Small Business Risk Management Guide



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When you operate a small business, it's important to have a comprehensive risk management strategy in place before a harmful event occurs. When a fire, windstorm or other unanticipated peril damages your premises, it often puts your operations in limbo. When preparing your business for sale, a proper risk management plan shall be one of your priorities.

If your product causes injuries or damage, your business suffers from the fallout. When employees are injured, you are responsible for their care and lost wages. A risk management review forces you to anticipate the potential for future losses. It encourages you to plan and implement the best methods to manage adverse events before they occur.

Major corporations hire full-time professionals to perform these tasks. If you operate a small business or sole proprietorship, you are likely to perform these duties on your own or not at all. As a small business manager/owner, you have the same risk management concerns as a larger business. Without the right plan in place, a catastrophe could force you to close your doors forever. Before you let that happen, you shall consider the potential outcome of these and other worst case situations.

  • Destruction of your premises forces you to suspend your operations.
  • Damaged or destroyed products reduce your productivity and profits.
  • Defective products become public relations nightmares and may cause damages or injuries.
  • A temporary shutdown causes you to lose key employees to competitors.
  • Injured employee claims are your legal and financial responsibility.
  • A company vehicle accident means claims, judgments, and financial losses.

Risk Management in Action

A recent energy plant fire in Pittsburg, California is a simple example of successful risk management implementation. When a steam turbine engine fire began, it triggered an automatic extinguisher system. Timely evacuation of the generator area allowed employees to escape the danger and avoid injuries.

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When the local fire department responded, they required only two hours of effort to get the situation under control. A hazmat team arrived to assess the dangers of volatile gasses. These coordinated efforts minimized the damages and the potential for future financial losses. When the plant resumes normal operations, the reopening process will run smoothly and take less time.

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The news reports of this incident didn't mention risk management, but the smooth evacuation, timely alarm, fire extinguishment systems, and hazmat team presence are evidence of a comprehensive plan. The outcome might have been far worse without a predetermined scheme for handling potentially harmful and damaging events. As with any effective risk management strategy, it's clear that the energy plant's administration team determined the potential for loss, decided how best to deal with the exposures, then executed their plan.

Your Risk Management Plan

It's important for your company to perform a comprehensive risk management evaluation before an unfavorable event occurs. If your small business budget is too tight to hire a risk management professional, you must perform critical tasks yourself. A proper review requires that you examine all of your business operations, analyze the potential for financial losses and find ways to manage them. Here are a few creative solutions to consider:

  • Employee awareness programs to encourage personal loss prevention responsibility
  • Safety programs to minimize employee injuries
  • Quality control guidelines for premises safety
  • Product production quality control to reduce customer injuries and claims
  • Alarm systems for rapid notification to fire departments and local authorities
  • Building loss reduction measures: fire extinguishing systems, firewalls, and safety glass to contain damage during an adverse event

Insurance and Risk Management

Even if your business has the assets to cover incurred losses, insurance still plays an important role. Business operations expose you, your property and your employees to a wide range of risks with the potential for ongoing financial losses. To remain in business, you must repair or replace damaged buildings, business personal property, and equipment. Employees injured during the course of their employment are legally entitled to reimbursement for medical bills and lost wages. You must defend or settle liability claims made against your company.

You can project the financial impact of some losses and set funds aside to cover the costs, but catastrophic losses can easily exceed your expectations. Insurance allows you to transfer some of the financial uncertainty from you to your insurance company. When an unexpected occurrence damages your building, your property insurance company pays the restoration costs. Your worker's compensation policy reimburses employee medical, wage losses and related expenses. Your liability carrier responds when a third party files a lawsuit or claims injury or property damage due to your business operations.

Options for Evaluating Your Business Risk

You probably started your business because you are good at what you do. Specialization gives you an edge over the competition, but it doesn't necessarily give you the knowledge to assess your risks and implement timely solutions. If you don't have the time or the desire to perform your small business risk management responsibilities, you can hire a professional. If your small business doesn't have funds to hire a full-time risk manager, you have other options.

Insurance Agent

When you apply for commercial insurance, your agent, broker, or insurance company will review your operations to determine if you are a good risk. Their commercial underwriting investigation will generate a risk management snapshot of your business and its loss potential. The risk assessment shouldn't cost you anything. Keep in mind, however, their primary goal is to sell insurance policies to cover your exposures.

Independent Risk Manager

You can hire a consultant, an independent professional to examine your business risks and recommend management solutions. The Society of Risk Management Consultants website has a roster of professionals who provide risk assessments and related services.


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