SBJ: The Four Ways To Manage Risk

Industry Insight

?KennyBY: KENNY GOTT

 

     Risk comes in many forms for all of us, including business owners who have a special set of additional risks—industry changes, competition, fluctuations in demand, legal problems, fraud and theft, natural disasters, supply chain problems and other economic turmoil such as inflation and upward pressure on payroll costs, and many others. Business owners are compensated for the risks they take…but only if they can successfully navigate through them. Here are the four ways to take control, for business owners and for the rest of us too.

 

  1. Avoid risk. Don’t get in fist fights, don’t parachute or ride bucking broncos. If you want to be extra careful, don’t drive a car, and don’t own a home or business. (Obviously some hazards are easier to avoid than others!) In the real world of your business, risk avoidance means doing regular assessments to head off trouble before it finds you: inspect your worksite to identify and eliminate potential physical hazards to employees, equipment, inventory, and the building; stay compliant with industry regulations and other legal requirements, especially when they change; protect physical and cyber access when you lose an employee (change locks, change passwords, whatever makes sense for the situation); carefully design and implement safety protocols with the help of experts in your industry, and make sure staff are trained on those procedures. Use your imagination—what could possibly go wrong, and how can you prevent it?

 

  1. Reduce risk. The next best thing to dodging or eliminating a risk is to keep it to a dull roar…so wear a seat belt and make sure your smoke alarms are in good shape. For your business, risk reduction may mean subscribing to legal compliance update newsletters for your industry so you can stay on top of changes; keeping abreast of what your competition is doing to expand their footprint (make adjustments to avoid getting stepped on!); having robust cybersecurity measures and keeping them updated; implementing controls on business cash and banking procedures to prevent or reduce mistakes and fraud. Risk reduction can also mean having processes ready (and trained) when problems do happen, for example emergency procedures for workplace injuries and equipment failures. Having a good attorney and accountant, and not being shy about calling them when in doubt, can help you reduce the impact of all kinds of potential problems. Look around, imagine bad case scenarios, and do what it takes to cut the chances of those things happening…and do this on a regular basis.

 

  1. Share risk. This generally means paying premiums to an insurance company to reimburse you if a risk results in financial loss. The basics for business owners are property and casualty insurance and/or general liability insurance, workers compensation insurance, and health insurance. Many also purchase business overhead insurance which helps pays the bills when a natural disaster shuts down operations for a period of time. Disability insurance (not just for business owners) replaces a portion of your income if you are injured or ill; life insurance on key employees can help with hiring and training a replacement, and for example replacing revenue from a key salesperson in the event of untimely death; life insurance on the business owner can fund the transition to successors you’ve already identified (as part of your effort to reduce the risk of problems for the business if something happens to you). There are now even insurance policies to share the risk of a ransomware attack. But understand you may not need every kind of insurance under the sun…and remember you’ll still also want to avoid and/or reduce those insured risks as always, because “shared” risk means you will still have some financial skin in the game in the form of copays and/or deductibles—and loss claims can lead to increased insurance costs. Evaluate your unique risk exposure profile, and talk to experienced professionals to determine which insurance products may make sense for you, then carefully comparison shop for price and features.

 

  1. Self-fund it. If the resulting financial loss is relatively low, or “uninsurable,” then we have to bear the cost ourselves—just say “that’s life,” pay the piper, and move on. There’s always the risk that we will run over a nail and need to buy a new tire, but there’s not an insurance policy to cover that. Most risks fall into this category…the risk of losing an employee to a competitor, most equipment breakdowns, rising costs of doing business, and many other daily hazards for business owners require creativity to avoid, reduce, or self-fund.

 

     Recognize each of the significant types of risk in your life, including in your business, and for each of those risks, think about your options within the framework of the four ways to manage

CERTIFIED FINANCIAL PLANNERTM Professional, Kenny Gott is President at Piatchek & Associates and author of the book "Bottom Line Financial Planning". He can be reached at kgott@pfinancial.com.