Can Small Business Finance Risks Be Measured?

Managing business finance risks is a top priority for some small business owners, but there are a number of reasons why this activity is not even considered by a large number of small businesses. Some of the possible explanations are noted below, but business risk is an unavoidable and critical issue regardless of the rationale for not actively taking steps to curtail it. The fact that many of these risk problems could be totally avoided with a nominal amount of effort in most cases only adds to the potential mystery of why there is not more risk control at the small business level. Here are three possibilities to explain what might be going on when many small businesses largely ignore risk management:

  1. A trusted advisor, banker or manager suggests that it is not necessary to be concerned.
  2. There is a lack of understanding as to why it might be important to analyze financial risks for commercial financing.
  3. Time management issues have led to a conclusion that there is not enough time to worry or do anything about this.

In addition to these three reasons, each company can have numerous unique factors that contribute to risk measurement being assigned a low priority. Two explanations that have been heard more often since the recent banking crisis are a variation of the following questions:

  • If the big banks cannot manage financial risks, what hope is there for small businesses to get these complicated problems under control?
  • If my banker is not able or willing to help with managing the business financing risks, who can help if there is not a qualified individual in my company to do this?

Because of questions and realistic concerns like this, it is not surprising that the issue ends up on the back burner. But that does not mean it is the best solution for handling the problem. Business finance risk management often requires personal involvement before a small business owner understands what the issues and problems are. This is not unlike many situations in which active participation leads to better comprehension of the subject matter. It seems to be true whether we are talking about learning a foreign language or getting a better grasp of how to reduce business risks. Here is an anonymous quote that helps to reinforce this observation:

  • "I hear and I forget. I see and I remember. I do and I understand."

As a final note regarding the question asked in the title of this article, commercial borrowers and business managers are likely to have more success in assessing business finance risks if they assume a personal and active role in risk management.