When entrepreneurs start a small business, most of their attention is on the positive possibilities the business promises: Profit, success, a new beginning, and happy customers or clients. But it’s also important to protect a business against the “what-ifs,” or in other words, manage the risk that the business may encounter.
All businesses are exposed to risk, which is the probability or threat of damage, injury, liability, loss or any other negative occurrence that may be avoided through preemptive action. Risk is commonly defined as four categories: Market, credit, operational and reputational. It might result from either internal or external factors, including marketplace volatility, changes in laws and regulations, a criminal activity, a workplace accident, a manager or employee’s mistake, an illness or even inclement weather. Risk can’t be avoided completely, but small business owners can take these important steps to manage risk effectively.
1. Identify potential risk.
While some risks are common for almost all businesses, other types of risk might be unique to your industry or your individual business. The Small Business Administration publishes a Small Business Insurance and Risk Management guide that can help you identify potential risks, such as:
Business interruption losses
Key person losses (when the company owner or a key employee leaves or passes away)
Injury to employees
2. Measure the impact of potential risks.
Once you’ve identified the potential risks for your business, document how they would affect your cash flow, earnings and operations. Some risks could have a minor impact, while others could have catastrophic results.
3. Create and follow an enterprise risk management plan.
Develop a strategic plan for mitigating all of the potential risks your business faces, emphasizing the risks that would result in the most loss or damage to your organization. Involve people from multiple areas of the business to brainstorm ideas and then assign responsibilities to individuals to make sure all bases are covered. Keep in mind that this isn’t a plan your business can develop and then ignore. It will require diligence and ongoing refinement and improvement.
4. Invest in business insurance.
Talk to an insurance agent or broker with small business insurance experience and find the right coverage for your business. Insurance is key to managing risk because it helps you to cover financial losses and continue operating or resume operating the business, even in the event of loss, liability or disaster.
5. Hire an attorney.
It’s critical to hire a good lawyer to protect your business from lawsuits and to assist you in risk management planning. Most business owners would find it hard to stay up to date on the law and the latest court cases, so it makes sense to have a professional working on your behalf.
In addition to protecting your business, managing risk has the added benefits of helping to reduce your insurance premiums, deductibles and business downtime. Creating a risk management plan should be one of the first tasks involved in starting a new business, and it should remain top of mind for a business owner as the organization grows and changes.