Preparing for Uncertainty Part 7
By Rieva Lesonsky
If there’s one thing you can predict about entrepreneurship, it’s that it’s unpredictable. In this special series sponsored by The Hartford, we’ll help you prepare for uncertainty, minimize risks and protect your business.
You took a risk when you started your business, jettisoning the security of a 9-to-5 job for the rollercoaster ride of entrepreneurship. But what’s your attitude toward risk now that your company is up and running?
As an entrepreneur, the way you handle business risk can make the difference between success and failure. That’s where the concept of risk management comes in. In this post, I’ll explain what risk management is and how it can benefit your business.
What is risk management?
All businesses are subject to risk. The risk of burglary, fire, embezzlement or natural disaster are just a few threats that can imperil just about any business. You can choose to put your head in the sand and ignore these risks. That might work…or it might not. A better move: Use risk management to lessen the odds of these risks occurring and protect your business in case they do happen.
Risk management takes a comprehensive approach to protecting your business that involves four steps:
- Identify risk
- Assess risk
- Mitigate risk
- Insure against risk
Step 1: Identify risk
Risks can come from outside or inside your business. Examples of external risks include:
- Natural disaster
- A fire
- A power outage
Examples of internal risks include:
- Employee embezzlement
- An employee being injured on the job
- An employee stealing customer data from your records
- Death or disability of the owner or a key employee
Some risks are inherent to all businesses. Any type of business could be affected by the fire, a customer lawsuit or a data breach. For instance, a restaurant owner faces risks from contaminated food, improper food storage procedures or from serving a customer who ends up getting arrested for drunk driving. A manufacturer faces risks if its products injure or kill an end-user. A company with employees faces different risks than one without. Risk identification helps you pinpoint the risks that are unique to your business and your industry.
When identifying risk, it’s also important to consider the longer-term effects and costs. If you own a wholesale business and your warehouse burns down, you’ll have to consider the cost of replacing lost inventory and repairing your warehouse. However, there’s also the cost of shipping delays, delays in payment from customers who have received their orders and possibly even lost customers if the delays go on for too long.
Step 2: Assess risk
Thinking about all the threats that could possibly affect your business can be overwhelming—and insuring against all of them could be prohibitively expensive. That’s why you need to assess the likelihood of each risk actually occurring, the potential financial loss if it did happen, and the cost of insuring against that loss.
For example, my business is technically located in a flood zone. However, there’s never been a flood here within my lifetime. Clearly, my flood risk is much lower than that of a business owner in New Orleans, who’s almost certain to face flooding at some point in the near future. Therefore, flood insurance is much more important for that New Orleans business than it is for my business and should take up a larger portion of their insurance budget.
Your insurance company can be an invaluable resource when it comes to assessing risk. Insurers review statistical data, such as actuarial tables, as well as industry-specific knowledge to predict the likelihood of any risk actually occurring to your business.
Step 3: Mitigate risk
Once you’ve identified and assessed risks to your business, figure out how you can reduce those risks. Enlisting the assistance of a risk management expert can help. Even if you were at high risk for certain threats, the right risk mitigation policies can greatly reduce the chances of actually occurring.
Suppose you own a manufacturing business that uses heavy machinery. You have a high risk of workplace injuries. However, you can reduce those risks by implementing workplace safety policies, training workers in those safety policies, providing the appropriate safety gear, and regularly inspecting and properly maintaining machinery and equipment.
Step 4: Protect against risk
Once you’ve done everything you can to reduce the risks you’ve identified, it’s time to protect your business by choosing the appropriate business insurance. Identifying the threats to your business will help you choose an insurance provider that offers the types of coverage you need.
The Hartford offers a wide range of business insurance for the specific needs of different industries. From marketing consultants and accountants to IT companies and landscapers, you’ll find all the insurance coverage you need. The Hartford can also assist you with risk management, customizing a risk management program to meet your needs. Find out more about business insurance from The Hartford and get a quote online.
In partnership with The Hartford