Although the actual risk management procedures vary depending on the size of the business, the problems that arise from poor management of risk are be the same.

If the risk is not managed well, financial loss will be caused because of inadequate security and control measures put in place to protect the business, as well as its assets and information.

Risk management, regardless of who does it, consists of:

1. Identifying and analysing the things that may cause loss to the business
2. Choosing the best method of dealing with each of these potential things that could cause loss

Exposure to loss

Identifying exposure is a vital first step. Until you know the scope of all possible losses you will not be able to develop a realistic, cost-effective strategy for dealing with them. The last thing you want to do is come up with a superficial band-aid approach that may cause more problems than it solves. It is not easy to recognise the hundreds of hazards or perils that can lead to an unexpected loss.

Unless you have experienced a fire, for example, you may not realise how extensive fire loss can really be. Damage to the building and its contents are obvious exposures, but you should also consider damage from smoke or water, from the fire hoses, damage to employees property (personal belongings, tools etc) and to property belonging to others (machinery and equipment leased from other firms).

There are also the losses from business that you lose during the weeks that it takes to get the business back to normal again and the loss brought about by customers who may not return when you reopen the business, because they will be lost to competitors.

You begin the process of identifying exposures by taking a close look at each of your business operations and asking yourself these questions:

1. What could cause a loss?
2. How serious would that loss be? – that is, what kind of costs in dollars would be involved? This is not to determine where the money will come from, but how costly the loss could be.

Many business owners use a 'risk analysis' questionnaire or survey as a checklist. These are available from various agents (insurance etc), most of whom will provide the expertise to help you with your analysis.

Benefits of risk management

Risk management programmes are all about businesses reviewing their administrative, accounting, financial, insurance and personnel areas to evaluate possible risks and putting in place strategies for covering those risks.

Sound strategies would produce the following benefits:

• Reduction of insurance premiums
• Reduction of your chance of being sued in certain circumstances
• Reduction of any losses to property
• Reduction of the time when the business may be unable to operate
• Allowance of a plan to replace key people in the business, should they be incapacitated for some reason
• Reduction of losses to automobile and other equipment necessary for the efficient running of the business

Strategies

Every business is subject to losses from many uncontrolled risks. The risks will vary according the business exposure and sometimes its location. One of the ways to protect your business against these risks is to carry sufficient types of insurance to cover against unforeseen events, robbery and fraud. Also focus on your company's former risk management efforts on operational risk exposure. Have a look at the following tips and see if they apply, or can be applied to your business.

• Work out the operational risks in your business activities and put in place strategies to minimise them. For example, businesses that handle large volumes of cash should be aware of the likelihood of crime and take steps to prevent operational loss.
• Prepare to respond quickly to any emergency or disaster. That is, have in place a plan that is followed should something like this arise.
• Develop strategies to minimise the frequency and severity of any of these risks.
• Make sure you protect your data security, especially if your business is involved in e-commerce or your systems are highly computerised.

What about pre-operational risks?

The Australian Securities and Investments Commission (ASIC) advise that many businesses extend considerably large amounts of credit to other businesses and yet have no plans set in place to protect themselves in case the businesses they are dealing with are not genuine. It seems many business operators have very little idea or awareness of the role of simple credit checking, for instance.

Before doing business with another organisation or company it is wise to check with the registers held by the ASIC to find out who is behind the company or business and to do other sensible background checking. It is ludicrous that a business would spend so much money and time on increasing its income and profitability and yet put no effort or cost into ensuring that risks involved with business they deal with are minimised.

If you own a business, it is a good idea to have a full discussion about these matters with your accountant and lawyer, to put in place strategies for protecting the business against unscrupulous or shonky operators. Many businesses do not have a plan for reducing their chances of losses in a situation where a customer goes into liquidation or bankruptcy. Too many ignore the standard procedures of putting agreements in writing - they are happy to take the other person's word alone.

If you are going into business, you are taking on a great amount of risk so you need to take action to minimise that risk early on before you even commence operations.

Don't risk being swindled

You can reduce your chances of being swindled by knowing with whom you are dealing. This will help to protect you against getting involved with operators who are con artists, which include those who set up companies, rack up debts and then close up shop, leaving the debts behind them – including the money they owe you. It will also help to protect you from dealing with people who may not be able to pay you what they owe when it is due.

