Chapter 11
Risk Management
In This Chapter
• Determining your business’s insurance needs
• Paying attention to regulatory issues that concern you
• Growing your business the right way
• Choosing an advisory board
Risk management is a key component of any business. By doing your homework upfront, calling on help when needed, and taking action when you know it’s necessary, you can ensure that your business is both operating legally and protected to the very best of your ability.
Too often, small businesses don’t consider risk management planning as a need for their business. But isn’t it better to be prepared than not?
As a small business owner, you won’t have expertise in every area of your business. You may be great with sales but not have a head for finances; maybe you excel in operations but aren’t so great with strategy. That’s why you need this chapter and its primary best practice: assemble a group of advisors to provide you with the guidance and support you need as your business grows and the risks you face multiply.
Securing the Right Advisors
As your business grows and changes, you will face many different kinds of risks. You’ll want a group of advisors you can call on to assist you with operations risk assessment, strategic planning sessions, problem solving, and decision making. This group can take the form of an advisory board.
DEFINITION
An advisory board is an informal group of individuals who help you make strategic decisions about your business by providing guidance, acting as a sounding board, and offering their own expertise.
Although advisory boards tend to be informal groups of individuals, you can make the process and the advisory board structure more formal by implementing the following best practices:
• Set regular meeting dates. Consider quarterly meetings that run between two and three hours in duration. (For smaller businesses, you may want to consider meeting twice a year initially.)
• Compensate members for their time and commitment with a small stipend on an annual basis.
• Have a staggered term of office of two years for advisory board members. By staggering the terms of office, you are not replacing your entire advisory board at the same exact time.
• Have a process in place to remove advisory board members who do not fulfill their responsibilities.
Choosing the Inner Circle
Advisory boards can provide you with valuable expertise that nobody else in your business has. To get the most out of your board of advisors, include individuals with a variety of backgrounds, including your particular industry, financial, strategic planning, human resources, and sales and marketing expertise.
Also include as part of your advisory board your accountant, legal counsel, insurance agent, banker, and any other professionals you hire for your business.
Many smaller businesses have seen the value of having an advisory board to help them to meet their goals. Sometimes you just need a push in the right direction—and the advisory board can do that for you!
Do Your Own Homework
Of course, having an advisory board doesn’t exempt you from doing the hard work of running your business. Specifically, you are in charge of running the advisory board meeting and setting the agenda. For every meeting, develop a formal agenda of what you would like to cover during that time. For instance, you might cover the following topics:
• New product-development initiatives
• New service offerings
• Expansion opportunities
• Partnerships
• Customer challenges
• General strategy planning
Let the advisory board members know what you need from them via the agenda. For example, maybe you want input on new products you are considering developing.
Take the advice you receive from the advisory board and combine it with your own experience and the experience of others to help you evaluate all the risks and make the very best decisions for your company.
The authors know of one small business—a magazine publishing company—that has been using an advisory board since inception. Members include an attorney, a marketing expert, a director of urban development, a publisher, and corporate and nonprofit executives. The board has assisted in directing the path of the magazine, helped with strategic growth plans, and served as a sounding board for the publisher/ editor.
Managing risk effectively is a vitally important job but one that is virtually impossible to do well without the insights and advice of experienced people. All of the advice that follows in this chapter assumes that you will take the first step of forming and consulting regularly with your advisory board.
Protecting Your Business
Regardless of the current size of your business, you need to take steps to protect yourself and the business. Certainly part of protecting your business is incorporating or setting up a similar legal structure (see Chapter 3).
You can also protect yourself and your business by following some commonsense best practices: purchase the appropriate insurances; make sure that you meet all state and federal regulations appropriate for your business; and track and document your responses to relevant incidents, such as a customer who trips over boxes stacked in an aisle of your store or an employee who gets injured on the job. If you operate a shop that works with caustic materials, you would be required to have eye wash stations throughout the shop floor in the event of chemicals splashing into an employee’s eyes.
As your business grows, it becomes even more necessary to ensure you have taken these steps. Failing to follow regulations or have the right protections in place can be a serious hindrance to your growth.
Handling Insurance Needs
Insurance needs vary widely depending on your particular business, the industry as a whole, and your location.
Protecting Small and Home-Based Businesses
If you’re running your business out of your home, do not assume that your homeowner’s policy will cover any business losses; likely it will not. Talk with your homeowner’s insurance agent to find out what you need to do to be protected if you run a business out of your home. They may offer Home-Based Business Insurance policies. However, some agents will advise you that you cannot run certain businesses out of your home because of the risk involved. While they aren’t necessarily prohibiting you from doing so, they will not insure you.
