The Importance of Including a Risk Analysis in a Business Plan
Posted by Ellen Arndt on October 6, 2009 in Business Start Up Advice [ 0 Comments ]
With the ongoing recession, it is critical for existing and new business owners to carefully analyze the risks prior to entering the marketplace and how they intend to overcome these challenges, or barriers to market. Not every business plan service includes a risk analysis, but as an experienced business plan writer, I argue that it is necessary to acknowledge any risk(s) associated with expanding or commencing a business. The technique of building a risk analysis may cause some business owners to cringe – especially those who are exuberant about their concept and see nothing in the way of jeopardizing their ability to thrive in the marketplace. However, that is not always the case.
Business owners need to be well-prepared to create a contingency plan in case things do not go according to plan. What do I mean? Maintaining a sustainable cash flow, unforeseen market circumstances, fierce competition, utilizing the right marketing methods, etc. To properly mitigate these market risks – the owner must carry out a plan of action based off of the contingency proposal to overcome potential risks that make their business vulnerable.
The risk analysis inserted into a business plan document should include at least three market risks specifically tailored to the business concept emphasized in the plan. It is up to the owner and/or management team to look at the more pressing risks facing their industry entrance. Commonly used risks include lean capitalization, the economic recession (slow times), competition, and the owner’s ability to successfully oversee day-to-day operations. Other risks, for such businesses like retail stores, eating places, and independently owned medical clinics entail obtaining a substantial customer/client base, slow industry traction, and how to advertise to the target audience. When speaking with a client, I ask them questions to engage then with confronting market risks, i.e. “How do you intend to rise above competition?”, “How will you draw in customers?”, and “How do you intend to obtain enough customers to sustain business and generate a strong profit?” Their answers are usually their planned action in overcoming these risks.
According to information submitted by the Small Business Administration, business plans should include a competitive overview, risk assessment (or analysis), and a contingency plan once the writer has collected enough data to possess a more thorough understanding of the business’ position and what it will need to focus on or strive for to supersede its competition in an effort to become a profitable entity.