Many business owners, and those who embark on new business ventures, have the typical rosy and optimistic outlook of an entrepreneur. They see all the great potential of their business ventures and the rewards of realizing that potential. However, they often fail to consider risks and ways to mitigate them. They don't always take advantage of help that is available to them for purposes of identifying and prioritizing by degrees all the risks and the associated effects if these risks becomes reality.
Every business plan should identify risks, keeping in mind that as the company hits certain milestones and growth projections, these risks will change. Once the risks are identified the owner must consider what can be done to remove them outright, reduce the likelihood of the risks occurring, reduce the effect if they do occur, and then have a plan for moving the business forward in spite of the effect of the occurrence of the risk. Unfortunately, some risks can't be eliminated or the effect mitigated, other than having cash to deal with the occurrence, thus the need for various insurances.
Each business and ownership situation has its own unique risks over and above the general risks that are prevalent in most businesses. Each item has to be considered in the context of the specific business, ownership, employee, technology, asset base and business operations situation. Some insurance products businesses should carefully consider:
- Key person life insurance.What happens to the business if the key person or persons die? E.g. a star sales performer with critical customer relationships or key technology driver who provides the company's competitive edge? The business needs cash to find a suitable replacement and cover losses while the replacement is found and begins to have a positive effect.
- Key person disability insurance. This is not for the affected person — this policy pays a company so that it can afford to hire temporary help while the key person is disabled and not able to contribute to the business. The temporary help may be a high priced contractor.
- Fire insurance on both owned and leased premises and all contents therein, including personal contents of employees stored there, such as computers, tools, software, etc.
- Business interruption insurance. A business may have its operations curtailed or shut down for a variety of reasons and, without business interruption insurance, can quickly be forced into insolvency and even bankruptcy.
- Third party liability insurance.Discuss with an insurance professional how wide ranging the policy is in order to be protected against the damages the business may be liable for because of defective products, missing critical delivery dates, various actions by the company's employees to people external and internal to the company, a visitor tripping on your lobby carpet and cracking their head while falling, etc.
It is critically important that the business owner develops a risk register. The risk register should include all the risks being considered and for each risk the following should be completed:
- 1. Description of the risk
- 2. The probability or likelihood of this risk event occurring
- 3. The impact if the risk event occurs
- 4. What can be done to mitigate it (e.g. insurance, processes, cross training)
- 5. What is the residual risk after mitigation efforts
- 6. What would have to be done if it did occur (Contingency Plan)
The risk register should be reviewed and discussed on a regular basis and at least quarterly; more frequently would be preferred. If each identified risk is considered individually and with each other identified risk, it is our experience that many risks can be minimized and that business owners are much more resilient to managing and overcoming a risk event if and when it occurs.
Here's another risk consideration that is specific to the current economic climate. A number of our clients have raised this issue: they are aware that their competition, all in the same field, are going through financial difficulties. Notwithstanding, the competitors are aggressively dropping their prices just to bring in cash flow. Although they know this is not sustainable, they feel pressured to follow suit in order to compete. Doing this is the start of a death spiral because the company may not be generating enough to cover costs. When multiple businesses in the same industry start doing this, a number of them will eventually fail.
What these businesses need to do is make sure their sales team are selling value not price, evaluate their cost structure to identify opportunities for improvement, look at bringing in new products and services that have better margins, consider moving into an adjacent industry, and in some cases, consider an orderly exit from the industry.
There is no shortage of help available. It just needs to be accessed. Organizations like CTG exist for this very reason. With over 16 years of experience helping businesses, we have seen just about every risk situation there is. And, you can be assured of one thing: if you've identified it, then you are more than halfway to being prepared for it.