All businesses come with risks, but small business owners often face a large number of preventable ones. In this article, we’ll look at some basic ways small business owners can reduce their exposure to risk.
Offload Risk Onto Insurers
The most obvious way to address risk is to offload it onto insurers by protecting the business with policies. If there is one type of insurance you absolutely need, it is general liability insurance. General liability can help protect you from lawsuits over employee conduct, product failure and other issues that can arise (For more, see Filling the Gaps In General Liability Insurance.)
A business owner's policy (BOP) can provide much more comprehensive insurance, including liability and business interruption insurance. Of course, the cost of covering those additional risks results in greater overall premiums, but insurance is not an area where being cheap now pays off in the long-term. Small business owners also need to have solid life insurance policies, particularly if their business is illiquid and their family is wholly dependent on its income.
Use Solid Contract Procedures
Legal procedure and advice is another area where the cheapest option may not be the best. A lot of risk can be controlled by having reliable contracting procedures where both parties know exactly what is expected and what is covered under the contract. If you are handling or signing contracts, it is well worth it to have a lawyer review them and explain the scenarios in plainer terms. If you don’t have a lawyer, get one - ideally one who has experience working with small business owners. (For more, see How To Pick The Right Lawyer.)
Take a Systems Approach
Within a small business, controlling risk comes down to systems and record keeping. Taking the time to establish standard operating procedures around critical tasks will allow you to onboard employees more quickly and ensure they receive proper training. Employees introduce a lot of potential risk into a business as they interact with customers or handle products; proper training can help mitigate those risks.
In fact, adding regular risk analysis into all your business systems from sales to hiring to accounting can also help get everyone aware of your business risks and thinking of ways to minimize them. You always want to be asking what the major risks are in an area of your business and how can you address them. (For more, see Identifying and Managing Business Risks.)
For example, an issue many small food businesses face is a product’s shelf life, so over ordering is as much of a risk as being under stocked. One way to address these risks is to have frequently purchase smaller amounts of perishable products and to create a flexible menu that can clear overstock through specials. Lastly, keeping accurate records completes the feedback loop you can use to see whether your attempts to reduce risks is working.
Be Open to Options
The biggest risk most small business owners face is financial. Having cash on hand for several months of operation is universally recognized as a great idea, but for many businesses this is as much of a pipe dream as ensuring you are paying yourself first. Owners tend to get wrapped up in the business financially, for better or for worse. To address this risk, you need to be open to options like finding a partner to bring in capital and share the risk or changing the business structure to one from which you can separate your personal assets. Losing a business is hard, but losing your business and your house is devastating. (For more, see Should You Incorporate Your Business?)
The Bottom Line
It’s actually not a bad time to be a small business owner. For one, the available insurance products have improved, and the package option saves you money over individual policies. Also, there is more awareness about the risks that weak control systems and untrained employees pose. Small business owners have better tools to control risk than ever before, making the whole concept of running your own business a little less daunting.