Felix Kloman
Seawrack Press, Inc.
61 Ely’s Ferry Road
Lyme, CT  06371 USA
Telephone:  860-434-2917
Email:  fkloman@aol.com
Website: www.seawrackpress.com

Managing a small business is constant uncertainty, even when things appear to be going well.  Who will buy tomorrow, next month, next year?  Will my expenses go up or down?  How will rising gasoline and utility prices affect me?  Is a falling dollar good or bad?  Will I have enough time and interest next year for the business?  What happens if one of my support staff falls ill?  Could I handle a 50% increase in business?  In a sense, uncertainty is also the lure, the excitement of a small business.  Something new crops up every day requiring a nimble response and imagination.  That’s part of the fun!

The prudent business manager and owner tries to anticipate this ever-changing variety of unexpected events, some favorable and many unfavorable.  The follow-up is to prepare responsibly for and even take advantage of them.  This process of being ready for an uncertain future is called risk management.

Yes, it’s basic common sense, often practiced in one’s head, but with the wide array of unusual situations in today’s globally connected economy, a more formal approach is helpful.  Risk management for a small business means:

• Considering all of the possible future situations or events that could materially affect the business;
• Calculating (or guessing) their likelihood, when they might happen, and their financial and human consequences, both plus and minus; and
• Developing your own responses, both current and future.

Many business owners plan to spend a few hours each year in thinking about what might happen and planning how they should respond.  Putting these thoughts in a written matrix helps to think more intelligently about what to do:

• List your assets (tangible and intangible) and resources along the side (such as owned property, bank accounts, human resources, annual revenue, customers, suppliers, community support, etc.).
• List the sources of unexpected events along the top (such as the national and local economies, irrational human behavior, natural disasters, governmental activities, technological changes, and your own commercial and legal relationships).
• Highlight those with the highest likelihood and/or the highest material effect on your business (good or bad).
• Remember that unexpected events don’t necessarily happen in isolation: they often come in bunches!
• Add a list of how you will respond right now and when and if the event(s) occurs.

Many of those responses are, again, simple common sense, while others may be new ideas, such as:

• Maintain reserve funds, such as cash in bank accounts, longer-term investments, equity in a home, a bank line-of-credit, and conventional insurance for property, liability, illness and life loss,
• Create “mutual aid agreements” with suppliers, competitors, neighbors, and friends. They promise to help you; you promise to help them.
• Use an accountant to check your bookkeeping and offer occasional counsel,
• Use legal counsel to review your work,
• Work with local chambers of commerce and similar community groups,
• Write contingency plans so that you know how to react to a special event,
• Develop a plan for shutting down or selling the business,
• Create internal controls to prevent violations of the law and to maintain product and service quality.

Being ready for the unexpected, including being able to take advantage of it, is the keystone of sound risk management for a small business.

April 13, 2008   For a more detailed workbook on this subject, see Risk Management for Small Business, by Claire Lee Reiss, published by the Public Entity Risk Institute (www.riskinstitute.org), Fairfax, Virginia 2004.