Risk is a common factor in all businesses today. However, small businesses are the ones to lose the most from risks. This is primarily because of the fact that businesses smaller in size, are also restricted by their financial capacity. Be it the spending power or the ability to pay hefty compensation in case they have not availed insurance. Thus, it is of utmost importance that the management of small businesses know the risks that they may face in the natural course of functioning and ways to counter such risks. Let us discuss some of the top risks that small businesses face today.
The risks faced by the business owner– In the case of small businesses mostly they are run by one person or a small group of people. At times, the personal financial condition of the business owner gets intertwined with the business and vice versa. Suppose, the owner of the business suffers any bodily injury or loses money, then their consequences will invariably be passed on to his/her business. A personal risk insurance policy can stop this from happening.
Product liability– This is one of the most significant risks faced by small manufacturing firms. A product liability risk means that if any legal concerns arise from the product manufactured by the concern then it is covered under insurance. Suppose, in a scenario when a customer develops allergies by using a beauty product and goes on to sue the business for his/her ordeal. In case there is no product liability insurance policy, the company will end up paying all the legal expenses which could severely affect its capital and financial situation.
Replacement value risk– Apart from concerns rising from legal implications, there is also the risk of damage of property which may need to be replaced. This damage could arise from natural calamities or through man-made problems such as theft and burglary. Small businesses cannot afford to lose important machinery or goods to theft. The result will be the company either loaning the amount on high interest or paying it from the pocket of the owner. However, the need to replace the damaged good is so high that there is no option but to pay the money for the business. That is why a replacement value risk insurance cover to counter replacement value risk is a must for small businesses.
Business interruption risk– In every business there is a risk of profits suddenly turning to losses. In the case of small business, it is even more serious because owing to its limited capacity, a small business can’t sustain for too long if the losses go on to accumulate over a long time. To avoid this risk, it is advisable that a business enters into a business interruption risk policy which will hedge against its losses and provide it with an income or benefit based on the data of its past profits.
Professional malpractice risk– Every business is dependent on its employees that form its foundation. But if the employees of a business engage in malpractices, it can not only harm the concern but also end up shutting it down. Ranging from petty thefts to major scams, professional malpractice is one of the biggest challenges that every small business face in the long term. Unless the business takes solid steps to counter this risk, it is in line to lose everything that it has built over the years. A professional malpractice insurance policy against professional malpractice risk is immensely helpful for small businesses.
Cybersecurity risk– Today, every business is dependent upon information technology, which has slowly become an integral part of all industry. There are also businesses which deal exclusively in the technological field, in a matter related to data security and computer science. If there is a malware attack that can erase all the personal data of clients which a business deals in, then it can have grave consequences and affect its reputation in the market adversely. This risk from virus or external hackers is termed as a cybersecurity risk and a cybersecurity insurance policy is necessary to ensure that this risk is minimised.
Strategic risk– Strategy is the core of every business and ultimately a company is judged from what are the things which it differently offers than other organisations in the industry. But many times, it is seen that a particular strategy is not successful owing to a large array of reasons such as technological innovations, fall in demand or misjudging of market factors. In such a case, a wrong strategy can cost the business not only its profits but can also deliver it a blow from which it could be difficult to recover. At times moves by rival companies such as offering a similar product at a lower cost or lack of demand can prove costly to a business. Strategic risk is one of the most important aspects that a business should take into consideration while commencing operations and it always helps to have a strategic risk insurance policy.
Reputation risk– The reputation of a business in the industry is key to its well-being. If a business has a good reputation in the market, then chances are that it will grow exponentially because more clients will trust it and will be eager to deal with it. On the contrary, if a business has a shoddy reputation with people not finding it trustworthy, then it could adversely affect its operations. That is why, to counter this risk of making a bad reputation, a business has to be constantly active on social media, monitor how it is being seen among peers and competitors in the industry and also engage with its clients to build more trust. The failure to do this could result in serious implications and problems such as defamation campaign by rivals and the impression that the organisation doesn’t care about customer satisfaction. A reputation risk management insurance policy is therefore quite useful.
There are several risks that a small business faces such as cybersecurity risk, reputation risk, strategic risk, professional malpractice risk and business interruption risk. Some of these risks arise from the normal course of the business while others come up in special cases such as malpractice by employees or legal cases. It is important that a business effectively hedges these risks and use mechanisms such as insurance to minimize them. Every small business before commencing its operations should take note of the various risks that it has to deal with. Once the assessment is complete, it should be seen that each risk is dealt with separately and the corrective measures are taken, which will not only provide immunity to the business but will also help to maximise profits. PlanCover is a SMEs insurance specialist that helps small companies with insurance policies aligned to specific business needs.