Risk Management is Key to Business Growth
Risk Management is Key to Business Growth
You start a business because of the potential to reap significant rewards. But, with rewards comes commensurate risk. As your business grows, so too does your risk exposure. However, risk can be managed, at least to the point where you know what they are, and you can take steps to minimize their impact on your business. It’s difficult to eliminate risk without adversely affecting your business’s growth. Still, with a sound risk management plan, you can balance the need to protect your business with your growth ambitions.
Risk Management is More than Insurance Coverage
A big mistake business owners make is limiting their risk management to purchasing different types of business insurance policies. While that is undoubtedly a step in the right direction, it falls short of what is needed to protect the business. Risk management is about understanding your business’s risk exposure, quantifying the potential financial impact, finding the most effective and efficient ways to mitigate the risk (which may or may not include purchasing insurance), and continuously monitoring your risk management plan.
Risk management can be very complex. Larger businesses are better served by hiring risk management specialists to develop and assist in implementing a risk management plan. However, for small businesses trying to get to the next level, an initial risk management plan can be as easy as following these simple steps and then building on them as needed.
Identify Your Risks
Most businesses share the same type of risks. However, some risks are specific to an industry or a type of business. The first step is identifying all risks that could impact your business. You can first look at some of the more common risks, such as
Property losses: Physical damage to your property requiring replacement or repair
Liability losses: Liability claims arising from damages or injury to others by your company or your employees
Business interruption: Financial loss resulting from an interruption in your business operations due to an event such as a fire or natural disaster.
Key person loss: Financial loss or costs involving replacing a key person lost to sickness or death.
Employee injuries: Costs incurred when an employee is injured on the job
A detailed checklist of potential risks can be found on the Small Business Administration website.
Weigh Probabilities and Costs of Each Risk
Some risks have a high probability of occurring, while others are less likely. You have to weigh the probabilities of a risk and its potential financial impact to determine whether it’s worth the expense of trying to protect against it. Regardless of cost, high-probability risks should prioritize over low-probability risks. If a low probability risk has a $25,000 financial impact but costs $20,000 to mitigate, it isn’t worth the outlay.
Develop Risk Management Plan
Your risk management plan must consider more than simply purchasing insurance. It should incorporate policies and procedures across all facets of your business, including:
- Employee education or risk avoidance
- Creating a culture of safety
- Security systems to protect property
- Training managers and key personnel on roles and responsibilities
Get the Right Kind and Amount of Insurance Coverage
The most efficient way to minimize your business’s financial exposure to most risks is by transferring the risk to an insurance company. Key coverages include:
General liabilityto protect against liability claims, including property damage, bodily injury, medical costs, and legal expenses.
Product liabilityinsurance covers liability claims arising from injury or damage caused by a product your business sells or manufactures.
Professional liabilitycovers claims related to services, such as malpractice, errors, and omissions.
Commercial property insurancecovers lost or damaged property, including vehicles, equipment, and buildings. Some commercial property insurance may also cover business interruption, but if not, you should get separate coverage.
Monitor and Manage Your Risk Management Plan
Your risk management plan needs to be reviewed periodically, preferably every six months, so it can be updated as required. That includes identifying new risks and reviewing current risks based on the changing conditions in your business. As your business grows, the costs of risks usually increase. Hence, you need to check your insurance coverages to ensure they reflect your actual financial exposure.
At some point, you may find it beneficial to have a risk management consultant sit in on your reviews to ensure you have properly and efficiently covered your risks. Some insurance companies will provide risk management experts to help you review your plan.
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