Small Business Basics: Dealing with Risks Using Policies, Insurance and Waivers
Around the world, most small business owners are still riding the pandemic roller coaster. Whether your business is up or down, what is certain is that there will always be obstacles that appear in your path to success. How you deal with those obstacles is what will ruin your business or make it stronger in the end.
Worrying about things you can't control can be counterproductive, but spending some time imagining what could go wrong is an important part of the process of prepare your business for the inevitable set-backs. What’s the worst that could happen? A dog bite, an employee quitting, a burst pipe ruining your facility for weeks – these are all risks that can be managed if they are identified and dealt with in advance.
“Risk management” is the process by which businesses identify, assess and treat risks that could potentially affect their business operations. A risk can be defined as any event or circumstance that has a negative effect on your business. There are three essential steps to risk management.
Identify Risks
The first step is to identify potential risks. This will take some brainstorming – what could go wrong? Think about internal risks (for example, employee embezzlement) and external risks (think natural disaster). Types of risk vary from business to business. For example, a dog trainer who works with aggressive dogs has a higher risk of a bite that injures someone than one who offers puppy classes; a trainer with no building or other facility will not worry about flooding. You can also talk to an accountant, your banker, or a lawyer to learn what common risks small businesses face. The Small Business Administration (SBA) can provide helpful resources, as can professional organizations like the APDT and other online groups of like-minded trainers.
Assess the Risk
The second step is to weigh the probability of the event happening and how it might affect earning, cash flow, and business operations -- in other words, how much would it cost your business. You can think of the level of risk as a product of the likelihood of the risk happening and the consequence. Some potential risks are highly improbable, and the potential cost is relatively small. In that case, the “level of risk” is very low. Some might have a relatively low likelihood of happening, but a very costly consequence, resulting in fairly high level of risk despite the low likelihood of risk.
For example, if there is a .3% chance that your building will be hit by lightning, and you estimate that a lightning strike could cause $50,000 in damage, then the level of risk would be 150. If there is a 1% chance that a dog might bite a client and cause an injury costing $20,000, then the level of risk would be 200. Assessing your risk in this way allows you to rank them in a logical fashion.
Some risks you may be willing to take as a business, or may even be critical to your success; however, exposing your business to the wrong types of risk may be harmful. You must decide on how much risk you are prepared to take in your business, and identify those that need to be addressed. “It’s hard to find the balance between peace of mind and profitability,” says Jamie Badial, co-owner of Best Paw Forward and our own Dog Trainer's Umbrella, “You can never eliminate all risk from business, but it’s important to think about it and manage it where you can.”
Manage the Risk
Once you have identified the risks that you want to address, the third step is to decide how best to manage each risk. Managing a risk may mean reducing the likelihood of its happening, or avoiding its consequence.
Avoid or reduce the risk of the event happening
Many accidental risks can be avoided through good preparation. This could mean, for example, putting policies and procedures in place, training employees well, or keeping equipment and property in good condition. Put the time into developing good practices now, to avoid costly errors in the future.
Transfer the risk to the other party
When a risk arises as a result of a contract between two parties, there is often an opportunity to shift some risk to one party or the other. For example, your landlord may ask for an indemnification clause in a lease, which transfers certain risks to you, the tenant; a waiver signed by your client transfers some risk of injury from you to your client. Review your contracts with an eye towards placing the risk on the party who is in the best position to control the risk or bear the consequences.
Insurance
The very purpose of insurance coverage is to manage risk. When purchasing insurance, you are agreeing to pay premiums over time so that if a potential risk happens -- like flooding or an injury to employee -- you can avoid the brunt of the costly consequence.
Thinking about all the things that could go wrong with your business is stressful, but avoiding thinking about them is even more so. If you work through the potential risks and address them through preparation and thoughtful investment of time or money, you can enjoy a more secure future.
If you need help developing business policies, hiring or training employees, drafting contracts or waivers, or any of the myriad issues facing a small business owner, contact us and we'll see if we can help.