Risk Management may sound like a process that involves statistical analysis and complex algorithms but in reality we all practice some form of risk management every day of our lives. Risk Management is defined as the process of analyzing exposure to risk and determining how to best handle such exposure. When we cross the street a prudent person looks both ways and determines what point in traffic he can cross without risking himself any bodily harm. Local municipalities are participating in risk management when they develop disaster preparedness plans. When a business implements a risk management strategy it not only must consider physical risks to people and property but it must also address the economic risks associated with a market downturn or negligent behavior by the business itself.
Insurance is logical first step to managing the risks of a small business. In some cases it is up to the businesses to decide which types of insurance are needed to give the business peace of mind but in many cases a business must purchase insurance because it is mandated by law or required by funders. Insurance for small businesses include but are not limited to the following:
The form of business ownership will impact the degree of risk that a business owner and the businesses principals are exposed to. The simplest form of ownership is a sole proprietorship, however, the owner of the business can be held liable for the activities and debts of the business in a way that puts all of the owner’s personal assets at risk. Partnerships are also limited in their ability to protect the assets of the partner owners. Corporations, S Corporations and Limited Liability Corporations (LLC’s) protect business owners and the principals of the business from personally being sued or from personally being held responsible for the debts that accrue from the business. Limited partnerships will provide protection to investors or limited partners but the general partners have a similar exposure to risk as a sole proprietor or business owner engaged in a partnership. As is the case with any legal matter related to business it is always wise to work with an attorney to decide the form of business ownership that is the best fit for your enterprise.
Perhaps the best practice for limiting or managing risk exposure to a business is to simply anticipate and plan for all bad outcomes. If your business relies on one particular vendor or employee how would you handle the loss of that particular person? If your business’ success depends on a unique innovations or concepts, have you taken the steps to protect that innovation otherwise called intellectual property from pirating by the competition? Trademarks, patents and copyrights are all forms of intellectual property protection that are ways to legally protect a business’ proprietary ideas. Computer networks and the Internet represent a host of issues that require some sort of risk management plan. Is the information located on your computer network backed up adequately? If you are among the growing number of web based enterprise it is important to prevent any interruption to business due to server failures. Think, also, about how you will protect yourself from credit card fraud and provide security for your client’s personal and financial information.
No business should expect 100% protection from all bad outcomes. The process for managing risks should always involve weighing the likelihood of the bad outcome against the cost of preventing that event. Risks in business are unavoidable. The key is to minimize their impact to the enterprise.
Prepared by Dar Knipe, University of Illinois