As every business owner knows, risk is an unavoidable part of doing business. However, it is manageable and controllable. Finding a practical balance between profitability and peace of mind is essential, and attempting to eliminate every risk can actually hamper 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 more complex than buying insurance and implementing rules; both are necessary parts of every plan, but there are other things to consider as well.
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.
1. Identify the Risks. Some risks are universal, while others are specific to certain industries. Conduct a thorough risk analysis and use a standard checklist to identify exposures. While reviewing a checklist, most owners will think of additional risks unique to their situation. If your company operates online, consider resources like e-Business Risk Management Program to address technology and cyber exposures.
Common risks to consider
- Property losses from loss of use, physical damage, or criminal activity.
- Liability losses to customers or third parties caused by the business.
- Business interruption losses from fires, natural disasters, or other unpredictable events.
- Key person losses when important employees leave or are incapacitated.
- Employee injury losses when staff are injured on the job and require compensation.
2. Determine How Vulnerable the Company Is to Various Risks. Consider each risk and estimate how much it would cost the company. Not all businesses are equally vulnerable. Focus on high-vulnerability, high-cost risks first. As a rule, the cost of preventing a risk should not exceed the estimated loss from that risk.
3. Create a Contingency Plan. Contingency planning goes beyond buying insurance. Prioritize employee safety over short-term efficiency, install security systems to protect property, avoid risky transactions with unknown customers, and train supervisors to minimize loss of key employees. When appropriate, consult specialists such as Insurance for Business Management Consultants to develop stronger operational controls.
4. Purchase Adequate Insurance. In addition to buying enough insurance, purchase the right types of coverage for your exposures.
Key types of coverage
- General Liability insurance, covering legal liabilities from injuries to third parties, medical expenses, and property damage.
- Professional Liability insurance, covering allegations of malpractice, negligence, and service errors.
- Product Liability insurance, covering expenses related to injuries or damages from defective products.
- Commercial Property insurance, covering loss and damage to business property and often business interruption.
For certain storefront owners, specialized policies such as Mercantile (Lessors Risk Only) may apply.
5. Revise as Necessary. Review and update your risk management plan regularly. Reassess risks and adjust controls and coverages as the business changes. Hold periodic review meetings with department heads, owners, and outside consultants, and inform your insurer of material changes or new risks.
Business owners who plan to raise capital from investors should be especially vigilant in their risk management planning; a clear, updated plan helps build investor confidence. To compare options or ask about coverages, talk to an agent.
Frequently Asked Questions
What is the first step in a risk management plan?
Start by identifying and listing potential risks using a standard checklist, then prioritize them by likelihood and potential cost.
How often should I review my risk management plan?
Review it at least annually and after any major operational change or loss event to ensure coverage and controls remain appropriate.
Is insurance enough to manage risk?
No. Insurance transfers financial risk but should be combined with prevention, contingency planning, and employee training.
When should I involve an insurance or risk management specialist?
Bring in a specialist when exposures are complex, you are expanding operations, or you need help matching coverages to specific industry risks.