Small businesses must understand their risks in order to be successful. When uncontrolled risks manifest, the results can be costly enough to sink even the best-laid business plans. After a business has identified its risks, the business owner cannot then ignore the risks and assume they will vanish. Rather, a savvy business owner will understand how to manage risk.
There are five methods for controlling risk often repeated in business and insurance management today. They are: avoidance, prevention, reduction, segregation, and transfer.
Risk avoidance. The business owner has identified a series of risks and the business takes steps to avoid a particular source of risk. For example, a small shop owner selects a neighborhood that has a low crime rate in order to attempt to avoid the risk of robbery or theft. Risk avoidance might also mean that a business ends certain activities. If a small store could avoid taking cash payments altogether, it avoids the risk of theft from its own staff and from outside.
Risk prevention. Similar to risk avoidance, not only does the business owner locate the small shop in a relatively safe neighborhood, the business owner uses a security service to alarm doors and windows, to post signage that the property is secured and monitored, and the business puts security personnel on the premises. The business owner has taken steps to prevent unauthorized access to the store.
Risk reduction. Again using the small store example, the business owner takes money to the depository every time it exceeds $500 so that the most that could be stolen is $500. This is an example of a reduction in risk exposure. The business owner might reduce the opening and closing balance in the cash drawer also to reduce the amount of money that could be stolen by employees or outsiders. Risk reduction is about reducing the severity of the loss ‘” reducing the amount of the loss the business might experience.
Risk segregation. To segregate risks, businesses often look for ways to spread or isolate risk(s) from other business functions. If one were to operate a small bank, moving the bank’s administrative staff to a site that is separate from the bank branch would be an example of segregating risk. Banks face the risk of theft by their very existence. Moving the administrative staff away from the branch segregates that administrative staff from any physical or emotional harm that might come from a robbery. Another example is petty cash. Many small businesses keep a little bit of cash on-hand to provide small services to staff such as the purchase of stamps or to provide small bills for vending machines. Segregating access and the responsibility of the petty cash to a single person or to maybe two staff members segregates the risk of insider theft to just a few.
Risk transfer. A common form of risk transfer is the use of insurance. Insurance is purchased for identified risks in many areas. The premium is typically a fraction of the potential loss. The underwriter of the insurance is quantifying the potential loss severity and the probability of occurrence and then assessing a premium. The business pays a premium in order to gain a large percentage of offset to the loss severity were the risk to manifest. Another risk transfer method is to outsource a business activity. Small businesses might use an employment placement firm to source new staff. This allows the business owner to transfer the risk of hiring an undocumented person and allows the business owner to leverage the due diligence skills and tools of the agency before hiring new staff.
Small businesses face a number of risks every day. Risk though is not something that keeps a business from opening, but risks can cause a business to suffer losses. Businesses must first identify its risks, but it does not stop there. A business owner has a number of tools for managing its risk and five are identified here. Using these tools can lead a small business owner to future success.