Question -- "What is risk management for business?"
-- Phil, Laramie
Answer -- When planning for your new or existing business for the near and long future, managers/owners think about competition, new products, developments, cost cutting, expansion and other important topics.
While all this is important and exciting, many people tend either to not pay attention or trivialize the prospect of something going wrong in their business. This could be small, something that reoccurs, nibbling away at the business's success or sudden, obvious and catastrophic. It could hurt profits but, in many cases, it could doom the business to failure.
Risk management is discovering what those risks are, and either minimizing chances of them happening, having a plan in place in case something does happen or paying someone else to take over that risk.
There are three types of risks for a business to identify: property risks such as vehicles, building and equipment; liability risks such as product, professional and obligation to guests on your property; and perils or dangers such as fire, theft or human error.
Once you figure out what is at risk or causing you to be at risk, the next step is to identify the best way to manage that risk. Essentially, there are three ways to manage each risk you identify:
- Risk transfer: This is for severe infrequent events such as fire, natural disaster or prolonged severe illness. Insurance is common, but think about leasing a building instead of buying it.
- Retain the risk: You accept the risk as part of doing business, probably for less severe risks. Within this, there are two ways to retain risk: passive retention is where you just play the odds it won't happen and, active retention, for example, is where you set money aside for an event. Raise your prices just a bit to cover breakage or shoplifting, for instance.
- Controlling the risk: You may just avoid the risk altogether or you can reduce the risk you've identified by training. Implementing a business ethics program, adding more fire extinguishers, getting certification and enacting drug testing, are all examples.
For every business, the types of risks vary and the best ways to manage those risks also vary. Over time, risk exposure changes, and the tools to manage risks also change.
Editor's note:R00;Jim Drever is a business adviser at the Wyoming Small Business Development Center.