Here are some steps that you can take to reduce your risk of being burnt early on before you open for business:

1. Find out who you are dealing with. Find out if there is a company behind the business name, because there is a big difference between a business operated by people training under a business name and one operated by a company. Anyone can register a business name, but a company must be registered with the ASIC and therefore has to provide information that any member of the public can have access to.
2. Search the database at the ASIC. A good place to start is to use the ASIC's database to find out a lot about a company.
3. Analyse and use the results. Some of the questions that you will want answered include:
   (a) How long has the company been in business?
   (b) What is the company's status – is it registered, de-registered, or under administration?
   (c) What is the address of the principal place of business – is a home or an office?
   (d) Who are the directors and company officers – how long have they been with the company, are the officers disqualified for any reason, are any of them bankrupt?
   (e) What is the company's capital – is it a $2 company, or does it have more capital?
   (f) Who are the members of the company?
   (g) Does the company have overdue annual returns and other paperwork that is required by the ASIC? If this type of documentation is overdue, then it is a good sign that perhaps the systems are not efficient, so care must be taken.
   (h) What are the company's financial details? If it is a small proprietary company, then it does not have to prepare and lodge financial statements, but a larger company or a public company does.
   (i) What other companies have the directors and officers of this company been involved in? If they have been involved in other operations, did they fail or were they successful?
4. Ask more questions. Other questions that can be asked include:
   (a) Does the company have adequate books and records?
   (b) Does the company have an accountant and how long has that person been associated with the company?
   (c) Does the company have a good name with other suppliers and competitors etc?
   (d) What is the company's credit rating?
   (e) What is the quality of the company's goods or services?
   (f) Does the company operate under a licence?
   (g) Is the company a member of an association in their industry?

At the end of the day it is up to you to do your homework and get professional advice if necessary to ensure that all the questions asked are answered, so as to minimise the risk to you and your business.

Risk and the small business

Is your business a risky business? Every business is. We all know that. Just think for a moment about the hundreds of things that most business owners worry about. While a few are predictable, others are not. Perhaps you can plan and control to a certain extent some of them.

These would be:

• Expected sales volumes
• Salary costs
• Taxes
• Overhead expenses
• Equipment and supply costs
• The price you charge for the goods and services you offer to your customers.

Others are unpredictable, largely beyond your control. Some of these include:

• Actions your competitors may take
• Changing tastes and trends
• The effect they have on your market and your customers
• The local economy and its impact on your customer base

And then there are the events that can and do happen to small businesses all the time. They can directly affect your day-to-day operations or impact profits and result in financial losses that may be serious enough to cripple the business or even bankrupt it. You have probably already considered the most obvious risks and bought insurance to protect against the financial losses that could result from them. Most business owners recognise the loss potential from fire and injury, for instance.

Fire can damage or destroy the building a firm occupies and turn the building's contents into a pile of smoking rubbish. Whether you rent or own your place of business, your ability to continue to do business may seriously be affected. If someone is injured on the premises, or injured by a product that you manufacture or market, or because of the way your firm performed a service, your firm may be held responsible for that person's costs and legal action may result. There are hundreds of other losses and liabilities that every small business faces, many of which are often overlooked or ignored.

Many larger businesses have a full time person whose responsibility it is to manage risks within that organisation. They take steps to protect the firm against accidental and preventable losses and to minimise the financial consequences of losses that cannot be prevented or avoided. However, most small business owners cannot afford the services of a specialised person looking after that function, so the owner often has to take on that responsibility.

What kinds of exposure should be looked at?

In general, most businesses should address the potential for:

• Property losses
• Business interruption losses
• Liability losses
• Key person losses
• Automobile losses

Property losses

Property losses will stem from one of the following:

• Physical damage to property
• Loss of use of property
• Criminal activity

Property damage can be caused by many of the common perils such as fire, or lightning, or vandalism. It is a rare business that does not buy insurance to protect against these.

To cope effectively with the possibility of physical damage to property, the business owner should consider more than just damage to or destruction of the building itself. Contents may be even more susceptible. Manufacturers might lose raw materials and finished goods that were ready to be shipped out. Merchants may lose valuable stock and fixtures. Any business might lose valuable accounting records. Machinery or equipment may become inoperable because of fire and, if replacements cannot be found and installed immediately, the business may be forced into a temporary shutdown.

The business could lose the use of property without suffering any physical damage. A government agency can close a manufacturer for violating health and safety regulations. The Health Department may close a restaurant because of unsanitary conditions. Small businesses may also be open to crimes committed by others, such as burglary and robbery. There is also the possibility of white-collar crime and employee theft or embezzlement.

Business interruption losses

You have already seen how a direct loss from fire can shut down a business temporarily. Although property insurance provides money for repairing or rebuilding physical damage that is a direct result of a fire, most property policies do not cover indirect losses such as the income that is lost while the business is not operating.

A special kind of insurance will cover indirect losses that occur when a direct loss forces a temporary interruption of business. Business interruption insurance reimburses the business for the difference between the normal income and the income that is earned during the enforced shutdown period.

