Opinion: 4 ways to manage financial risk

Risk comes in many forms for all of us, including business owners who have a special set of additional risks: industry changes, competition, fluctuations in demand, legal problems, fraud and theft, natural disasters, supply chain problems and other economic turmoil such as inflation and upward pressure on payroll costs.

Business owners are compensated for the risks they take – but only if they can successfully navigate through them. Here are four ways to take control, for business owners and for the rest of us.

1. Avoid risk. Don’t get in fistfights, parachute or ride bucking broncos. If you want to be extra careful, don’t drive a car or own a home or business. Obviously, some hazards are easier to avoid than others. In the real world of your business, risk avoidance means doing regular assessments to head off trouble before it finds you: Inspect your worksite to identify and eliminate potential physical hazards to employees, equipment, inventory and the building. Stay compliant with industry regulations and other legal requirements, especially when they change. Protect physical and cyber access when you lose an employee by changing locks and passwords, etc. Carefully design and implement safety protocols with the help of experts in your industry – and make sure staff members are trained on those procedures. Use your imagination: Think, what could possibly go wrong? And then, how you can prevent it.
2. Reduce risk. The next best thing to dodging or eliminating a risk is to keep it to a dull roar. So, wear a seat belt and make sure your smoke alarms are in good shape. For your business, risk reduction may mean subscribing to legal compliance newsletters for updates in your industry; keeping abreast of what your competition is doing to expand their footprint – and making your own adjustments to avoid getting stepped on; having robust cybersecurity measures and keeping them updated; and implementing controls on business cash and banking procedures to prevent mistakes and fraud. Risk reduction can also mean having processes ready, including staff training, when problems do happen – for example, emergency procedures for workplace injuries and equipment failures. Having a trusted attorney and accountant, and not being shy about calling them when in doubt, can help reduce potential problems. Look around, imagine bad-case scenarios, and do what it takes to cut the chances of those things happening – and do so on a regular basis.
3. Share risk. This generally means paying premiums to an insurance company to reimburse you if a risk results in financial loss. The basic insurance policies for business owners are property and casualty and/or general liability, workers’ compensation, and health. Many also purchase business overhead insurance, which helps pay the bills when a natural disaster shuts down operations for a period. There’s also disability insurance – not just for business owners – to replace a portion of one’s income when injured or ill; life insurance on key employees to help with hiring and training replacements, and, for example, replacing revenue from a key salesperson in the event of untimely death; and life insurance on the business owner to fund the transition to successors already identified. There are now even insurance policies to share the risk of a ransomware attack. But understand you may not need every kind of insurance under the sun, and remember you’ll still also want to avoid and/or reduce those insured risks, because the shared risk means you will still have some financial skin in the game in the form of copays and/or deductibles – and loss claims can lead to increased insurance costs. Evaluate your unique risk exposure profile, and talk to experienced professionals to determine which insurance products may make sense for you, then carefully comparison shop for price and features.
4. Self-fund it. If the resulting financial loss is relatively low, or “uninsurable,” then we have to bear the cost ourselves—just say “that’s life,” pay the piper, and move on. There’s always the risk that we will run over a nail and need to buy a new tire, but there’s not an insurance policy to cover that. Most risks fall into this category. The risk of losing an employee to a competitor, most equipment breakdowns, rising costs of doing business and many other daily hazards for business owners require creativity to avoid, reduce or self-fund.

Recognize each of the significant types of risk in your life, including in your business, and for each of those risks, think about your options within the framework of the four ways to manage risk.

Certified financial planner Kenny Gott is president at Piatchek & Associates and author of the book “Bottom Line Financial Planning.” He can be reached at kgott@pfinancial.com.