For small businesses, risk management is an important function that combines a blend of anticipating what can go wrong, evaluating the potential risk, developing mitigation strategies, and backing up your plans with insurance protection.

Without the dedicated risk management staff found at large companies, small business owners have to use their best judgment to identify risks and choosing the best strategies to prevent losses or at least mitigate their effects.

What Can Go Wrong?

Businesses of all sizes are exposed to a variety of risks and potential losses including property damage, legal liability, employee accidents or injuries, disaster recovery, technology outages or breaches, and other exposures.

The first step in developing an effective small business risk management plan is making a list of potential losses that can affect your business. This can be somewhat daunting, but is an important step in understanding your company's operations and protecting against potential problems.

A good starting point is wandering around your workplace with a notebook, paying attention critical systems or potential hazards. Your insurance agent and carrier will offer a variety of resources online to help you identify and understand potential risk, and can arrange access to experts who can provide specialized advice about reducing your company's risks.

Understanding the Effects

Once your list is complete, it's a good idea to rank those risks by their potential effects on your company. Some risks, such as the loss of your workplace in a fire, may be catastrophic to your company, while others may be relatively minor. It's important to understand the difference so you can direct your risk management efforts to the most important exposures.

The next step is developing ways to reduce those risks and their potential effects. Instead of storing all of your inventory in one facility, for instance, it may be a good idea to divide it among two smaller storage areas so a fire at one building wouldn't destroy all of your inventory.

Safety programs are another important step in reducing employee accidents and injuries. The federal Occupational Safety and Health Administration (OSHA) and similar state agencies offer valuable industry-specific information and training resources to help companies improve worker safety and regulatory compliance.

Financial Protection

Once you've identified the risks, categorized them by severity, and identified potential mitigation strategies, the final step in developing your risk management program is arranging insurance coverage to provide financial protection in case your other strategies fall short.

Even with the best of intentions, things can go wrong, and it's important to ensure that a relatively minor lose won't have an inordinate financial consequence for your company. Insurance provides an important financial backstop that helps you concentrate on running your business and serving customers.

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