Entrepreneur Manual

Friday, January 9, 2009

Risk Management

All businesses are indirectly in the insurance business. I am not referring to the traditional types of insurance, rather I am referring to the management of risk. The people we hire, the technology we put in place, the operational procedures we produce are all a form of insurance we invest in to protect and strengthen our businesses. There is the flip side, what is the cost of not having them? What is the risk?

An example: A business is a store that only has one person that works in the store. The store owner feels like he cannot afford the $15,000 annually to hire a part time person. To fully understand his predicament, I have him do a little bit of workplace reconnaissance.
  1. Confirm that the business is operating in a risky manner.
  2. Estimate the potential loss if the employee was to get sick, injured in an accident, or quit?
  3. The owner estimated this exposure at $8,500.
  4. The owner took that risk and deducted it from the costs associated with hiring the part time person and he realize the actual increase of costs is $6,500, not the initial $15,000 that the owner assumed.
Armed with the actual costs the business owner was better able to make his decision. He was now informed and could properly manage his risk.

As business owners and managers, we need to manage this risk. The owner determined that the $6,500 additional investment was affordable so he hired the person. In addition, he understood the investment needs to yield a return. He set forth additional tasks for the two person team to complete to help get more value out of the investment.

This approach will help you make decisions that are based on risk adjusted numbers. This outlook has helped me lower my risk and strengthen my company. I hope it can do the same for yours.



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