How to use a business risk assessment to make financing decisions

Running a small- and medium-sized business comes with risks. Take a bicycle shop owner that decides to set up shop near a rundown waterfront. She opens banking on the city revitalizing the waterfront. And when the city cleans up the waterfront, adding new, tree-lined bike paths, she sees her business profits skyrocket. On the flip side, what if that same small business owner loses 50% of her inventory when a faulty outlet causes an electrical fire in the shop. Or, unexpected shipping delays during her business’s peek season means she doesn’t have enough bikes to fill demand.

Identifying and assessing potential business risks before they happen, helps you plan for the unexpected – and minimize the impact. Here are some common questions and answers about creating a business risk assessment.

What is a business risk assessment?

A business risk assessment is an exercise that helps an organization pinpoint potential risks and gauge the financial impact of those risks. An important part of performing a business risk assessment, is identifying potential cash flow problems and making proactive financing decisions now that can help your organization when faced with the unexpected.

What are the types of risk?

In general, there are two types of risk that can impact an organization: internal and external.

Internal risks are those that come from within an organization, and, for that reason, it can often be easier to plan for them. Some common internal risks are:

• Financial risks (such as revenue drops)
• Marketing risks (such as an underperforming campaign)
• Operational risks (such as supply chain issues)
• Workforce risks (such as high employee turnover)

In contrast, organizations have little or no control over external risks, which come from the outside world. External risks include:

• Economic changes (such as an economic recession)
• New competitors (such as a major corporation entering your industry)
• Natural disasters (such as a fire, tornado, or flood)
• New regulations (such as a new regulation from OSHA)
• Changes in consumer demand

Different industries will likely want to focus on the forms of risk that impact their specific industry. For example, if you’re in manufacturing, you’ll likely want to pay particular attention your supply chain risks. In contrast, you’ll want to focus on how high employee turnover can impact your cash flow if you’re clothing retailer. For more about these risks, see the U.S. Small Business Administrations Risk Management for Small Business guide. 

How do you perform a business risk assessment?

Conducting a business risk assessment is a straightforward process. There are 5 key steps, which include:

1. Identifying and documenting the risks your business is most likely to encounter
2. Estimating the financial impact of each risk on your organization
3. Creating two lists: the first list will rank risks in terms of how likely they are to occur and the second will rank risks by their potential financial impact
4. Identifying the levers in your organization that you can pull to quickly mitigate each top risk
5. Assigning someone to actively monitor your organization’s top risks

Business risk assessments aren’t a one-and-done process. A crucial part of managing risks is reviewing and updating your organization’s business risk assessment at least once a year. By doing so, an organization can stay on top of any emerging trends that could negatively impact cash flow.

How can a business risk assessment help you make financing decisions?

While most risks have some financial consequence, ones that directly impact revenue or expenses are the most significant. That’s why having a flexible source for credit before the unexpected happens, can better help you navigate the financial toll.

For example, a small business credit card can help you make ends meet in the event of a sudden, surprise downturn. Or, if a coming financial risk is likely, but won’t seriously impact your cash flow. If you identify a risk that isn’t imminent, you might consider applying for a bank loan or line of credit as it typically takes longer to receive approval for each than it does for a small business credit card.

Amazon Business has several financing options that can help small- and medium-sized businesses manage their cash flow, including:

• Amazon Business Prime American Express Card Members can take extra time to pay interest free on U.S. purchases at Amazon Business, AWS, Amazon.com, and Whole Foods Market. There’s no annual fee for the Card.¤ Terms apply.  
• Amazon Business’s Pay by Invoice credit line, an invite-only purchasing line, offers 30-day payment terms to eligible organizations (additional extended payment terms available with an eligible Business Prime membership plan). Terms apply.

Taking a proactive approach to identifying, managing, and responding to risk is important whether your organization is a hundred-year-old ice cream shop or a new, independent bike shop. While there’s no crystal ball that can allow a business to prepare for everything the future holds, a business risk assessment is a step you can take immediately, giving your organization clear strategies about how to respond to risk.

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