The ability and willingness to assess and successfully avoid or mitigate risk is what separates entrepreneurs from employees.

All businesses come with some level of risk, whether that risk is fluctuating prices, dependence on seasonal sales, a potentially dangerous work environment or a lawsuit-prone industry.  Finding ways to limit your business’ exposure to risk, while also taking the calculated chances necessary to grow and prosper is key to being a successful businessperson.

Business owners have a variety of ways they can hedge against risk, including training, insurance and contingency planning. Being aware of each of these hedges and determining how best to use them is key to allowing you to take risks in business while also preserving the business if you make the wrong call.

Identifying risk

In general, there are three types of risk to a business, hazard based risks, uncertainty based risks and opportunity based risks.

Opportunity based risks are essentially the risks any business owner takes in taking or declining an opportunity, such as rolling out a new product, declining an offer or expanding payroll or locations, etc.  Opportunity based risks can be subtle, they are often financial in nature and can be hard to spot.

Opportunity based risk can be the most difficult form of risk to manage, and the ability to identify the right risks to take and the ones to avoid are what separates the Steve Jobs of the world from the just Steves. One way you can better weigh the risks involved with taking or passing up an opportunity is to do your homework. When presented with an opportunity, look at all the angles. Consider the potential upsides of the opportunity, and the financial condition of your business. Look at what your competitors are or aren’t doing. Also weigh what can go wrong, and determine whether and how your business would survive if the opportunity turns into a disaster.

Hazard based risks are risks associated with sources of potential harm or situations that may cause harm to employees, customers or the general public. These can include workplace hazards, chemical or biological hazards or psychological hazards such as workplace bullying or harassment. Hazard based risks can be reduced by careful attention to sources of potential hazard and training and policies to help cut their chances of occurring and mitigating the impact if they do occur. Insurance can also insulate your business financially from hazard based risks.

Uncertainty based risks are risks that occur as a result of unexpected events, such as natural disasters, regulatory changes, emergence of new competitors, loss of suppliers or customers, etc. Uncertainty based risks, are by nature, tough to predict and plan for, but there are a few ways you can reduce your risk such as insurance policies, frequent examination of data and a business continuity plan that details how your company will operate in the event of a disaster that puts your out of your physical location.

Insurance policies

Perhaps one of the best hedges against risk you can have in your small business is an insurance policy. Insurers provide a number of policies to provide you and your business with protection from incidents or claims that may arise in the course of your business.

Insurers can provide coverage for a number of potential risks:

General liability insurance – This type of insurance will provide coverage for claims that arise from injury to third parties (customers, vendors, etc.) and usually will cover damages to property and bodily injury. This coverage will also fund a legal defense for your company.

Commercial property insurance – This insurance provides coverage to your business property, providing coverage for property losses that occur as a result of covered occurrences as defined by your policy. An example may be coverage for potential damage to a construction company’s building equipment.

Business interruption insurance – This insurance can make sure that you continue to have revenue in case your business is unable to operate because of a natural disaster, civil unrest or other covered occurrence.

Professional liability insurance – This provides coverage for services offered by business. For example, a doctor or attorney may have professional liability insurance to offer protection from malpractice claims. This form of insurance is also known as errors and omissions insurance.

Cover Your Bases

Small businesses can help reduce their potential for losses by making sure their physical locations are safe and in compliance with state and local regulations. When starting a business, inquire about the safety regulations for your particular industry and make sure that your facilities comply with laws regarding public and employee safety. You may also want to consult trade groups within your sector to see if any other measures are becoming industry-standard.

When considering a new business opportunity, be sure to look over your financials and do as much market and other relevant research as you can to get a clear picture of the opportunity and its potential downsides. When entering into a contract with another business or customer, make sure you understand every aspect of the contract, from deliverables to cancellation clauses.

Proper Training

Having a properly trained staff can help head off many of the risks involved in employing others. Employees should receive safety training appropriate to their jobs, so you can comply with government regulations regarding employee safety in your industry, and so employees will know how to minimize harm to themselves and the company in the event of an incident.

For employees who deal with sensitive information and material, providing training in document retention and destruction is important to preventing claims related to identity theft or data loss. It’s also important to provide employees with training in ethics and laws pertaining to their work, so they can avoid unknowingly engaging in illegal behavior that can give rise to a claim or penalty.

Providing your employees with sexual harassment and discrimination avoidance training can help them avoid engaging in behavior that could give rise to a claim. It also helps shield you from lawsuits accusing you of failing to adequately train employees to refrain from such behavior and can act as a mitigating factor if a claim against you is successful, helping to limit damages assessed against your company.

Limitations of Risk Management

Even the best laid plans cannot account for and mitigate all risks. And excessive aversion to risk can paralyze a company in excessive bureaucracy and fear to act. When making your risk management decisions, severely limit the no-brainer risks (keeping a safe workplace, discouraging sexual harassment, etc.) while taking appropriate, reasonable action to reduce the potential for damage from more complicated risks such as decisions to add new products or open new stores.