Risk is one of the most overlooked areas in small businesses in spite of the fact that it is clear to most small business owners that operating any business involves risk. While taking a risk and winning is fun, prudent business owners take care to minimize the risk, just as you would in any other type of risky venture you undertake. A good risk management system is a continuous process of analysis and communication.
A search for risk management on the internet turns up a very diverse set of links, none really addressing comprehensively the risks a business should consider. Some topics that surface are insurance, environmental issues, OSHA standards, financial safeguards, security services, backup systems and government regulations – all of which are valid risk control systems, but are specialized areas for consideration. Part of the difficulty is that each business will have different types of risks, so it is difficult to generalize. Insurance covers the ones that are most common. Specialized insurance for particular risks that are inherent to your particular field of endeavor is also available for some businesses. However, insurance is only part of the package you as a business must consider. Contingency planning for other potential hazards is just as important as insuring against losses.
Sloppily thought out risk management plans are almost as bad as none because they can be time consuming with no long term benefit. One business backed up its data from its computer on a date storage device and stored the device in a nearby vault. The vault was closed and sealed when they left for the night. When the toilet water main broke during working hours and water rushed into the whole floor of the building, the vault filled with filthy water just like every place else. The computer operator only had enough warning to flip off the electricity. The computer was a loss and it took months to recover the data lost. The company had a contingency plan for a corrupted database, they just were not ready for a flood disaster. While there is always something that unanticipated that can happen, planning for the worst case will help you through many a bad moment.
You prepare for marketplace risk through your business plan. In the same way you need to prepare for the risks of illness, disability, damages, losses, injuries, and even disasters. A good risk management system not only has adequate insurance coverage to compensate you for losses which might occur, but it also includes a plan to prevent losses, if possible, and to manage unexpected events as they occur.
Setting up a risk management system
Your overall risk management system, while it does not need to be formal, needs to have contingency plans in place for whatever “surprises” might occur and employees need to be trained in how to handle these “surprises.” What do I mean by “surprises?” It could be someone entering your retail store with a gun and asking for the all the money in the register. It could be the river in town overflowing and flooding your place of business. It could be you having a heart attack unexpectedly. It could be your best supplier closing its doors.
Risk management involves five steps:
Formulating strategies to limit it
Carrying out specific tactics to implement those strategies
Continuously monitoring the effort
Does this sound a little too complicated for your small business? It doesn’t have to be. Here is how you can apply this wisdom in a simple way initially that will set you on the right path as you grow.
A good place to start is with your business plan. If you don’t have one, do it now. Reading through your business plan with an outsider’s eye gives you a good overview of where some of the problems might arise. Think of yourself as a banker deciding to fund the business, what would you worry about happening that could cause this business to default on its loan? This is not a time to try to ignore dire possibilities. I promise you something you didn’t anticipate will happen. The more backup plans and alternatives you have available, the better off you will be when it does.
While you can’t anticipate everything, a good brainstorming session in which you look at “what if thus and so happens” will go a long way towards helping you plan for some of the emergencies that arise. If possible, include others who have very different perspectives in this brainstorming session. Taking some time in your startup phase to go through this “what if” process may even alert you to some unanticipated outcomes that indicate a need to modify your business plan.
There are many businesses you could contact to provide risk management consulting for you. The difficulty is that many of these businesses are also highly specialized. You are in the best position to assess your risks. I, personally, would save the consultants for the time when your business grows to a large enough level that you are considering going public or have outgrown being a small business. You can also buy many complex computer simulation models for anticipating risks. While these are great tools, they are also time consuming and expensive. Save them for later. Be thorough, but go for simplicity.
From your brainstorming session you should have developed a list of all the possible risks you need to manage. Using these lists, decide what action or coverage is needed for your business to handle each possibility that you outlined. Consider alternatives. For instance, a fire alarm system may greatly reduce fire insurance or may negate the need for it at all. Once you have this list you are ready to look at what you need to put in place to manage your risk.
Risk management tools
The most common tool used in risk management is insurance. Besides the standard health, life, and possibly disability insurance, you need to look at the types of liability and property insurance you may need. Specialized insurance for particular risks in your business can also be necessary. For instance, if you have a chemical component of your production process, you may want special toxic risk insurance. Think comprehensive, then pare it down to fit the level of risk you are comfortable with. Many people prefer a comprehensive policy that has a large deductible which reduces the cost of the policy.
As with any purchase, get a number of quotes – and don’t choose the cheapest one. No two policies are identical. Look carefully at the pluses and minuses of each policy, the agent, and the insurance company before making a decision. Be certain to arrange for the insurance coverage to start before you open for business. This seems like common sense, but in the rush to get money coming in the door it is often put off. It may take some time for the policy to be written if valuations need to completed or other information checked. Do not expect to decide and have a policy in place the next day.
You still need to deal with those risks you didn’t insure against. Each needs a contingency plan; i.e., what are you going to do if this event happens? Write the plan down. Then train every employee what to do in the event something unexpected happens. If a robber comes in and demands the cash in the cash register, what action should they take? If the computer shuts down and won’t reboot, what do they do? Put the plan in a place that it is easily accessible and have an extra copy in a safe location. Additionally, you will want a good accounting and financial control information system to alert you to problems that might be arising in cash flow, thefts, fraud, or other financial trouble spots in the business.
Your insurance and your contingency plans are your risk management system. Don’t just put them in a safe place, however. Make it an annual commitment to review the system and update it as necessary. No startup is a static venture. Likewise the components of the startup should also not be static. Involve your employees as much as possible. They, more than anyone, can spot the flaws that can be tomorrow’s disaster.
Should you need additional financing at some point, having a good risk management system in place will impress the lender and may make the difference in obtaining the funds your need. In fact, a good risk management system should provide the information you need to know exactly when you need to seek additional financing and give you as very clear picture of what your needs will be. It can be an information system about how your business is doing as well as a system to control risk.