Running a business can be a dangerous occupation with many different types of risk. Some of these potential hazards can destroy a business, while others can cause serious damage that can be costly and time consuming to repair. Despite the risks implicit in doing business, CEOs and/or risk management officers – no matter the size of the business, from small to corporate giant - can prepare for them if they know what they are.

If and when risk becomes reality, a well-prepared business can moderate the risk's impact. Dollar losses, lost time and productivity and the negative impact on customers can all be minimized. (For more, read Determining Risk And The Risk Pyramid.)

Physical Risks
Building risks are the most common type of physical risk. Fire or explosions are the most common risk to a building. To manage this risk, and the risk to employees, it's important to do the following:

  • Make sure all employees know the exact street address of the building to give the 911 operator in case of emergency.
  • Know the location of all exits.
  • Install fire alarms and smoke detectors.
  • A sprinkler system will provide additional protection to the physical plant, equipment, documents and, of course, personnel.
  • Inform all employees that in the event of emergency their personal safety takes priority over everything else. Tell them to leave the building and abandon all work-associated documents, equipment and or products.

Hazardous material spills or accidents also occur with some regularity. Among the hazardous materials most frequently spilled or released into the atmosphere of a workplace are: acid, gas, toxic fumes, toxic dust or filings, and poisonous liquids or waste. Fire department hazardous material units are prepared to handle these types of disaster. People who work with these materials, however, should be properly equipped and trained to handle these materials safely.

A plan should be created and implemented to handle the immediate effects of these risks. Government agencies and local fire departments may help in acquiring information to prevent these accidents and provide advice on how to control them and minimize their damage if they occur. (To learn more, see our Intro To Insurance Tutorial.)

Location Risks
Among the hazards facing the location of a business are nearby fires, storm damage, floods, hurricane or tornado, earthquake and other natural disasters. Employees should be familiar with streets leading in and out of the neighborhood on all sides of the place of business. Keep sufficient fuel in your vehicles to drive out of and away from the neighborhood.

Human Risks
Alcoholism and drug abuse are major risks to personnel in the work force. Employees suffering from these conditions should be urged to seek treatment, counseling and rehabilitation if necessary. Some insurance policies may provide partial coverage for the cost of treatment.

Protecting against embezzlement, theft and fraud may be difficult, but these are crimes which occur frequently in the workplace. A system of double signature requirements for checks and invoice and payables verification can help prevent embezzlement and fraud. Stringent accounting procedures may discover embezzlement or fraud. A thorough background check before hiring personnel can uncover previous offenses in the applicant's past. While this may not necessarily be grounds for declining to hire an applicant, placement for the new hire in a critical position in which money and cash equivalents are used may not be judicious.

Sickness among the work force is inevitable and is always a problem. To prevent loss of productivity, assign and train backup personnel to handle the work of critical employees when they are absent due to illness.

Technology Risks
Power outage is perhaps the most common of technology risks. Auxiliary gas-driven power generators are a good back-up system to provide electrical energy for lighting and other functions until utility power is restored. In manufacturing plants, several large auxiliary generators can keep a factory producing until utility power is restored.

Computers may be kept up and running with high-performance back-up batteries. Power surges may occur during a lighting storm, or randomly, so computer systems should be furnished with surge-protection devices to avoid loss of documents and destruction of equipment. Offline and online data back-up systems should be used to protect critical documents.

Although telephone and telecommunications failure is relatively uncommon, risk managers may consider providing emergency-use-only company cell phones to personnel whose use of the phone is critical to their business.

Prioritizing Risk
After the risks have been identified, they must be prioritized in accordance with your assessment of their probability.

Establish a probability scale for purposes of risk assessment. For example, risks may be:

  1. Very likely to occur
  2. Some chance of occurrence
  3. Small chance of occurrence
  4. Very little chance of occurrence

Other risks must be prioritized and managed in accordance to their probability of occurring. Actuarial tables – statistical analysis of the probability of any risk occurring, and the potential financial damage ensuing from the occurrence of those risks – may be accessed online and can provide guidance in prioritizing risk.

Managing Risk
Insurance is a principle safeguard in managing risk, and many risks are insurable. Fire insurance is a necessity for any business that occupies a physical space, whether owned outright or rented, and should be a top priority. Product liability insurance, as an obvious example, is not necessary in a service business.

