Small business owners often have most, if not all, of their personal wealth tied up in their businesses. These businesses are exposed to risk but those that manage risk well are more likely to thrive than others. Risk management should be viewed as a strategy for growing not just protecting your business.
The first step in risk management is to identify the risks facing your business. Once risks have been identified, potential consequences need to be quantified. Some consequences such as property damage are easily quantified. Others, such as staff morale and customer perceptions, are tougher to measure but potentially more important.
Once you have identified and quantified the consequences of the risks facing your business, you can employ three main strategies for each risk:
• Accept it
• Take action to reduce it
• Protect against it with insurance.
Accepting risk means accepting the consequences. What would be the worst-case outcome? Would it put you out of business? Temporarily? Permanently?
Risk reduction strategies are usually the first line of defence. Continuous review of the risks a business faces and development of policies and procedures to reduce these risks characterize well run businesses. Specialists in areas such as IT and security have valuable insights to offer on risk reduction strategies. Insurance brokers can also be a good source of advice on initiatives and how they can lead to sizeable reductions in your annual premiums.
Simple steps can be taken to reduce losses from theft which can come from both outside and inside your organisation. For example, mark all equipment with your business name and keep a register of serial numbers. Some equipment, including computers, can be cabled to desks. Losses from theft from within the organisation can be reduced through procedures for those handling money and simple IT policies such as secure and confidential computer passwords.
The benefits of a good risk management programme stretch well beyond lower spend on insurance. Other benefits such as higher staff morale and productivity can result. A safe workplace will be viewed by employees as a mark of respect from their employer and engender strong employer/employee relations. Safe procedures not only reduce potential disruption but can also be efficient procedures. Reduction of potential impact on profit (and therefore staff bonuses) of factors beyond one’s control are also likely to enhance motivation. Finally, do not underestimate the “sleep at night” benefits for business owners, managers and staff freed to focus on what they do best – building a better product, winning that key customer contract – rather than reacting to unplanned events.
Businesses are required to comply with risk management practices by law (Legal Compliance) and their insurance companies (Policy Compliance).
An example of Legal Compliance is the Occupational Health and Safety (OH&S) Act which requires that employers provide a safe and healthy workplace for their employees.
An example of Policy Compliance is provision and maintenance of sprinkler systems specified in an insurance contract. Policy terms and conditions need to be understood and observed by businesses to ensure that insurance coverage is valid. Insurance companies will also expect businesses to be legally compliant at all times and may not pay out in circumstances where the insured party was not legally compliant.
Managing Risk with Insurance
Risks will vary from business to business. This means that each business will need design an insurance package which is likely to include the following types of cover.
In the course of daily operations, you and your employees risk that your activities may hurt someone or damage their property. Public liability insurance covers you and your business should you be found liable for such damage. Some businesses (eg construction companies) are likely to require higher levels of public liability insurance than others (eg internet-based companies) but all companies will be exposed in some way. A simple fall by a customer whilst on your premises could give rise to a public liability claim.
A business can be held responsible for a product that it makes or sells. Product liability insurance covers you for any legal liability that may result from death, injury or other damage from your product.
Your business assets are at risk from flood, fire, theft and other damage. Asset protection covers you against these risks. Terms and conditions can vary between policies. For example, new vs replacement cost and the definition of a flood.
Events beyond your control such as natural catastrophes may affect your ability to run your business for a period of time. Revenue protection insurance covers you for loss of sales from such events. In the modern age, most businesses can not operate without computer systems. Revenue protection insurance will cover business disruption from damage to computer systems too. Your IT disaster recovery policies and practices will impact your ability to access revenue protection insurance and its cost.
Your employees may be injured whilst at work or travelling to or from work. As an employer you are responsible for any financial consequences. Workers compensation covers you for such loss and is compulsory in all states of Australia.
Key Person Insurance
Small businesses may face significant risk from the loss of a key staff member. In a small business, owners and founders are often pivotal in customer relationships. Key person insurance covers the business, its shareholders or partners for such an unfortunate event.
Businesses involved in professional services such as accountants, lawyers and financial advisors can, in some situations, be held liable for the advice they provide. Professional indemnity insurance can be used to protect against any claims arising from that advice.
If you would like to explore your risk management further, then please talk to your Lockwood & Ward Director or Client Manager. We can refer you to a range of Insurance and OH&S experts in our network.