers have to continually audit their systems to ensure they are ahead of the curve. It is a difficult thing to do, and even businesses that have the latest anti-breach measures in place are infiltrated. That is why it is critical to prepare for this type of risk.
Senior business managers should come up with a solid plan to be implemented right away in the event of a breach, and it should include how to stop it right away, how to inform customers that their data is at risk, and how to compensate them for any losses they may incur. Everyone in the company should be aware of how to handle data breaches when they occur.
Business managers are increasingly having to prepare for operational risks, but not nearly enough of them have good enough plans to effectively mitigate them. These types of risks have to do with natural disasters and the damage they do to premises and equipment, as well as supply chains and service delivery.
Flooding has become an annual occurrence in many parts of America, and one of the things that we witness in the news after each event is business owners talking about the losses they have incurred after a flood. Fire is also a big risk in some states, and organizations that are unprepared for it end up incurring huge costs every time they are affected by climate-change-related blazes.
Indeed, it is hard to prepare for natural disasters because they are impossible to predict accurately, but risk managers should find ways to buffer their companies from the effects of fires, floods, and other natural disasters. These plans should take into account damage to physical structures and infrastructure, how supply chains are affected, the effect on customers, and the danger these events pose to employees.
Financial and economic risks
It is one of the risks most closely scrutinized in American businesses. Everyone wants to get paid at the end of the day, and anything that affects how much they take home is of interest to business owners and managers, shareholders, and employees. These risks are usually attributed to market movements, currency exchange rates, price fluctuations, and a host of other factors that are difficult to prepare for.
For the risk manager, one way to mitigate financial and economic risk is to make sure they are always aware of the financial environment, keeping a close eye on how the different elements move and affect business. Many of the risks associated with market movements are beyond the control of the risk manager, but if he is prepared for them, he can take measures to try and buffer company profits when fluctuations occur.
Many businesses close their doors because they take on loans they can’t afford to service. When the banks come knocking, they cannot meet the repayments and are forced to sell assets so that they can pay off their debts.
To mitigate this risk, senior management needs to carefully consider the kind of debt they take on and whether it is needed. They must assess expenditures and whether they can afford to take on debt given the revenue projections. Sometimes risk managers are overly optimistic, hoping that everything will go as planned, the business will make enough money, and they can take on new loans against projected earnings.
All new debt should be taken on with the risks discussed here in mind. Just because things are great now doesn’t mean they will be six months or a year into the future. With this in mind, is it a good idea to take on more debt, or are there ways to cut costs and keep the business running?
How familiar is the risk manager with the laws that govern his industry? Compliance can be difficult, especially for small businesses, because it costs time and money.
The laws that govern the business landscape in different states are not static; they evolve with the changing economic environment, and it is, therefore, vital for risk managers to make sure that they are aware of how regulations are changing and how they affect their business.
It is not often classified among the top risks that American businesses face, but it is a reality that businesses have to deal with every day.
Competition is a risk that businesses must plan for in the short and long term. What happens when another business starts undercutting you and stealing away customers you feel should be buying from you? How do you deal with new entrants who have lower costs and can extend further service, redirecting customers to themselves?
Innovation and lowering costs are two ways to stay ahead of the competition, but risk managers must always remember that other businesses are using the same strategies to make themselves more attractive to customers. They should, therefore, look at every point of customer contact and find ways to deliver service in such a way that they are the preferred vendor.
What are the different methods that are used to identify risk?
The above are not the only risks that American businesses face; there are many others, and they differ depending on the industry, state legislation, the prevailing economic and political environment, and even external factors such as wars in other countries.
The important thing is that managers learn how to identify risk, and there are different methods by which they can identify factors that have the potential to impact business in the future adversely.
It is probably the easiest way to identify risk, and it involves bringing together stakeholders from different departments and listening to what they have to say about the risks they feel the business is facing.
Root cause analysis
This method of risk identification is a little more complicated because it involves an in-depth analysis of the factors that contribute to the risk and finding ways to mitigate them.
SWOT is one of the most common methods of identifying risk, and businesses like it because it is self-explanatory. All they have to do is identify the strengths and weaknesses of their particular set-up as well as its opportunities and threats. The risk manager brings together employees from different departments to talk about all these things and then collates them into a single report that can help with future planning and risk mitigation.
It is a little more expensive than the risk-identification methods discussed above, and it usually involves bringing together external experts to identify risks and make recommendations as to how they can be managed. It is not an approach that many small businesses use because of the cost implications, but it is quite common in large corporations.
The nominal group technique
The nominal group technique, or NGT, is where the risk manager asks employees from different departments to write down the challenges they face and the risks they think the business will face in the future. They must do this without discussing it with one another, and they are encouraged to be as in-depth as possible. Afterward, the team gets together and discusses every point that has been raised, and each is given due consideration.
It is a handy way of identifying risks when dealing with large projects. At the beginning of the project, the team will draw out a long list of requirements needed to complete the project. Reviewing this list every few months can give insights into how the landscape has changed since the beginning of the project and what risks it is likely to face. Managers can use these projections to make plans for the future, taking into account whatever eventualities they feel may slow things down.
Risk is a part of life, but how businesses manage it is what sets them apart from their competition. Even when things are great, there’s always a risk around the corner, so businesses need to be on alert at all times. Those who see the issues beforehand have a better chance of dealing with them effectively.