PRACTICE MAKES PERFECT
According to Nick Dager of Gagne & Dager Insurance Agency in Merrimack, New Hampshire, you should spend some time with your insurance agent describing your business and what you are doing—the products and services you offer, the number of employees you have, their roles and responsibilities, and your future goals. The more you share with your agent, the better able he will be to help you in protecting you and your business.
In fact, if something happens to your home business, you may find your insurance does not protect you and you are effectively uninsured. The complications from such a possibility are not even something you want to think about! Additionally, some states and cities require you to register a business you are running out of your home, which may entail paying fees. Do your research!
One policy common for small businesses is called a business owner’s policy (BOP). BOPs can cover businesses that make up to $10 million in revenue. It is a very reasonable insurance for small businesses and costs between $500 and $1,000 per year for coverage.
DEFINITION
A business owner’s policy (BOP) is similar to a homeowner’s policy in that it is a package policy. A BOP combines property, liability, and business interruption insurance for small to medium-size businesses. Retail and office services (such as medical offices, real estate firms, and so on) can be covered under a BOP.
A BOP covers incidents such as damage or destruction of business property and actions (or nonactions) taken by employees of the business that result in injury or property damage to others. Additionally, depending on your policy, you may have coverage for burglary or theft, protection if your product causes harm to someone, and coverage for vehicles registered to the business. Your agent can help you to select the BOP most suited for your business needs.
BOPs are not available for restaurants and bars. These businesses will need other types of insurance policies to cover them effectively.
Often, business owners are unsure of what coverage they actually need. For example, did you know that any employee you hire, even if he or she only works for your business one or two days a month, must be covered under a workers’ compensation policy? If something happens while they are on the job, you will be held personally responsible for the incident. These are the types of things you’ll learn from an insurance agent.
DEFINITION
Workers’ compensation is an insurance policy that is provided by the employer to ensure medical compensation for employees injured on the job. All employers should have workers’ compensation insurance on their employees, even if they are part-time employees.
Protecting Larger Businesses
Larger businesses may have to purchase insurances separately (rather than in a package such as a BOP). You should look into purchasing the following types of insurance for your business:
• General liability insurance
• Property insurance
• Loss of income insurance
• Disability insurance
• Product liability
• Criminal insurance
• Business interruption insurance
• Malpractice insurance
• Terrorism protection
Some of these insurance policies may not apply to you and your business. A conversation with your insurance agent will clear up many issues regarding insurance and ensure you are getting the appropriate level of protection for your business.
Dealing with Regulatory Concerns
Many industries have local, state, and federal regulations that must be followed. If your business—even if it is home-based—is part of one of those industries, you need to be sure you are in compliance with those regulations.
Employment laws may vary from state to state. Check out federal government and state websites, along with the U.S. Chamber of Commerce site, to help you determine which laws are applicable to your business. Additionally, many states require licenses to operate businesses within the state. This information can also be found on state websites.
Additional federal and state regulations that may be applicable to your business include the following:
• Patent, copyright, and trademark information (see Chapter 15)
• Tax laws (see Chapter 15)
• Certificate of Occupancy for buildings
• Laws relating to employees, including labor laws, wages and overtime, family and medical leave, jury duty leave, unemployment insurance, unionization, immigration, health and safety, workers’ compensation, termination, and sexual harassment protections
BEST PRACTICE
Two key resources are the Service Corps of Retired Executives (SCORE) and the U.S. Small Business Administration (SBA). Visit the SCORE website (www.score.org) and consider meeting with volunteers from SCORE to help you think through requirements for your business in your state. This is also perhaps the easiest and most effective way to assemble an advisory board. SCORE provides a wide variety of resources for businesses and also includes links to additional information. Many SCORE Business Counselors will serve as a personal mentor. Don’t discount the importance of this valuable resource for your business! You should also visit the SBA’s website (www.sba.gov) for free and low-cost help and support from a team of experts who can help you make sense of the regulatory requirements relevant to your business. The SBA offers business guidance and support in a wide range of areas and can connect you with counseling, training, and business development specialists providing free and low-cost services in your area.
Key Employee Insurance
For many small businesses, one or two individuals are absolutely key to the business. If you own a small business, you are a key employee of that business as well!
Key employee insurance ensures continuation of the business operations if a key person passes away, becomes seriously ill, or otherwise cannot participate in the business. This insurance policy is something like a life insurance policy on your key employees. Banks might require that you have this type of insurance before they will lend you money. Additionally, some key employee insurance policies provide financing meant to help you find a replacement for a business owner and to compensate you for loss of profits in the business.
Growth Risks
A big challenge for smaller businesses is managing growth. Common challenges relating to growth include managing new customers, retaining loyal customers, introducing new products and services, and figuring out when and how to hire people to support all those efforts.