Not only is income reduced or cut off completely during interruptions, but also many business expenses continue as usual. These could include taxes, loan repayments, salaries to employees, interest charges, depreciation and telephone charges. Without income to pay for these expenses, the business is forced to dip into its reserves and, if it does not have any reserves, then it can run into major problems.

Liability loss

Every business also faces exposure to liability loss. A business may become legally liable for bodily injury suffered by another person or persons, or for damage to property of others.

This liability may be the result of:

• A court decision (for example, when someone brings a law suit charging negligence)
• Statutory provisions (for example, workers' compensation law)
• Violation of contract (a contract that makes one party responsible for certain kinds of losses)

Public liability

A business may be held liable for injuries or other losses suffered by a member of the public as a result of the firm's or its employee's negligence or fault. For example, a customer trips on a broken step, or a defect in the product causes injury to the user, or a workman who installs a ceiling fan fails to secure it properly and it falls, injuring a customer. The possibilities are limitless.

A firm that is found legally liable for harming a third party will have to pay damages to compensate the injured party. Compensation can run into many thousands and can hurt the business, or even put the business out of action. Regardless of who wins or loses such a legal action, litigation is still time consuming and very costly.

Key person losses

What would happen to your business if an accident or illness made it impossible for you to work? What if one of your partners or your sales manager was to die suddenly? Most of us would rather not think about such a 'what if?' Nevertheless, it is important for you to prepare your business for survival long before a person, who could be called a key person, dies or is disabled. It is a step that most businesses overlook.

The following are the questions that need to be answered:

1. How will the business survive if the owner becomes ill or disabled?

2. What will the owner's source of income be?

• How will it be treated for tax?
• Who would take over so the business could continue?
• What if that person is not qualified or is a minor?

3. Suppose the owner dies?

• If the will is not in place before the owner's death, what happens to the business?
• Does it close?
• Does someone inherit it?
• If the owner's life savings have been invested in the business, will the surviving family have to watch those savings go down the drain because no one knows what to do or how to do it?
• What will the surviving family's source of income be while the future of the business is being decided?
• If the business has to he sold, where would the working capital come from?
• How is the fair market value of the business going to be determined?
• Would the fair market value of the business change because of the loss of a key person?
• If the business forms the bulk of the estate, what are the tax implications for the surviving family?
• Is there some pre-death strategy that could minimise a tax liability?

4. Suppose the business is a partnership and one of the partners dies?

• Unless the partner has prepared some other binding arrangement, the partnership is resolved when one of them dies
• The duties of the surviving partner are limited to winding up the affairs of the partnership
• The surviving partner will be personally liable for losses that the business assets are insufficient to cover.
• The partners may have set up agreements that provide for the surviving partner's purchase of a deceased partner's interest at a pre-arranged evaluation. Business life insurance of each partner could provide for the survivor's need to purchase the deceased partner's interest.

5. What if the business is incorporated?

In most small incorporated business (companies) there are only a few shareholders and most of them take an active part in running the business. The death of a major shareholder could throw the spotlight on the survivors' differences. Conflicts or major personality clashes can seriously threaten the continuing survival of the business. If the major shareholder is deceased then his share of the business will form part of his or her estate.

• If those shares are passed on to heirs, how will things work?
• What if the heirs decide to get involved in the business?
• What if the heirs decide to sell out their share?

It is essential, therefore, for a plan to be put in place early. This planning should be discussed fully with your advisers and solutions put in place at the earliest.

6. Exposure from a key person

Don't overlook what would happen if you were to suddenly lose the services of a key person (a person who is not the owner or partner, but who has expertise in a particular area).

• What impact would that person's absence have on sales, costs, or productivity?
• How would you reassign duties to cover the missing person's functions?
• What extra costs would have to be incurred to recruit a replacement
• How long would it take to train a replacement?

Automobile losses (refer to loss control)

Preventing losses

This can be put into 2 groups:

1. Loss control – what can be done to prevent or limit exposure to loss?
2. What techniques can be used to ensure that funds will be available for losses that cannot be avoided or prevented?

Loss control

One principle of loss prevention and control is the same in business as it is in your personal life - avoid activities that are hazardous. For example, a business may decide not to sell a particular product because it is likely to injure customers. Thereby the firm avoids a product liability exposure. If you cannot avoid an exposure completely, minimise it. Always look to see if the extent of any possible loss can be further reduced.

A business owner may also decide that the firm can afford to absorb some losses, either because the frequency and probability of loss is very low or because the value of the loss is manageable. For example, a firm may own several vehicles. All the drivers have an excellent safety record and exposure to collision etc is low. Because the vehicles are older, their book value has decreased substantially. Rather than pay heavy insurance premiums on the vehicles, the firm decides to carry some of it themselves and insure the rest of the risk.

