Business owners know risk is an unavoidable part of doing business. However, it can be managed and controlled. Although it is a challenge that does require time and effort, finding a perfect balance between profitability and peace of mind is essential. It is impossible to eliminate risk completely, so it is important to set realistic goals. Policies that are enacted in an attempt to fully eliminate risk may actually hurt business growth.
The Importance of Risk Management:
The common concept of risk management among small business owners involves purchasing regular insurance protection, but other aspects of protection often escape consideration. Risk management is more complex than simply purchasing insurance and implementing rules. These are both necessary parts of every plan. However, there are many other things to consider:
1. Identify Risks
Some risks are universal. However, there are also those specific only to certain types of businesses. It is important to conduct a thorough risk analysis to identify them. The best way to accomplish this is to use a standard risk checklist. Some of the most important initial risks to consider include:
- Property losses that occur from loss of use, physical damage or criminal activity
- Liability losses that happen to customers and are the fault of the business.
- Business interruption losses stemming from fires, natural disasters or other unpredictable occurrences.
- Key person losses or the loss of important employees, which results in a negative impact on the company.
- Employee injury losses that occur when an employee is injured on the job and must be compensated.
2. Determine How Vulnerable the Company is to Various Risks
Consider various risks and determine how much each would cost the company. Not all types of companies are as vulnerable as others. Companies with high vulnerability to expensive risks need to make those specific areas a strong priority in their risk management plan. The risks that aren’t worth worrying about should receive a much lower priority. Keep in mind that it’s not feasible to eliminate every possible risk.
3. Create a Contingency Plan
Implement plans that place employee safety higher than efficiency. Install a security system to protect all property from theft and damage. Avoid transactions with unknown customers. Implement plans to train supervisors to minimize loss of key employees.
4. Purchase Adequate Insurance
In addition to purchasing enough insurance, it’s imperative to purchase the right types. Some of the key types of coverage to purchase include:
- General liability insurance, which covers the legal liabilities faced from injuries to third parties. Medical expenses, property damage and bodily damage are typically covered.
- Professional liability insurance, which covers allegations of malpractice, negligence and other errors in services.
- Product liability insurance, which covers the expenses related to injuries or damages resulting from a defective product. This is essential for all companies producing tangible products.
- Commercial property insurance, which covers loss and damage costs for business properties. Business interruption is typically covered by this provision.
- Revise as Necessary
Be sure to review and update risk management plans regularly. Reassess risks and make any necessary changes. Conduct regular review meetings with department heads, owners and a risk management consultant. Be sure to inform the insurance company of any changes or new risks.
Business owners who plan to raise capital from investors must be especially vigilant in their risk management planning. Having a good plan and regular updating of the plan is important for gaining their trust and making them comfortable with the opportunity to invest.