Some risks are inarguably high priority, such as the risk of fraud or embezzlement if employees handle money or perform accounting duties in accounts payable and receivable. Specialized insurance companies will underwrite a cash bond to provide financial coverage in the event of embezzlement, theft or fraud.

When insuring against potential risks, never assume a best-case scenario. Even if employees have worked for years with no problems and their service has been exemplary, insurance against employee error may be a necessity. The extent of insurance coverage against injury will depend on the nature of your business. A heavy manufacturing plant will, of course, require more extensive coverage for employees. Product liability insurance is also a necessity.

If a business relies heavily on computerized data – customer lists and accounting data, for example – exterior back up and insurance coverage are mandatory. Finally, hiring a risk management consultant may be a prudent step in the prevention and management of risks. (To learn more, read Insurance Coverage: A Business Necessity.)

The best risk insurance is prevention. Preventing the many risks from occurring in your business is best achieved through employee training, background checks, safety checks, equipment maintenance, and maintenance of the physical premises. A single, accountable staff member with managerial authority should be appointed to handle risk management responsibilities. A risk management committee may also be formed with members assigned specific tasks, with a requirement to report to the risk manager.

The risk manager with the committee should formulate plans for emergency situations such as:

  • Fire
  • Explosion
  • Hazardous materials accidents or the occurrence of other emergencies

Employees must know what to do, and where to exit the building or office space. A plan for the safety inspection of the physical premises and equipment should be developed and implemented regularly, with the training and education of personnel, when necessary. A periodic, stringent review of all potential risks should be conducted. Any problems should be immediately addressed. Insurance coverage should also be periodically reviewed and upgraded or downgraded as necessity requires.

While business risks are abound, and their consequences can be destructive, there are ways and means to insure against them, to prevent them and to minimize their damage if and when they occur. Finally, hiring a risk management consultant may be a prudent step in the prevention and management of risks. (For more, see The Evolution Of Enterprise Risk Management.)

Related Articles
  1. Mutual Funds & ETFs

    Top 3 Muni California Mutual Funds

    Discover analyses of the top three California municipal bond mutual funds, and learn about their characteristics, historical performance and suitability.
  2. Professionals

    Hard and Soft Due Diligence: What's the Difference?

    Learn about the differences between "hard" and "soft" due diligence in a mergers and acquisitions deal (M&A) and why soft diligence is increasingly important.
  3. Insurance

    Explaining Indemnity Insurance

    Indemnity insurance is an insurance policy that protects business owners and employees from losses due to failure to deliver expected services.
  4. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  5. Economics

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  6. Insurance

    How Car Insurance Companies Value Cars

    Learn the methodology used by car insurance companies to value cars, and understand why the amount they give you may not cover the cost of a similar vehicle.
  7. Professionals

    5 Ways Your Small Business Is at Risk for a Cyber Attack

    Small business owners think they are immune to hacks because of their size, but they are not. When they find the guard is down, hackers are exploiting common weakness.
  8. Mutual Funds & ETFs

    Mutual Funds Are Not FDIC Insured: Here Is Why

    Find out why mutual funds are not insured by the FDIC, including why the FDIC was created and how to minimize your risk with educated mutual fund investments.
  9. Professionals

    How to Sell Mutual Funds to Your Clients

    Learn about the various talking points you should cover when discussing mutual funds with clients and how explaining their benefits can help you close the sale.
  10. Professionals

    Fund and ETF Strategies for Volatile Markets

    Looking for short-term fixes in reaction to market volatility? Here are a few strategies — and their downsides.
  1. How do modern companies assess business risk?

    Before a business can assess or mitigate business risk, it must first identify probable or likely risks to its bottom line. ... Read Full Answer >>
  2. How do companies identify and manage business risk?

    In each stage of the business life cycle, companies face both internal and external risks that can have detrimental effects ... Read Full Answer >>
  3. What's the difference between general, limited and joined venture partnerships?

    Partnerships, which can come in both general and limited forms, are a separate type of business structure from joint ventures. ... Read Full Answer >>
  4. What is enterprise risk management and why is it important?

    Enterprise risk management is a plan-based business strategy that aims to identify, assess and prepare for any risks that ... Read Full Answer >>
  5. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  6. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!