Many businesses don't see the importance of risk management planning until they go through some sort of disaster. It's only after everything falls apart—whether thanks to a natural disaster (like a hurricane) or something your business brought on itself (like failing to vet employees with a background check)—that people tend to start asking, How could we have avoided all of this?
That's where risk management assessment comes in. If you're looking for ways to limit the risks associated with your business, you may want to try the following.
1. Create a culture of safety.
Ben Gold is the president of QuickBridge, an Irvine, California-based financial services firm with approximately 90 employees. He suggests talking to your staff and encouraging them to be safety-minded.
“A great way to assess a business's risks is to listen to the employees who work in riskier positions and encourage them to be proactive in reporting errors and helping the company make improvements," Gold says. “Create a culture where any employee feels encouraged to come forward with ideas that will improve safety and limit risk."
Gold also suggests that every business have a clearly communicated plan that vets and implements the best ideas—and rewards the employees who come up with ways to make your company safer.
And when you do your risk management assessment, keep in mind that safety isn't just keeping your employees from getting physically hurt (although that's the most important form of safety). You also want to keep your business protected from situations that could make it hemorrhage money.
—Robin Lee Allen, managing partner, Esperance Private Equity
"We don't wait for big errors to happen before taking action," Gold says. "We believe little problems can add up to big problems if they aren't addressed right away.
"For example," he says, "if a deal goes from processing to an analyst, and the analyst catches an error, we don't just fix it and move on. Instead, the analyst goes back to the processor with that data and uses it as an objective coaching moment. We make a note of what happened and how it should be done differently next time. The processor corrects the error, and then we move forward."
Since this is a standard, routine process, Gold says, it not only creates a learning opportunity—it also takes the emotion out of addressing the problem so that the processor still feels empowered. After all, if your employees come away from a teachable moment feeling emotionally exhausted and scared they're going to make another mistake, they probably will.
2. Talk to your insurance agent about risk management assessment.
Probably just about everyone has said, “If only I could have guessed this would happen" after a business disaster.
Well, you can guess. Or if you can't, your insurance agent probably can, says Walt Capell, president of The Insurance Shop, headquartered in Washington, D.C.
“Insurance agents interact with customers not only when they are selling them insurance, but also when those customers have to file a claim," Capell says. "They hear horror stories about business insurance claims on a daily basis. This gives an insurance agent a unique insight into the types of risks many business owners do not foresee."
For instance, maybe your business hinges on a key supplier's ability to perform and never have a problem. Your insurance agent may suggest that that is a problem.
Or maybe you tell your insurance agent about some new software you've incorporated into your company, and the agent will say, “Oh, sure. We have a client who used that same software and had all of their customers' identities and personal data stolen."
You never know what you might learn about risk management assessment by talking to your agent.
Sure, you might be a little squeamish because you could wind up being talked into paying for more coverage. But it may be safer to be properly insured or even over-insured than underinsured.
And while you could end up paying higher premiums, you may be able to get discounts from your carrier if it likes the risk management assessment work you're doing.
“Insurance companies like it when a company wants help with safety and are concerned about risk," Capell says.
3. Dissect your business.
“Each business is unique, but risks typically fall into three categories," says Robin Lee Allen, a managing partner with Esperance Private Equity, a private equity firm based in San Francisco. According to Allen, those three categories are:
“Legal issues can include everything from local permitting ordinances to sexual harassment codes and taxes," she says. If you get in trouble with the law, she warns, you could find your company halted from doing business.
“Operational risk includes not just physical hazards, but time-wasting activities that eat into profitability," Allen says. “Operational risks usually will kill a business insidiously, progressively hobbling the ability to conduct business activities."
“Financial risks center around cash management and accounting. but not taxes, which are a legal obligation," Allen says. “This is the worst sort of risk—and unfortunately the most common."
Why is a financial risk the worst kind of risk? Often, if a financial risk plays out into a worst-case scenario, Allen says, it can shut down a business permanently.
As for identifying potential tripwires, “these risks are best discovered by owners getting in the trenches and getting their hands dirty," according to Allen.
For instance, she says, if you do the accounting yourself and without the help of software, you may become aware of potential problems, and then you can address them.
You never know what sort of peril-prone business behavior you might find if you dig around and do a proper risk management assessment. Allen once had to turn around a restaurant in Atlanta where the health department had walked into the establishment, chased away the customers and then locked the doors. She found out that there were no permits and the taxes hadn't been paid. Meanwhile, some employees had been waiting eight weeks to be paid.
Of course, if things with your business are that bad, you already know that. But what if someone else is in charge of permits and payroll? Would you recognize if everything was about to fall apart? That's one of the secrets to truly mastering risk management assessment—knowing at all times how close or far away trouble truly is.
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