Risk is an inherent part of being in business. It can be managed and its adverse outcomes can be mitigated. The greatest challenge for small business owners is to find the proper balance between peace of mind and profitability. Trying to completely eliminate risk from your business is unrealistic and can be prohibitively expensive or cause you to institute policies that may be so risk averse that your business never grows.
When many business owners think about “risk management” it’s usually limited to purchasing standard insurance protection without much consideration for other ways to protect the business. Risk management can be very complex, but it doesn’t have to be at first. Get started with a simple, easy to follow plan for managing and mitigating business risks and if needed expand from there.
Take these steps to put an initial risk management plan into place at your company:
First: identify risks
Some risks are common to most or all businesses. Others are very specific to your business and only you as the owner can know them. The best way to approach this is to use a standard risks checklist as a start and then add to it based on your specific expertise. The Small Business Administration provides a Small Business Insurance and Risk Management guide which addresses potential risks.
Some initial risks to think about are:
- Property losses – typically occur from physical damage, loss of use and/or criminal activity.
- Business interruption losses – occurs if your business stops selling for some reason (say because of a fire). In addition to the property losses incurred, the company would not be able to produce goods and sell them. This “interruption in your business activities” can be protected.
- Liability losses – refer to legal liability for damages or injury caused to others by your company.
- Key person losses – refer to the costs associated with an important employee or owner becoming sick, disabled or dying. The impact of a key person loss on a small business can be catastrophic.
- Injury to employees – refers to the costs associated with an employee becoming injured while at work.
AuditNet.org provides a good risk assessment survey and mapping document at no cost for download.
Second: determine your company’s vulnerability for each risk
Vulnerability is a function of probability – what are the odds that a particular risk will materialize- and cost – how much does your company stand to lose as a result. The goal of this step is to quantify which risks are worth worrying about and which ones aren’t. For the ones that are worth worrying about, the question becomes how affordable is it to protect your company against that risk. If a particular risk has a low probability of occurring and if it did would cost your company a maximum of $50,000 in losses but it will cost $45,000 to protect against this risk, it may not be a good use of resources to protect against it.
Go to the article: Risk Management 101 for Small Business Owners