How to create a business risk management plan
Operating a small business can be exciting and rewarding. It’s also inherently risky. Many types of unforeseen events can produce unexpected expenses, including workplace injuries, property damage, mistakes, auto accidents, and cyberattacks, to name just a few. That shouldn’t discourage you as a business owner, but it should prompt you to take action to protect your company. One way to do that is to create a risk management plan.
This article addresses the concept of business risk management, explaining how to create a risk management plan and how, when paired with small business insurance, your plan can help you and your employees stay focused on your work, knowing that you’re doing all you can to reduce the chances of costly and disruptive events. Read on to learn more.
No business owner would start a company without a plan for operating it. Or at least, they shouldn’t. Knowing what products and services you’ll offer, who your target customers are, and how you’ll market your offerings to them is essential.
Similarly, you shouldn’t try to run a business without understanding the risks you face and taking steps to avoid them. That’s why having a plan for risk management is essential. Knowing how to manage risk for a new business is particularly important, as you’re facing so many uncertainties.
Essentially, a risk management plan is a documented strategy explaining how a business will identify, monitor, analyze, and respond to potential risks. Importantly, it should be a living document that evolves with your business, reflecting changes in your offerings, operations, and target market.
As you consider creating a plan, it’s crucial to look at risk management the right way. The goal isn’t to eliminate all risks, which is impossible, but to understand them, evaluate their potential impact, and decide on the most effective ways to address them and reduce their potential impact.
For small companies, formal planning and risk management might seem excessive and unnecessary, but even on a smaller scale, time spent on developing a risk management plan can be beneficial. A simplified plan might focus on key areas such as:
The scale of the plan should be proportionate to the size and complexity of the business, but the act of thinking through potential issues is what’s important. You can search online for risk management plan examples relevant to your industry to get an idea of how companies like yours protect themselves.
Steps for creating a risk management plan
Developing a comprehensive risk management plan requires a systematic approach, typically broken down into key steps:
- Risk identification. This is the crucial first step. It involves brainstorming with your team and identifying all potential events or circumstances that could negatively impact your business.
- Risk analysis. Once you’ve identified threats to your business, the next step in developing your risk management strategy is to analyze them. This involves assessing the likelihood of each risk occurring and its potential impact. Some owners find it helpful to create a risk matrix, plotting risks based on their probability and impact and highlighting those that require the most attention.
- Risk prioritization. Based on your analysis, you should prioritize the risks your business faces. This step enables you to focus your resources and efforts on the issues that have the highest likelihood and the most severe potential impact.
- Risk mitigation. This step involves developing and implementing strategies to manage the prioritized risks. These tactics can include avoiding or minimizing the risks. You might also determine that, for some risks, the cost of mitigation is higher than that of dealing with incidents if they occur. In that case, you won’t take any preventative action.
- Risk monitoring and plan review. A risk management plan isn’t a static document. As the business environment changes and new risks emerge, you should reassess the effectiveness of your mitigation strategies and make changes as necessary. Consequently, it’s crucial to set a schedule for reviewing your risk management plan—annually, semi-annually, or more frequently, depending on your industry and business dynamics. This review should include reassessing identified risks, identifying any new ones, evaluating the effectiveness of your avoidance or mitigation strategies, and making necessary updates to your plan.
Training and communication: the importance of engaging your team
A risk management plan is only effective if everyone in the organization understands and follows it. Training your employees on the plan is crucial. Your workers will often be the first to encounter potential hazards or issues. You should ensure they understand the importance of risk management, the specific risks relevant to their roles, and the procedures in place to mitigate those risks.
Encourage open communication where employees feel comfortable reporting potential risks or concerns. A culture of risk awareness, created and supported through training and communication, significantly strengthens your overall business risk management efforts.
The role of business insurance in risk management
Small business insurance helps protect your company financially by paying for specific covered losses. It's a critical component of a comprehensive risk management strategy, particularly for handling risks that you can’t avoid entirely.
General liability insurance protects your company against claims of bodily injury or property damage caused by your business operations. Commercial property insurance covers damage to your company’s physical assets, such as buildings, equipment, and inventory, from things like fire or theft.
Workers' compensation insurance, which states require for most companies with employees, provides benefits to workers who get hurt on the job, paying costs related to their medical care. Professional liability insurance is important for businesses that provide professional advice or services. Also called errors & omissions (E&O) insurance, this policy protects your business from claims of negligence or errors if a client sues you.
Commercial auto insurance is for business-owned or leased vehicles. It can cover damages and legal defense costs if someone driving a company vehicle is at fault in an accident and the other party sues. It also covers damage to your car or truck. Cyber insurance, purchased as an add-on to a biBerk general liability, professional liability, or business owners policy (BOP), covers specified costs associated with data breaches and cyberattacks.
Umbrella insurance provides an extra layer of financial protection. It can pay amounts that exceed the limits of underlying biBerk liability policies (up to the umbrella policy’s limit).
Your company’s specific business insurance needs will vary depending on your industry, business size, and other factors. They will also change over time, so, similar to your risk management plan, you should review your insurance policies periodically to ensure they’re adequate for the risks you face.
Prioritize risk management to protect your business.
Developing and maintaining a comprehensive risk management plan requires an investment of time and effort. However, the payoff in terms of increased stability, reduced losses, and enhanced resilience is significant.
With a risk management plan in place, owners and their teams can navigate the uncertainties every business faces with greater confidence, knowing they have a strategy to address potential challenges. This allows everyone to stay focused on the company’s business objectives and pursue new opportunities free from the anxiety caused by unforeseen risks.
Implementing sound business risk management isn’t just about protecting your business from adverse events; it's about creating a secure foundation for a positive future.