The Importance of Risk Management In Business

By: Kathleen Murray (Capstone Brokerage, Client Advocate)

Risk Management might seem a “boorish” topic. The principles and concepts however are essential to the survival of your business and are more essential than are regular maintenance check-ups and oil changes for your car. Successful risk management affords a small business an opportunity to thrive, grow and ultimately enjoy the fruits of success.

Risk exposures are one of the most overlooked areas in small business in spite of the fact that it is clear to most small business owners that operating any business involves these hazards. While taking a risk and winning are fun, prudent business owners take care to minimize the loss, as in any type of venture or investment. A good risk management system is imperative and requires a continuous process of analysis and communication.

Changes in our society and technology have led to new challenges for business. The cost of workplace injuries and illness alone can cripple the growth and profit of a small business. The cost to small businesses for workplace injuries alone is estimated to be $250 billion annually. The figure is $31 billion more than the direct and indirect costs of all cancers, $76 billion more than diabetes and $187 billion more than strokes.

Recent studies strongly suggest that poorly thought out risk management plans are almost as bad as not having one because they can be time consuming, provide no long term benefit, greatly reduce operating costs and ultimately, profit. Preparation for marketplace risk is attained through a well thought out business plan. One thing is certain, unexpected events will transpire. A good plan not only has adequate insurance coverage’s to compensate for losses which might occur, but it includes a plan to prevent losses, if possible, and to manage unexpected events.

There are risk management procedures for every category of business. What is significant is that the process and benefits resulting from a solid plan will produce positive and noticeable results. It is also important to understand “mitigating damages which is a term used over and over again in risk management. The definition is, “the use of reasonable care and diligence in an effort to minimize or avoid injury.”

The Risk Management process is a 5-step process:

• Identify and Evaluate the Potential Loss or Risk – Which is
self-explanatory. Is there an unsteady chair, cracked
steps, unstable banister on the stairway, well-lit
walkways, and the list can go on and on, which goes
hand-in-hand with an awareness of potential incidents that
could arise.

• Allocate ownership – Accepting the risk. Taking the chance
that the negative impact will be incurred. Who to call,
what to do, how to respond to an incident. What to do in
the event of a loss? Do you know the name of your insurance
carrier? What is your policy number? What number do you
call to report a loss?

• Plan for Mitigation – What is the plan to avoid
consequences? What is the plan to prevent losses from
happening again?

• Action – Be proactive, always. Have an emergency plan
before it happens.

• Assess effectiveness – The outcome will demonstrate either
a decrease of incidents or none at all, which is the goal.

The Risk Management and Insurance professional’s role of providing guidance and assistance is as vital to the progression of a business as a CPA or business attorney, of which, all three are necessary to identify and mitigate possible claims.

In conclusion, a good risk management plan is a strategic management approach to foresee the risks, estimate the impacts and create response plans to mitigate them. Every manager and business leader needs to be aware of the practices and principles of effective risk management. Understanding how to identify and treat risks to an organization, a program or project can save unnecessary difficulties later on, and will prepare managers and team members for any unavoidable incidences or issues. An effective risk management plan will assure the growth of a business and provide a solid foundation for success in this ever-changing world of risk.