Being in business is exciting but it also means facing challenges and risks every day. These risks and threats to your business can come from innumerable sources, including economic conditions, lawsuits, competitors, and the weather. In order to be able to sleep at night, it’s essential that you adopt a variety of risk management strategies. These are designed to avert catastrophe and provide you with protection to the extent possible. There’s no single action to shield you from the consequences of risks to your business. You need to take a holistic approach and cover your bases. Here are five strategies to consider.
1. Choice of entity
You start a business to make money, but things don’t always work out as planned. If, for example, you can’t pay the remainder of your lease, you may be personally liable for what’s owed. One way to protect your personal assets—your home, your personal car, your personal bank account—is to use a business entity that provides personal liability protection.
A sole proprietorship or general partnership does not provide personal liability protection, but a limited liability company (LLC) or corporation does. The cost of setting up an LLC or incorporating and complying with other administrative tasks associated with having the entity is small compared with the potential personal liability exposure for not having the entity.
2. Insurance policies
There are many statistics showing that it’s not a matter of if but rather when you’ll experience an occurrence that could have been covered by insurance. Carrying adequate insurance coverage can go a long way in protecting you from property losses as well as liability claims. Consider the following types of policies for optimum protection:
- Business owners policy (BOP). This policy for small businesses provides protection for your property (except for excluded events and amounts over the policy limit) as well as liability protection for claims by third parties (e.g., a customer slips and falls on your premises). The policy may also cover employee theft and other occurrences.
- Professional liability coverage. This policy protects professionals from client claims of mistakes (malpractice), negligence, or unfinished work.
- Business interruption policy. This policy provides funds to cover your fixed costs (and possibly loss of profits) following an event that shuts you down (e.g., a hurricane).
- Workers’ compensation insurance. This protects the business for claims when employees have a job-related injury or illness.
- Employer practices liability insurance (EPLI). This covers you for claims by employees and former employees for such actions as discrimination and wrongful termination.
3. Contracts and agreements
Put it in writing…whatever you consider important to your business. This can be requiring employees to sign nondisclosure agreements protecting your trade secrets (client lists, pricing, etc.).
In some cases, you can’t even sue unless you have a written contract:
- Sale of goods over $500
- Leases over $1,000
- Agreements creating a security interest (e.g., a right to collateral)
If you draft contracts and agreements yourself, be sure to have an attorney review it so you’re protected to the extent you expect.
4. Disaster preparedness plans
What will you do when disaster strikes? What steps will you take to recover from a disaster? These actions should be specified in a plan you create for your business. The SBA offers guidance on crafting a preparedness plan.
5. Best business practices
All of the actions listed above are best business practices, but this list isn’t exclusive. There are numerous business practices that you can use to minimize risk. Here are some ideas to get you started in developing your own list of best business practices:
- Hire right. Be sure to find the right person for your job opening. For example, if you’re hiring someone who’ll be driving on company business, check the driving record.
- Enhance safety in your facility. This will minimize accidents by customers and staff.
- Check your computer security. Avoid ransomware and other threats that can damage your data and cost you a lot of money to repair.
- Stay compliant. Federal, state, and local laws are constantly changing, but you must stay up to date so you can remain compliant.
Be an offensive player when it comes to running your business to minimize your risks. Work with knowledgeable professionals, such as an attorney and an IT person to help you in this regard. Stay vigilant!