Business risk management for owners of smaller companies

Being proactive, rather than reactive, is key.

When you start a small business, it’s easy to get excited about the positives: a new beginning, future growth, happy customers and profits. But it’s also important to consider the possible risks.

All businesses face risk, which is defined as the probability or threat of damage, injury, liability, loss or any other negative occurrence that may be avoided through preemptive action. Risks are commonly separated into four categories: market, credit, operational and reputational. Risks may involve internal or external factors, including marketplace volatility, changes in regulations, criminal activity, a workplace accident, an employee’s mistake, an illness or even inclement weather.

Risk can’t be avoided completely, but small business owners can take these important steps to manage it effectively.

1. Identify potential risk

While some types of risks are common for almost all businesses, others might be unique to your industry or your individual business. The Small Business Administration has resources to help you identify potential risks, such as:

• Property losses
• Business interruption losses
• Liability losses
• Key person losses (when the company owner or a key employee leaves or passes away)
• Injury to employees

2. Measure the impact of potential risks

Once you’ve identified the potential risks for your business, document how they would affect your cash flow, earnings and operations. Some risks could have a minor impact, while others could have catastrophic results. For example, if you run your business out of a home office, take inventory of all the equipment you use and what could happen if an event — a power outage, equipment failure or theft, for example — prevented you from using it. How would your cash flow be affected after an afternoon of interrupted service? After a day or a week?

3. Create and follow a business risk management plan

Develop a strategic plan for mitigating the potential risks your business faces, emphasizing the risks that would result in the most loss or damage to your business. Involve people from multiple areas of the business to brainstorm ideas and then assign responsibilities to individuals to make sure all bases are covered. Keep in mind that this isn’t a plan your small business management team can develop once and then ignore. It will require diligence and ongoing refinement and improvement.

In the above example, what simple methods could be implemented to protect your equipment? Some preventative measures might include extra security locks to prevent theft; power surge protectors or a backup generator; or investing in an equipment service plan from the manufacturers.

4. Invest in business insurance

Talk to an insurance agent or broker with small business insurance experience and find the right coverage for your business. Insurance is key to managing risk because it helps you cover financial losses and continue — or resume — operating the business, even in the event of loss, liability or disaster.

5. Hire an attorney

It’s critical to hire a good lawyer to protect your business from lawsuits and to assist you in risk management planning. Most business owners would find it hard to stay up to date on the law and the latest court cases, so it makes sense to have a professional working on your behalf. 

In addition to protecting your business, managing risk has the added benefits of helping to reduce your insurance premiums, deductibles and business downtime.

Creating a risk management plan for your small business should be one of the first tasks you take on when you start a new business, and it should remain top of mind as your business grows and changes.

Discover other ways to manage risk in your small business at usbank.com/small-business.