It’s not for everyone to take the plunge and start a small business. Ever wonder why? Why do some people choose to work for someone else instead of for themselves? Security is one of the major reasons. The worst thing that could happen to your job is for the business you work for to go under. A risk management plan should be one of the first steps any small business owner makes on their entrepreneurial journey.
You could lose a lot more if the business you run and own fails. Simply put, starting a small business can be risky and there are very few guarantees.
There are many risks that all businesses, large and small, can face. One can argue that small business owners are more at risk than large corporations because any financial loss or financial problem can cripple their company.
What is risk management?
Risk management is a process. This includes identifying and evaluating your business risks and then deciding how you will deal with them.
Did you know that 42% fail in startups because there wasn’t a market for the product they wanted to sell? Although this may sound like a risk that should be identified early in the business’ life, you’d be surprised at the number of businesses that don’t do the necessary market research to determine if it is.
Your business should be able to easily follow a risk management program when it is done. The plan will allow your company to establish procedures that help minimize risks that can be avoided and minimize the effects of those that can be.
Risk management is a continuous process that never ends. As your business grows and changes, risks must be evaluated continuously. Let’s look more closely at how to create and implement a sound risk management plan.
How to create a solid risk management plan
There are three steps you need to take to create a solid risk management program for your small business.
Identification
The process requires business owners to create a comprehensive list of potential risks that could affect their businesses. These risks could relate to your business strategies and their effectiveness, risks that can affect your business’s day-to-day operations, regulatory risks related to laws and compliance, reputational risk, financial risks, etc.
Evaluation
After identifying your risks, it is time to analyze them. It is important to consider how likely they are to occur, and what the consequences are if they do. You can make an informed decision about how to reduce your risk.
Mitigation
This stage is where you recommend concrete actions to take about the risks you have identified.
Management of risk is an ongoing process
This process doesn’t end as long as your business continues to run, as we have already mentioned. You must continuously monitor and adjust your risk management plan to ensure that you protect your business as fully as possible.
Let’s now look at the most common ways businesses can mitigate their risk.
Common risk management tactics
After your small business has assessed and identified its risks, you can now decide how you will address them.
There are generally four main strategies that are used most often:
Risk avoidance
If you have assessed the risk as potentially volatile and see the potential for financial damage to your company if it fails, it is probably best to avoid it. If you own an ice cream shop, for example, you might consider adding sweets or baked goods to your menu. It might be best not to take this risk if you’ve conducted research with customers and haven’t noticed much interest.
As we mentioned, it is important to review all potential risks regularly. While this may seem like a risky idea at the moment, it could be less risky in the future if your ice-cream business is growing steadily and you are seeing consistent revenue increases each year. This will make expanding your offering less risky financially because you have more money available to optimize your business.
Risk reduction
Reduce means to do everything possible to reduce risk. If you don’t want to try new products in your ice cream shop, but still want to reduce risk to increase sales, you have options.
You could add new toppings and flavors to your ice cream offerings. You haven’t done anything that could put you in a financial bind if you don’t succeed with the change.
Risk acceptance
You’ve reduced your risk in the above example by minorly changing your offer. By adding new toppings and flavors to your menu, has made it acceptable to accept this risk. Acceptance is the best approach to dealing with risks that won’t cause any damage, even in the worst-case scenario.
Transference of risk
When someone talks about purchasing business insurance, they mean risk transference. Your small business pays to transfer risk to an insurer when they purchase a policy. It doesn’t matter how small or large your business, buying business insurance to protect business risks is a necessity.
Insurance’s role in risk management
After identifying and evaluating your risks, it’s easier to understand which risks should go to an insurance company. A majority of small businesses, especially those just starting, will purchase a Business Owners Policy (also known as a BOP).
It is an insurance bundle that provides three policies: general liability insurance and property insurance. Because they offer small businesses basic coverage at a fraction of the cost of buying those policies individually, BOPs are very popular.
Your business’s risk profile will determine the cost of your BOP. However, regardless of that price, it will still be less expensive than purchasing general liability, property, and business interruption insurance separately.
Let’s look at some of these risks that a BOP typically covers:
General liability
This policy covers bodily injury and property damage to third parties. This insurance policy covers you for legal costs and settlements if a customer injures himself in your store.
Insurance for commercial property
Unexpected and often unavoidable risks can cause business problems such as fires, weather damage, natural disasters, or weather. Your insurer will pay for the costs of inventory and property damage if you have purchased property coverage. This covers the cost of weather-related risks such as vandalism, fire, lightning, power outages, and other unpredictable events.
Insurance for business interruption
Property insurance can help you rebuild your business if it is damaged by an electrical fire. What will you do? You will need to ensure your business against losses such as income loss, rent, and loans. This insurance will help you keep your business afloat so you don’t lose any money.
Every business has different insurance requirements
There are many insurance products available to help mitigate business risks. No two businesses are the same.
A risk management plan created for a law company will differ from one for a realty firm. For example, two retail businesses could face different risks depending on how many employees they have and whether they sell online or offline. What products they sell also plays a role.
It is important to speak to an experienced broker who is familiar with the industry you are in to receive quality recommendations about coverage that will protect your company from both serious and often uncontrollable risks.
Proper risk management reaps many benefits
A good risk management plan can help you avoid potential risks that could hurt your business. Proper risk management can also have positive impacts on other areas of your business, such as:
Improved finances
If your business has a solid risk management plan that is well-executed, it can avoid many pitfalls that could have adversely affected your bottom line. Banks and other financial institutions will be more willing to lend to companies that have successfully managed and transferred their risk.
A stronger bran
Businesses that can manage their risks well are more likely to be stable, successful, and financially sound. A small business that is proactive in managing its risks sends a message to its employees, customers, and partners that it values its reputation and success.
Efficiency increases
Your business’s efficiency can also be revealed by the risk assessment process. This allows you to identify and fix any problems that could be affecting the quality of your product or service. Risk identification techniques can help you identify inefficient financial processes and areas where money is being squandered.
Your business’ success depends on your risk management plan
You can learn more about your business by performing a risk analysis and creating a risk management program for your small business. It also allows you to get to know your business partners and customers better.
These additional benefits only magnify the importance to create a plan for managing all the risks your business may face.
Disclaimer. The opinions and views expressed in this article are the authors Judge Napolitano.
