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Growth = Complexity = Risk. Managing business risks for start-ups and other fast growing companies
Written by Peter Deans, Director of Notwithoutrisk Consulting, February 2020
Small businesses and start-up ventures face unique business challenges. They are, by their nature, smaller enterprises without the established management or financial resources of larger, established businesses. This will often limit the investment a business can make in range of initiatives – be they sales & marketing, capital items, technology and management infrastructure. This in turn can impact on a range of business management and growth initiatives.
Many years ago, Harvard Business Review published an outstanding article, ‘The Five Stages of Small Business Growth’1 by Neil C. Churchill and Virginia L. Lewis. It outlined the five stages of growth small businesses face, and issues to be addressed at each stage.
The five stages of growth, in order, were:
• Resource Maturity.
The first two stages are the most relevant for start-up businesses. In the Existence stage, according to the authors, the “main problems of the business are obtaining customers and delivering the product or service contracted for” as well as having “enough money to cover the considerable cash demands of this start-up phase”.
In the Survival stage, “the business has demonstrated that it is a workable business entity” and the focus is on “whether it can, at a minimum, generate enough cash flow to stay in business and to finance growth to a size that is sufficiently large, given our industry and market niche, to earn an economic return on our assets and labor.”, stated Churchill and Lewis. The authors could never have predicted the relevance today in the start-up and tech space of their framework!
The framework highlights how as start-ups grow, trade-offs continue to have to be made on where to reinvest scarce profits and cash flow. One of the key questions business owners and leaders face on this journey is how - and when - to build out infrastructure in risk management and what form this should take.
The reality of rapid growth is that growth inevitably results in business complexity, which in turn creates increased business risk. There comes a point where it will be necessary to consider an overall enterprise wide (or a co-ordinated) approach to the management of risk. The activity is referred to formally as Enterprise Risk Management. It is the overall approach and end to end process of the identification, assessment and management of risks arising in the operation of a business or enterprise.
Even before establishing an enterprise wide approach, business owners and managers can, in the first instance, simply consider what can go wrong with either existing business practices, or with the design and implementation of any new business models, initiatives or investments. The full range of possible business and risk outcomes need to be considered. This provides a basis for considering what risk mitigations strategies can be taken. For example, business plans can be tailored or changed, or the risk profile of the initiative or investment can be accepted (eyes wide open).
For start-up ventures, the initial design of the business model provides an opportunity to implement upfront risk mitigation techniques. A more structured approach to the enterprise wide management of risk is an important step in establishing a sustainable and robust business. The steps below provide a road map for companies looking to implement processes for the management of business risks for the first time.
Each of the steps can be quickly undertaken and will provide immediate, tangible business outcomes.
1) Initial Risk Management Workshop(s)
Conduct an initial workshop (or series of workshops) to assess the business risks the business or venture faces. The 52 Risks® framework (click here) is a useful tool to assist systematically going through each Strategic, Financial and Operational Risk.
Discuss each risk category, identify the key business risks in each category (there is often more than one), rate each risk and agree on any action to be taken. This can include additional work on understanding a business risk more.
2) Develop a Risk Management Strategy or Action Plan
Using the outputs of any initial risk management workshops and the existing understanding of the business, either write a Risk Management Strategy for the company or simply prepare an initial Action Plan.
The strategy or action plan should document the key business risks that the company needs to manage, and the proposed business strategies and actions.
For larger, more established businesses this should document any risk management processes in place, key business polices and roles and responsibilities for the management of business risks.
For start-up ventures a simple Action Plan of things to be done, by when and by whom will suffice.
3) Allocate Responsibility for Each Business Risk
As with any business strategy or initiative, it is important to allocate responsibility for management of each identified business risk.
Strategic Risks can be allocated to specific individuals (for example the CEO) or groups of people (the Board, key executives or a project team).
Financial Risks are naturally best allocated to the CFO, Finance Director or Finance Manager.
Operational Risks need to be carefully assessed to identify the best owner of each risk category. Operational Risks cover a diverse group of risks than can span a wide range of operational, supplier and business partner, technology, regulatory, and employee risks.
4) Establish a Management Rhythm
The management of risk is not set and forget. The final step in the road map is to establish a management rhythm.
Firstly, identify regular forums to discuss key business risks, receive updates on any changes since the initial workshops, and review any management reporting in place.
Secondly, progressively develop and implement ‘fit for purpose’ risk management reporting. This will depend on the nature and size of the company.
Best practice for established, larger companies will be to also conduct half yearly or annual risk management workshops. These workshops will revisit the risk assessments undertaken in the initial workshops. It will, however, be of benefit for smaller, start-ups to have a formal process to periodically re-evaluate its initial risk assessments.
The above steps outlined will provide start-up and other fast-growing businesses with some practical steps and guidance on how and when to build out risk management infrastructure across the business.
For more information on the 52 Risks® framework click here. The 52 Risks® website has additional tools and resources to assist firms and organisations more effectively manage business risks click here.
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