Risk Management for Small Businesses

Risk Management is a business practice that attempts to foresee events and circumstances that endanger your business, and prevent them from happening, or lessen their impact if they do happen.

With that in mind, there are generally two types of events – Preventable and Unpreventable.

Some examples of Preventable events include:

• The customer or client that attempts to sue you for one reason or another.
• Bad publicity surrounding an event, which can cause repercussions to your business.
• Health and safety issues.
• Manufacturing variances that reduce the quality of your product.
• Criminal activities that affect your business.

Some examples of Unpreventable events include:

• The death or disability of key members of your company
• Natural disasters (floods, fires, weather)
• Economic events (inflation, competition, taxation)
• Social events (public opinion, changes in consumer practices)

You can’t prevent a customer from suing you, but you can prevent the possible effect on your business by purchasing insurance. Health and safety issues can be dealt with before someone is hurt or injured. Installing a security system or hiring guards can prevent criminal activities. Manufacturing variances can be dealt with proactively rather than reactively.

While death and disability can’t always be preventable, the impact on your business can be dealt with through advance planning. If you are a sole proprietor, is your life and health insured? Do you have disability insurance? Are you a partnership with the partners relying on each other for the success of the business? Insurance is the answer. Again, insurance can help you get back on your feet after a flood or fire. Economic events are dealt with through advanced planning. What will you do if your top product becomes obsolete? What will you do to minimize the affect of negative publicity?

There are two key elements to risk management. Insurance and Advanced Planning.
For new businesses, insurance may seem like a high expenditure, but it is absolutely vital to the success of your business. You don’t want to see all of your hard work disappear because your business burned down, or watch your profits walk away after losing a lawsuit.

Plan for contingencies, document those plans, and put them into use. Review this document frequently to add new contingencies that you hadn’t thought of earlier and to make sure they are still relevant.

For manufacturing, utilize Quality Management instead of Quality Control. Quality Management looks at what kind of variances are acceptable, and takes action to keep those variances in line. Quality Control simply responds after the variances have exceeded acceptable levels.

The key to Risk Management is acknowledging what risks you can control or minimizing their impact, determining how you will respond to those risks, putting a plan together and implementing it, and keeping those plans up to date.