Risk Management for Small Business

When starting out a new business we immediately think of the obvious. We focus on issues such as where we source our product, the cost of acquisition, do we need to rent premises, if we need staff how will we cover payroll and so forth.

Well down on the list, if at all, some thought might be given as to how we can protect ourselves from unforeseen circumstances.

Considering all the things that could harm your ability to manage the business effectively, is referred to as Risk Management.

What Is Risk?

There are two major aspects to risk, the first is prevention and the second insurability. The prevention aspect is your responsibility; if well executed, it will not only stop you from the hassle of making an insurance claim, but also reduce the cost of premiums.

Insurability addresses the possibility that a random event could damage your company’s ability to meet its objectives, in a way that could not be foreseen in spite of your prevention programs.

Physical risk

When assessing potential risks, never assume a best-case scenario. Knowing that the fire department is only a few blocks away isn’t good enough. A fire could be disastrous even in a few minutes. In every community, a fire prevention or safety officer will be happy to come to your place of work and assess your preparedness. Your regional emergency preparedness office will do the same regarding earthquake preparedness.

These visits have many advantages. Your staff will see that you care for their safety, your business property will be safer, and your insurance company will know you are doing all you can to minimize risk they might have to pay for.

Staff related risk

You’ve got a first class, motivated staff, but mistakes can and will be made. Employees under pressure can be responsible for financial mismanagement or even fraud. Errors that can result in your company losing a significant amount of money. For example, a major florist recently ordered 50 boxes of Christmas Poinsettias only to discover an employee had mistakenly put out a purchase order for 50 flats rather than boxes; a difference of several thousands of dollars of product that she couldn’t sell.

Key person risk

Most insurance companies offer something called Key Person, formerly referred to as Key Man, insurance. Key Person insurance is simply life or disability insurance on a key individual in a business. In a small business this is usually the owner, the founders, or perhaps a key employee or two. These are the people who are crucial to a business – the ones whose absence could sink the company. The purpose of key person insurance is to help the company survive losing the person who makes the business work.

There are many other types of insurance, including director’s liability, and employee health and disability. The trick is to buy only the insurance you need and not get talked into buying unnecessary insurance, or become over-insured.

Risk Prevention

The best risk insurance doesn’t require a paid premium – and that’s prevention.

You may think prevention is costly in terms of your time, but in the end it’s a money saver since it can reduce your insurance premiums while sending a strong message to employees and customers that this is a well run business that is serious about everything from safety to product and service quality. Prevention also includes employee training, safety checks, regular equipment inspection, and overall preparedness and maintenance of the physical premises.

The bottom-line is, a major challenge to your business that is recognized early, and for which you have a contingency plan, is going to cost your firm considerably less than one that comes out of left field and takes you by surprise.

Buying risk insurance

Don’t be overwhelmed by all the risk issues. When starting out, or reviewing your operation, the first thing you should do is sit down with an insurance broker. These professionals usually represent a number of insurance carriers rather than just one supplier. Go to them as prepared as you do when you meet with your banker. Have all your concerns written down, a brief description of your business and any specific issues that might concern you.

The Insurance broker can help you prepare a comprehensive plan to cover all aspect of risk, often with a single premium.


To start you thinking about what risks your company might face, here’s a dozen very general risk factors your business might face – of course only you will know what specific risks your operation faces.

  1. Your business plan not unfolding as predicted
  2. Dropping revenues/sales
  3. Poor cash flow
  4. Key staff member(s) leave
  5. Changes in market trends
  6. Inability to manage growth
  7. Unexpected competition
  8. Technology efficiency, reliability, trends
  9. Manufacturing issues
  10. Supply or supplier issues
  11. Fire, flood, earthquake or other disaster
  12. Legal challenges