RISK MANAGEMENT SYSTEMS

Running a business comes with many different types of risk. Some of these potential hazards can
destroy a business while others can cause serious damage that can be costly and time- consuming to
repair. Despite the risks implicit in doing business, CEOs and/or risk management officers can
anticipate and prepare for them regardless of the size of the business.

Identifying Risks

If and when risk becomes reality, a well-prepared business can minimize the impact on
earnings, lost time and productivity, and the negative impact on customers. For start-up
businesses and established organizations, the ability to identify which risks pose a threat to
successful operations is a key component of strategic business planning. Business risks are
identified using various methods, but each identifying strategy relies on a comprehensive
analysis of specific business activities that could present challenges to the company. Under
most business models, organizations face preventable, strategic, and external threats that can
be managed through acceptance, transfer, reduction, or elimination.

Below are the main types of risk that can affect a business:

Physical Risks

Building risks are the most common type of physical risk. Fire or explosions are the most
common risk to a building. To manage building risk, and the risk to employees, it is
important to do the following:

 Make sure all employees know the exact street address of the building to give to the
911 operator in case of emergency.
 Make sure all employees know the location of all exits.
 Install fire alarms and smoke detectors.
 A sprinkler system will provide additional protection to the physical plant, equipment,
documents and, of course, personnel.
 Inform all employees that in the event of emergency their personal safety takes
priority over everything else. Tell them to leave the building and abandon all work-
associated documents, equipment, and/or products.

Business Risk

Hazardous material risk is present were spills or accidents are possible. Among the
hazardous materials most frequently spilled or released into the atmosphere of a workplace
are:

 Acid
 Gas
 Toxic fumes
 Toxic dust or filings
  Poisonous liquids or waste

Fire department hazardous material units are prepared to handle these types of disaster.
People who work with these materials, however, should be properly equipped and trained to
handle them safely.

Create a plan to be implemented to handle the immediate effects of these risks. Government
agencies and local fire departments can help in acquiring information to prevent these
accidents. Such agencies can also provide advice on how to control them and minimize their
damage if they occur.

Location Risks

Among the location hazards facing a business are nearby fires, storm damage, floods,
hurricanes or tornados, earthquakes, and other natural disasters. Employees should be
familiar with the streets leading in and out of the neighborhood on all sides of the place of
business. Individuals should keep sufficient fuel in their vehicles to drive out of and away
from the area. Liability or property and casualty insurance are often used to transfer the
financial burden of location risks to a third-party or a business insurance company.

Human Risks

Alcohol and drug abuse are major risks to personnel in the workforce. Employees suffering
from these conditions should be urged to seek treatment, counselling, and rehabilitation, if
necessary. Some insurance policies may provide partial coverage for the cost of treatment.

Protecting against embezzlement, theft, and fraud may be difficult, but these are common
crimes in the workplace. A system of double-signature requirements for checks, invoices, and
payables verification can help prevent embezzlement and fraud. Stringent accounting
procedures may discover embezzlement or fraud. A thorough background check before hiring
personnel can uncover previous offenses in an applicant's past. While this may not be
grounds for refusing to hire an applicant, it would help HR to avoid placing the new hire in a
critical position where the employee is open to temptation.

Illness or injury among the workforce is inevitable and a persistent problem. To prevent loss
of productivity, assign and train backup personnel to handle the work of critical employees
when they are absent due to a health-related concern.

Technology Risks

Power outage is perhaps the most common technology risk. Auxiliary gas-driven power
generators are a good back-up system to provide electrical energy for lighting and other
functions. Manufacturing plants use several large auxiliary generators to keep a factory
operational until utility power is restored.

Computers may be kept up and running with high-performance back-up batteries. Power
surges may occur during a lightning storm (or randomly), so furnish critical business systems
surge-protection devices to avoid loss of documents and destruction of equipment. Establish
offline and online data back-up systems to protect critical documents.
Although telephone and communications failure is relatively uncommon, risk managers
may consider providing emergency-use-only company cell phones to personnel whose use of
the phone or internet is critical to their business.

Strategic Risks

Strategy risks are not altogether undesirable. Financial institutions such as banks or credit
unions take on strategy risk when lending to consumers while pharmaceutical companies are
exposed to strategy risk through research and development of a new drug. Each of these
strategy-related risks is inherent to an organization's business objectives. When structured
efficiently, the acceptance of strategy risks can create highly profitable operations.

Companies exposed to substantial strategy risk can mitigate the potential for negative
consequences by creating and maintaining infrastructures that support high-risk projects. A
system established to control the financial hardship that occurs when a risky venture fails
often includes diversification of current projects, healthy cash flow, or the ability to finance
new projects in an affordable way, and a comprehensive process to review and analyze
potential ventures based on future return on investment.

Making a Risk Assessment

After the risks have been identified, they must be prioritized in accordance with your
assessment of their probability.

Establish a probability scale for purposes of risk assessment.

For example, risks may be:

1. Very likely to occur

Other risks must be prioritized and managed in accordance with their likelihood of occurring.
Actuarial tables—statistical analysis of the probability of any risk occurring, and the potential
financial damage ensuing from the occurrence of those risks—may be accessed online and
can provide guidance in prioritizing risk.

Insuring Against Risks

Insurance is a principle safeguard in managing risk, and many risks are insurable. Fire
insurance is a necessity for any business that occupies a physical space, whether owned
outright or rented and should be a top priority. Product liability insurance, as an obvious
example, is not necessary for a service business.

Some risks are an inarguably high priority, for example, the risk of fraud or embezzlement
where employees handle money or perform accounting duties in accounts payable and
receivable. Specialized insurance companies will underwrite a cash bond to provide financial
coverage in the event of embezzlement, theft, or fraud.
When insuring against potential risks, never assume a best-case scenario. Even if employees
have worked for years with no problems and their service has been exemplary, insurance
against employee error may be a necessity. The extent of insurance coverage against injury
will depend on the nature of your business. A heavy manufacturing plant will, of course,
require more extensive coverage for employees. Product liability insurance is also a necessity
in this context.

If a business relies heavily on computerized data—customer lists and accounting data, for
example—exterior backup and insurance coverage are mandatory. Finally, hiring a risk
management consultant may be a prudent step in the prevention and management of risks.

Risk Prevention

The best risk insurance is prevention. Preventing the many risks from occurring in your
business is best achieved through employee training, background checks, safety checks,
equipment maintenance, and maintenance of the physical premises. A single, accountable
staff member with managerial authority should be appointed to handle risk management
responsibilities. A risk management committee may also be formed with members assigned
specific tasks with a requirement to report to the risk manager.

The risk manager with the committee should formulate plans for emergency situations such
as:

 Fire
 Explosion
 Hazardous materials accidents or the occurrence of other emergencies

Employees must know what to do and where to exit the building or office space in an
emergency. A plan for the safety inspection of the physical premises and equipment should
be developed and implemented regularly including the training and education of personnel
when necessary. A periodic, stringent review of all potential risks should be conducted. Any
problems should be immediately addressed. Insurance coverage should also be periodically
reviewed and upgraded or downgraded as needed.

The Bottom Line

While business risks abound and their consequences can be destructive, there are ways and
means to insure against them, to prevent them, and to minimize their damage if and when
they occur. Finally, hiring a risk management consultant may be a worthwhile step in the
prevention and management of risks.