Providing for loss

Another method of managing exposure to loss is by transferring the risk. Most businesses do this by buying insurance, but there are other non-insurance options. For example, a firm may decide to cut its insurance on its vehicles and use a local delivery service for that function or, to reduce exposure to property damage, a retailer may decide to cut its in-store stocks and to handle certain items only on a special order basis. The result will be that stock levels in the store are lowered; therefore, the exposure is lowered.

Use of insurance for risk

The most common method of transferring risk is by the use of insurance. By insuring your home and your car, you have transferred much of the risk of the loss to the company that issues the policy. You pay a small amount in premium, rather than run the risk of not being protected against the possibility of a much larger loss.

In business insurance you can decide which exposures you absolutely must insure against and which ones you can cover yourself. Some decisions in this regard have already been made for you, such as those required by law (eg workers' compensation) and others required by customers or clients (where lenders will finance a vehicle, but require you to take out insurance before they pass over the loan).

As far as obtaining insurance is concerned, make a time for full discussion with an insurance professional who will take you through all the methods of risk cover and put in place what the business needs.

Insurance checklist for businesses

In addition to helping you identify, minimise and, in some instances, eliminate business risk, this checklist will help you strengthen your insurance programme and provide guidelines for discussion you should have with a qualified insurance professional. Some of these items are coverages that are essential for most businesses, while others are desirable, and others are only for benefits for staff.

Insurance is essential for the following:

• Fire insurance
• Liability insurance
• Automobile insurance
• Workers' compensation
• Business interruption insurance
• Burglary cover
• Glass insurance
• Employee benefits
• Disability insurance
• Other types

Survival checks

Here are some more survival checks that every business owner should look at carefully and put in place if things are not going as planned.

The whole objective of the exercise is two-fold – reduce costs and increase income.

Here are 15 things you need to check off:

1. Check your margins – see that you are making a profit on your sales. The gross profit margin that you put on to your products is really the starting point and will determine whether you will gain or lose.
2. Reduce stock levels – to where they are sufficient to meet sales demand. It is no good carrying excess stock because that is money that is sitting on the shelves
3. Watch all your collections – Any money that is owing to you by customers should not be allowed to run into overdue for too long. A friendly call to chase money owing can make a big difference to your cash flow and, as 'cash is king'; your business will have more chance of failure if your cash position is poor
4. Reduce your credit accounts – If possible have little or no accounts on credit. Give credit only to those customers who are regular buyers and have been with the business for some time. Customers who continually pay their bills late should be wiped from credit facilities, as the time spent in recovery of these debts is a drain on the business
5. Do daily banking – Make sure that income received by the business is banked daily to reduce costs charged by the bank
6. Reduce rent – If possible reduce the rent you are paying by getting rid of excess areas. This can be done by reducing your lease from the landlord or perhaps subleasing areas that are not used
7. Cash-in equipment – Any excess equipment or plant that is not used by the business can be turned to cash
8. Clear slow moving stock – It is best to reduce the price of stock and turn it into cash rather than have it sitting on the shelves or in the warehouse where it does not sell. Best to cut your losses and use the cash to buy in stock that does sell
9. Watch your staff – Staff that do not produce should be dismissed. Staff in the business should each be contributing towards the profitability of the business and, if they are not prepared to work or if they do not have the expertise, then they should be replaced
10. Pay your bills on time – but not before the due date. Do not pay your bills early because having the money sitting in your bank will reduce your bank fees and interest costs. If you can, take advantage of any early payment discounts that are offered and, where necessary, if the funds are short contact your suppliers and see if they can allow you further time to pay
11. Talk to your bank – If you are a good customer with your bank, then there is nothing lost by calling and seeing if it is possible to get reduced banking fees and interest costs
12. Use your credit card – Credit cards often have an interest-free period. You can take advantage of this by using your card to pay some expenses and then paying the credit card on the due date. The result is that you have been able to get an interest-free period through the use of this facility
13. Look at your trading times – It may be that there is not the necessity to open the hours that you do. You may find that it is best to close at 4.00pm every day and open up for all of Saturday morning, for example
14. Discontinue products that are not profitable – Assess each product line in your range and, if some are slow moving and are not contributing a profit, then it is best that they be discontinued. Far better to turn that into ready cash to be used for those products, which do provide a profit contribution
15. Look after your customers – Your customers are the basis of your success and the service to them should be superior at all times. Happy customers will keep coming back to buy. It is when they stop coming back that sales are lost and the business will suffer.

This factsheet is provided by ezybusiness.com.

Their disclaimer is as follows: This fact sheet is intended to giver users general information and is in no way a substitute for taxation, legal or other professional advice. Ezycorp and its related entities accepts no responsibility for the accuracy or currency of this fact sheet and also does not accept any liability (irrespective of how incurred, including negligence) for loss to any person, who either acts or does not act on the basis of information contained in this fact sheet).

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