As every business owner knows, risk is an unavoidable part of doing business. However, it is manageable and controllable. Although it is a challenge that requires time and experimentation, finding a perfect balance between profitability and peace of mind is essential. It’s impossible to eliminate risk completely, so it’s important to set realistic goals. Policies that are enacted in an attempt to fully eliminate risk may actually hamper business growth.
The Importance Of Risk Management
The common concept of risk management among small business owners involves simply purchasing regular insurance protection. Other aspects of protection often escape consideration. Risk management is much 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.
Tips For Implementing A Realistic Risk Management Plan
It’s best to start with a simple plan that is easy to follow. The prime goals should be mitigation and management of business risks. After trying the plan, analyze it and make any necessary changes or additions. Consider the following steps in order to make a positive change:
1. Identify The Risks
There are some risks that are universal. However, there are also some that are specific only to certain types of businesses. It’s important to conduct a thorough risk analysis to identify them. The best way to accomplish this is to use a standard risk checklist. There is a Small Business Insurance & Risk Management Guide available from the Small Business Administration. This guide is helpful in outlining potential risks. While going through the list, pay close attention. Most business owners are able to think of other potential risks that are unique to their situation during this process. 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 the various risks and how much each one 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. However, some need much more consideration than others. For example, a paper manufacturing company should consider the risk of employees losing limbs on dangerous presses in the manufacturing line before they become concerned with possible paper cuts to fingers of employees in the inspection department. As an overall rule, the cost of preventing the risk should never exceed the amount the estimated loss would be from that risk.
3. Create A Contingency Plan
There is more to this aspect than purchasing insurance. Be sure to 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.
5. Revise As Necessary
Be sure to review and update risk management plans regularly. Reassess risks and make any necessary changes. It’s important to have 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.