All kinds of organizations have long recognized the benefits of risk management; you don’t have to be a small business to reap the benefits. Risk management for small companies has traditionally focused on techniques related to hazard risks such as fire or flood. The primary risk mitigation strategies were risk avoidance, risk prevention, and risk transfer that not only benefit organizations but also individuals within the organizations.
The benefit of Risk Management is not only to the organization or individual but also to the overall Economy because it reduces overall systemic risk in the economy. Small Business Insurance is also an integral part of global risk management as it can prevent a business failure and the resulting unemployment of the employees after a major catastrophe such as a Product Liability or manufacturing plant failure.
Reduction of Risks to Small Business
A Risk Management strategy that looks beyond just Hazard Risks is critical as it will reduce the cost of hazard risks as well as reduce the frequency of them occurring. This will help maximize the profitability of the business and ensure that it complies with legal and regulatory risk management requirements depending on the business industry. A holistic strategy also benefits the whole economy through better management of waste, improved allocation of resources, and the reduction of systemic risk.
All organizations face risks by merely being in operation. Losses due to accidents could prevent an organization from meeting its objectives or reduce profitability. Other risks can have positive impacts; however, such as the risk of developing a new product or investments in process improvement which all could lead to an organization meeting or exceeding its objectives.
Calculating the Cost of Hazard Risks to a Small Business
An organizations Risk Management Strategy should look at the cost of risk associated with a particular asset or activity. The cost of Risk is the total of these:
- Costs of accidental losses not reimbursed by insurance or other outside sources
- Insurance premiums or expenses incurred for non-insurance indemnity
- Costs of risk control techniques to prevent or reduce the size of accidental losses
- Costs of administering risk management activities
The goal of Risk Management programs within small businesses and startups for that matter is to reduce the long-term cost of risk for the organization without interfering in a negative way the organization’s ability to achieve its goals or in its normal course of activities.