Leveraging Forture 500 Business Practices: Managing Risk

Fortune 500 companies use a formal process and mathematical models to manage risk. Depending upon the industry, the appropriateness and validity of their models can be subject to regulatory oversight and require certification by an independent auditing firm. Failure of these models to gauge the probability of risk or the resultant cost associated with recovering from an occurrence is often the lead story on the morning news and can affect countless lives or the environment.

As a current or future business owner you can leverage what these companies have spent millions to learn by conducting your own risk assessment, assigning a probability to an occurrence and rating the severity of each type of risk then developing a strategy to either reduce the risk or mitigate it should it occur.

Plotting these risks on a Risk Cube is a visual method large companies with a formal risk programs have of determining where to focus.  One axis of the risk cube is probability of occurrence and the other is the severity if it occurs.  Risks that have a low probability of occurrence and low severity can typically be readily mitigated.   Conversely those that have either a high probability of occurring and/or a high impact if they occur are those you should insure against.

Risks common to start-up businesses often include the obvious such as: an absence of working capital or a low volume of sales, but the highest risk area is the owner’s ability to show up and run the business during the start-up phase.  The more common Owner’s Risks are:

Owner’s Health: For many start-ups if the owner doesn’t come to work there’s no one to run the business. Although it goes without saying – I’ll say it anyway: if you’re a solo entrepreneur who is dependent upon the business you’re operating for your livelihood, the best investment you can make is to keep yourself healthy. I can hear the collective, “duh”; however, new business owners often sacrifice getting enough sleep, eating right, exercising and getting regular check-ups while they’re starting their business.

Owner’s Reliability and Availability:  To operate a business an owner either has to be available or ensure someone is available who can fulfill client or customer requests during the established business hours.  If the shop is supposed to be open from 9 to 5 and a potential customer finds the door locked, she might not return.  If a customer calls they will probably be willing to leave a voicemail, but your outgoing message should indicate when they can expect a return call.  Failure to return the call is a clear indicator that you’re too busy to provide reasonable service.  If you fail to show up for an appointment because your car broke down or your flight was cancelled you risk not getting that customer’s business, particularly if you don’t call prior to the appointment and let the person who’s expecting you know the situation.

Loss of Income: An injury or illness can derail even the most promising business if it occurs during the critical start-up phase.   Worker’s compensation, short and long-term disability can help pay the bills should this happen.

Because payments are based upon your income and because the risk to your business is often the highest the first year you start your business, you may be able to base your income estimate on your previous salary rather than the estimated earnings from your new business during the first year. This will, of course, may raise your premium, however, you may need those payments due to an injury or illness to meet basic living expenses.

$1,000 Start-Ups has additional sage advice to reduce risk for 60 different businesses.

Published by Leah Ward-Lee

Leah Ward-Lee, the author of "$1,000 Start-Ups", is a serial micro-entrepreneur. She opened her first business at ten after lobbying for and receiving a shoe shine kit for Christmas. She pulled her wagon through the neighborhood, going door-to-door, offering to shine her neighbor’s shoes for twenty-five cents a pair. Once her wagon was full, she took the shoes home and polished them. Unfortunately that business was short-lived. She hadn’t tagged the shoes and couldn’t remember whose shoes were whose, so her dad went with her to retrace the route until every pair was returned. Since then she’s had businesses developing and teaching college courses, instructing aerobic classes, owning half a plane that was rented to a flight and maintenance school, and renting homes. She’s also owned a consignment store, a gift shop, a gift basket business, a consulting firm, hosted The Executive Toolbox (a weekly radio show), and a publishing company. She also spent twenty years in the US Army, served as the Chief Information and Technical Officer for two major insurance companies, and has a second career as a management consultant. Leah resides in Dallas, TX and on Amelia Island with Sammy and Goliath, her two rescue dogs.


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