For example, when is the right time to expand your inventory, take over more space, hire new staff, and address pressing infrastructure needs? How do you balance those initiatives against the fact that you are just starting to see more activity with your customer acquisition efforts? Shouldn’t you devote your limited resources to ensuring that those customers come back? You want to keep customer satisfaction high, but you also want to expand. By the same token, you don’t want to hire prematurely or invest in infrastructure you don’t actually need.
You face big choices, and every one of those choices affects multiple areas of your business. A poor decision about how to address growth could cause significant problems for your business, up to and including the need to lay off employees.
Let’s be frank: your competitors are probably hoping you don’t make the right calls here. The best way to disappoint them? Surround yourself with experienced advisors—paid or unpaid—who have faced similar growth issues in the past. These are the members of your advisory board.
We know of a situation where a small business decided that since they were doing so well, it was time to hire more employees to support that business and take over some additional space (at the time when the real estate market prices were sky high) in various areas throughout the state. Here’s the problem: they had only just started growing, and they had no idea whether it would continue.
Rather than getting advice, keeping track of what was happening in their industry, and developing sound strategic plans for growth, they embarked on the following course:
• Increased staff by 20 percent
• Signed multi-year leases for three new locations in office buildings
• Agreed to lease clauses that mandated significant investments in build-outs and other improvements
The business did no analysis of their plans. In one situation, they chose an area because a competitor was there. This is emotionally driven decision-making at its most dangerous.
They ended up in serious financial trouble when the market changed, and it changed quickly. Bottom line: they had no sound strategic plan for growth, no guidance, and no backup plan.
When you are ready to expand (or believe you are ready), develop a business plan for the expansion of your business and then discuss it with your advisory board. Remember all that planning we talked about as being critical to starting your business? Well, it is just as important when planning for your company’s growth.
Dealing with Rapid Growth
When you start to see rapid growth, try to avoid making snap decisions. You want to be sure the growth you see is actually sustainable growth and not just a spurt that you need to get through.
PRACTICE MAKES PERFECT
Monitor what is happening in your industry. You’ll see growth patterns there that will help you understand and plan for what is happening in your own business.
The biggest challenge is determining how much growth you can handle before you start investing in that growth. Don’t invest any money in growth before examining whether it makes good strategic sense for you to do so.
When you begin to see rapid growth in your business, try to identify the cause of that growth. Ask yourself the following questions:
• Has your marketing strategy improved?
• Is the growth due to the release of a new product or service?
• Has something occurred in your industry to create growth?
• Has your customer profile changed?
• Has the competitive situation changed?
Don’t assume that, just because you’re busier than you used to be, your business is growing. It may be that you are catering to the wrong customers and that this new group of customers simply takes more work. Maybe your pricing could be increased because demand for the product or service has increased. Maybe processes in place need to be reworked to be effective for your business, or you need to improve your systems in general. Analyze the situation—and create a realistic plan for dealing with it!
Balancing Innovation with Efficiency
One major challenge for small businesses is balancing innovation with efficiency. How do you balance the objective of making profits now to support the business and the objective of building for the future to sustain your business?
One best practice that can help you achieve this balance is to set aside time for being innovative. By this we mean calendar slots for both you and your employees. By scheduling specific time periods devoted exclusively to innovation, you engage your employees in brainstorming sessions that may turn up some fantastic business ideas. You create a culture of sharing ideas and being creative that can benefit your business in the long run.
BEST PRACTICE
Schedule idea development sessions on a quarterly basis with your employees and partners. These brainstorming sessions will enable your employees to participate in growing the business and will encourage them to think of creative, innovative ideas for the business.
Part of running your business effectively and efficiently means to have processes and procedures in place to ensure that orders are fulfilled, services are delivered, customers are invoiced, and inventory is managed. Employees who work in these areas may have ideas for changing processes and procedures to be more cost effective, efficient, or more in line with customers’ needs. Setting aside some time to catch up with those doing the work to learn their ideas for improvements will garner you some great ideas on how to be more innovative.
As you grow, you might want to give employees time off from their daily responsibilities by allowing them to be part of an innovation team. You don’t need a large team—even a handful of key employees can come up with great ideas. Find a way to invest the time, even if it means taking a few hours out of the day each month to work together as a team and brainstorm.
The Least You Need to Know
• Choose an advisory board to guide you in strategic decision-making and provide advice for you and your business.
• Work with an insurance agent to determine your business’s insurance needs.
• Ensure you understand regulatory issues that apply to your business based on the state and industry in which you work.
• Manage growth by planning for it.
• Find a way to balance innovation with efficiency in your business.
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