In business, two things are certain: taxes and risk.
In this article, our focus in on risk – after all, there’s little we can do about the taxes.
When you’re running a business, there’re different types of risks you face. There’s operational risk, financial risk, reputation risks, compliance risk, competition risk, and economic risk.
These risks have consequences if you don’t take the right mitigation steps.
The good news is you can implement a risk management plan and prevent the worst from happening. Continue reading to learn about the importance of risk management and how to make it a reality.
Prevents Economic Losses
You’re in business to make a profit – a good profit.
Unfortunately, losses are part of the game. In fact, most small businesses lose money, which is why they have such a high failure rate.
Fortunately, there are steps you can take to protect your business from making losses. This is where risk management comes in.
When you have a proper risk management strategy, it’s easy to identify all the risks that pose a threat to your business’s economic well-being. You’ll also be able to design measures that will help you neutralize those threats.
For instance, let’s say you run a coffee shop. During your risk analysis, you’ll establish that fire is a big risk. If a fire starts in the kitchen and razes down the building, you’ll lose a lot of money, and possibly your business.
But with a risk management plan, you’ll find a way to mitigate the risks and caution your business from economic losses. You could purchase adequate property insurance, for example. If a fire engulfs your building, your property insurance coverage provider will compensate you accordingly.
You can also purchase business interruption insurance, which compensates you for loss of income when there’s an event that keeps your business from operating normally.
Protect Your Employees
Your employees are a critical cog in your business operation. Without them, most of your operations will come to a halt.
However, hiring employees comes with a number of risks, the biggest being the threat of workplace accidents and injuries. In 2018, about 5,000 employees died as a result of workplace injuries. About 2.5 million were injured.
Regardless of what you do to make your workplace safer, the risk of accidents will always be there.
Risk management enables you to identify all the risks your employees face. You can then take the right steps to minimize those risks.
For instance, to prevent workplace injuries, you’ll have to invest in employee training. The more employees know the various kinds of risks they’re exposed to and what they can do to keep themselves safer, the better.
Another risk management strategy is to purchase enough workers’ compensation insurance. When an employee is injured on the job, you’ll have to compensate them for their economic and noneconomic losses. But with workers comp insurance, your provider will compensate the victims.
Protect Your Customers
Running a business also comes with a number of risks that could affect your customers.
Here are a couple of scenarios.
You run a brick and mortar store. Customers come in every day to buy what they want. One day, one customer slides on a wet floor, breaking their back.
Did you know the injured customer can sue your business and ask for compensation? In general, operating physical premises comes with the risk of injury to you, your employees, and your customers.
Or, let’s say you run an online store. Lucky for you, you don’t have to worry about customers tumbling over and injuring themselves.
But you’re not entirely out of the woods. Your online business certainly collections customer information, such as names, email addresses, and physical addresses.
One day, an online hacker penetrates your business, steals customer data, and releases it on the web. Did you know your customers can sue you for failing to protect their personal information?
Clearly, every business faces risks that can affect their customers. A risk management plan will enable you to identify these risks and take appropriate steps to protect your customers.
Again, insurance seems to be the answer. Premises liability insurance will ensure you won’t pay injured customers out of pocket. Cybersecurity insurance will do the same when you’re facing a data loss lawsuit.
How to Implement an Effective Risk Management Plan
If you’re like most small businesses, you don’t have a proper risk management plan. You’re only shooting yourself in the arm.
The first step to implementing an effective risk management plan is to hire a risk manager. This professional will be responsible for evaluating the risks your business faces and finding ways to mitigate or eliminate those risks.
As you already know, insurance plays a big role in any risk management strategy. A risk manager will find ways to reduce your insurance costs.
For example, instead of purchasing insurance policies from commercial companies, your manager can advise that you set up a captive insurance company. When you’re an insurance captive, it means you own the company that provides you with insurance coverage. As such, you can control the pricing of the premiums and save money in the process.
Don’t Overlook the Importance of Risk Management
As a business owner, you shouldn’t overlook the importance of risk management. It’s only with a proper risk management plan that you can overcome the myriad of risks your small business faces. You’ll be in a better position to protect your revenues, employees, and customers.
Keep reading our blog for more business tips and insights.