Most small business owners have at least some knowledge of the risks they face. Likely their insurance broker has educated them on some basic coverage for workers compensation, property damage, and business interruption to name a few. But several other potential exposures exist that, if left unaddressed, can mean massive and unncessary risk for a small business. As a company grows, so too does its risk.
Business owners therefore would be well served to understand exactly what risks they face, how their specific industry affects their situation, and what they can do about it.
Never be blindsided by a seemingly unforeseen issue. Visualize worst case scenarios so you can prepare for them and act accordingly. Here are five threats to help get your imagination going.
Key employee losses
Almost all companies have a few true linchpin employees. These are people who affect not just the bottom line, but may also have irreplaceable expertise, or other tough-to-replace qualities. You can probably think of a few of yours off the top of your head. If this person were leave unexpectedly due to death or injury, how much damage would your business incur? Would you be able to perform at your current level? Would you lose large accounts?
Did you know there is coverage available for this exact scenario? Key person insurance works basically as a life insurance policy for the key employee. If the person dies or suffers serious injury, the company will receive the insurance payoff to cover the expenses of finding a replacement and covering potential losses.
Contract exposures
Many small business owners don’t adequately understand each clause contained within the contracts their signing. They risk being taken advantage of by suppliers or even customers. Cutting costs by being frugal with legal expenses can be devastating and is certainly not worth the risk.
Instead, ideally you’ll want an independent third party to review your contracts and the specific clauses within. While this may seem like a superfluous step at first, it can save you a serious headache down the road. Staying out of court is always a good thing.
Supply chain risk
Risks within the supply chain can pose significant and hidden risks for your company and can seriously complicate delivering your goods and services to the market.
Only a small percentage of management teams truly understand how vulnerable their supply chain (and each supplier’s supply chain) is to a disruption event.
Disruption events can include unfavorable exchange rate movements, input price increases, energy price increases, supplier insolvency, labor shortages, and political and social unrest.
So what steps can you take to mitigate the financial impact of your supply chain risks?
- Improve collaboration with your suppliers and partners
- Shift from a single to multiple suppliers to minimize over-dependency and related vulnerability
- Benchmark the performance of suppliers to allow an “early warning system” that may signal a more systemic failure
- Conduct a risk audit of key suppliers and develop a risk/reward score to evaluate outsourcing and the use of third party providers
- Complete a formal mapping of the supply chain including a Risk Register
- Evaluate the intended delivery route for risk factors
- Evaluate IT security and the ability to track/re-route goods while they are in transit
Reputation damage
A study by the World Economic Forum found that on average, more than 25 percent of a company’s value is directly attributable to its reputation. Reputation issues that are not quickly addressed and properly managed can quickly snowball into serious strategic crises.
Considering the ubiquity of social media, blogging, and other publishing outlets, the risk of something negative appearing on a Google search results page are ever-present. Reputation issues can arise from employees behaving poorly, cyber attacks undermining credibility, negative press coverage on supplier’s labor practices, or disgruntled employees speaking out.
While they are still relatively rare, brand reputation insurance policies exist to protect against these types of threats. Obtaining coverage in this area will cover costs of PR, brand monitoring, communications and media relations. Always keep in mind that reputation issues occur with companies of all shapes and sizes and they almost always come with little or no warning. Having a plan in place to mitigate this sizable risk is therefore a wise bet.
Cyber threats
Cyber threats grow every day, and so too does their potential for devastation. Malware, spyware, phishing schemes, DDOS attacks, ransomware just to name a few are all spreading rapidly. Many companies fundamentally miss how badly they are exposed to these types of attacks, and how disruptive they can be. How would your company fare if you were not only taken offline for several days, but all of your customer data was compromised? What if crucial files and intellectual property was permanently deleted? These are difficult questions that small business owners must face head on.
Purchasing a standalone cyber insurance policy is one way to go to mitigate this ever-present risk. Traditional insurance policies typically will not cover cyber events, so you’ll need a separate policy. Also, most insurance brokers aren’t well-versed in the ins and outs of cyber insurance, so you’ll probably want to do additional research and find a suitable third party to help you craft a policy that covers your specific needs.
One place for a small business owner to start uncovering hidden risk is to obtain a third party Risk Management Assessment. Using a multi-dimensional approach to risk, your consultant team will work with you to:
- Gain a thorough understanding of your organization and business model, including competitors, supply chain, production and distribution risks.
- Consider strategic drivers and any obstacles that might impact achieving long- and short-term goals.
- Identify and analyze operational exposures to evaluate the level of materiality the company can absorb.
- Evaluate existing risk management practices and insurance programs and recommend ways to lower the organization’s TCoR.
A powerful strategic tool, RMAs uncover hidden exposures but also, crucially, very often reveal hidden opportunities.
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