Most of us think that small business is the riskiest. Partially this is correct because there are various risk factors in small businesses. But don’t worry here we mention all about small business risk management strategy.
Table of Contents
The Concept of small business risk management
Risk in a business sense generally refers to the uncertainty of profit or loss. Risk is therefore a psychological block based on human emotions and reactions. The risk may also be viewed as an objective or concrete phenomenon that is based on probability and statistics. When dealing with business, it is important to reduce risk or uncertainty as per as possible.
One would like to know for sure that the contract has been signed and a sale has been made, rather than just knowing that one has a 50-50 chance of that being the case.
Operating any business involves taking a risk, or being exposed to losses. Most types of business risk, however, can be dealt with if the practice of risk management is followed.
That is, the risk manager must be able to identify risks that can be avoided, reduce the possible impact of unavoidable risks, and transfer the burden of risks to someone else if possible.
Many business risks are insurable, but some are not. For u- insurable risks, however, small firms may use various methods of offsetting or avoiding them, like Business Recessions, Price Fluctuations, Product or Process Obsolescence, Losses from Bad Debts, and Shoplifting.
Types of Possible Losses
The types of loss to an individual or to a business may be classified in the following ways:
1. Personal losses: These are the losses arising out of theft, accident, illness, unemployment, fire, and the like.
2. Commercial losses: The commercial is a loss to the business and results in decreasing profit and increasing costs.
3. Property losses: Properties damaged or destroyed belonging to an individual or to a business. If the clothing inventory of a store is damaged by smoke or water resulting from a fire, then property damage occurs.
4. Business record losses: Banes record losses may be classified in terms of
- decreasing revenue or income
- an increasing expenses
- a decreasing assets
- an increasing owner’s liabilities or
- a decreasing owner’s equity (net worth)
5. Liability losses: Liability loss may occur as a result of an individual voluntarily giving up some property, due to a threat of legal action or because of a breach of contract or a legal wrong (tort).
The most common form of liability is if someone fell down on one’s property and was heart. The business owner is usually held liable for a person’s health while that person is in his or her business establishment.
Additionally, a manufacturer or a retailer may be held liable for poorly manufactured goods, such as a toy that can harm children.
Kinds of Financial Risks
Generally, there are three types of financial risks: pure, speculative, and fundamental. Further inclusion in each of these may be seen in the following figure:
Figure showing the different types of risks
Officer Risks to be Covered
- Workers’ Compensation;
- Malpractice Insurance;
- Plate Glass Insurance;
- Crime Insurance;
- Group Insurance;
- Vehicle Insurance;
- Boning Insurance;
- Disability Insurance;
- Life Insurance Policies.
- Unemployment Insurance;
- Annuity Participation Plans; and
- Loss through dishonest employee
The main purpose of dealing with risk is to reduce uncertainties, reduce losses, and increase profits. This does not demand the elimination of the possibility of loss; rather, it just tries to reduce the likelihood of loss and improve the probability of success.
It is important to know how to handle risk. It is likewise important to know how much insurance to buy and what kind of insurance to carry.
Guidelines for Handling Risks
There are five general guidelines that are important in handling risks:
- Review all potential losses;
- Determine the probability of loss;
- Determine how much of a loss can be sustained;
- Review the amount of money involved with potential losses; and
- Identify those potential losses that should be transferred to another party- The insurance company.
Devices to Cope with Risks
All risks are not of the same magnitude. Some are big while others are small. Some are easily manageable while others are difficult to handle.
In general, four major methods of dealing with risks are recognized; (1) Risk avoidance, (2) Risk prevention, (3) Risk absorption, and (4) Risk transfer, la other words these are:
- Shift Risks
- Absorb Risks
- Eliminate. Risks
- Minimize Risks
Some Experts say the following:
- Remove the Cause
- Purchase Commercial Insurance
- Practice Hedging
- Create Self-Insurance
- Ensure Good Management:
- Careful & safer use of tools and equipment;
- Compliance with policies & rules with care;
- Training & orientation of personnel;
- Use of low-risk materials;
- Pre-qualifying of all credit sales customers;
- Maintaining safe & healthy working conditions;
- Duplication and double filing of all important records;
- Taking policies for all owners/ partners and key employees;
- Involvement in employee safety and accident-reduction campaigns;
- Bonding of and rotating of employees who handle money and book-keeping;
- Installation of loss-detection devices-smoke detectors, fire, burglar alarms, etc.
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