For many small business owners, “risk management” means buying insurance. But while insurance coverage is a crucial part of any risk management strategy, it’s only one piece of the bigger picture.
Of course, as a small business owner, you likely don’t have the same training and expertise risk management professionals have. But you’re still responsible for managing the risks to your business – and if you plan to raise capital from investors, it’s even more important to have a good grasp of risk management.
So how do you think like a risk manager? It doesn’t have to be a big mystery. You just need the right mindset and a little direction. Follow these five steps to get you started in the right direction:
- Identify your risks. There are many risks that are common to most or all businesses, but others are specific to you and your line of work. As the business owner, you’re in the best position to know what those risks are. Use a risk checklist to start from, and add to it based on your specific exposures. To help you get started, see Small Business Insurance and Risk Management Guide by the Small Business Administration (SBA). Specific types of risk you need to consider include property loss, business interruption, legal liabilities, key person losses, and employee injuries.
- Assess your vulnerability to each risk. In other words, what are the odds that a particular risk will materialize, and how much would it cost you? The goal here is to quantify which risks are worth sweating over and which ones aren’t. For those that are, figure out how affordable it is to protect your company against that risk. For example, if it’s a low probability risk that would cost your company $40,000 in losses but would cost you $35,000 to protect against it, your resources may be put to better use elsewhere.
- Choose the appropriate method of minimizing exposure to each risk. That could mean taking steps such as implementing safety policies and more training, installing a security system, or avoiding dubious transactions. You also need to decide which risks you want to transfer, which risks you can retain yourself, and which risks you need to finance through insurance or other means.
- Get the right insurance. Insurance is a central part of any risk management strategy. Key types of business insurance include general liability, commercial property, and workers’ compensation. But do you also have risks that require product liability or professional liability coverage? Make sure you cover all the bases.
- Monitor and adapt as needed. Take a few days every six months or so to review and update your risk management plan. Include owners, department heads, and other key people in your company, and consider bringing in your insurance carrier for advice.
Remember, smart business owners take smart, calculated risks, and smart risk management is the key.
By learning to think like a risk manager, you’re giving yourself the ability understand your risks more clearly and make better decisions in managing those risks. When you need advice from a risk management expert, contact Heffernan Insurance Brokers.