Risk in Business is a Given, Risk Mitigation is Up to You

By Kevin Huhn

Injuries in the game of hockey cannot be eliminated, but the risk of injury can be reduced. The advent of better protective gear, the increased focus on player safety and application of stricter rules lower the risk of issues that surround playing hockey. Regardless of age for any player, there is a lot at stake. Protecting these players is important because it is not only those on the ice who are impacted, but also their families.

In any business, key drivers to success need to include proper protection, policies and procedures to reduce the risk of a debilitating problem that can arise. Any issue that can cause a stoppage in production or deliver of service is a risk. These risks have a direct impact on the bottom line as well as the lives of people… like clients, employees and the owner(s).

Risk of issues cannot be fully eliminated, but they can be reduced. To clearly define what it takes to reduce risk in business today, I reached out to a friend of mine, Philip Ber, Commercial Insurance Broker and Risk Advisor at the FSB Group.

“First it is important to understand what is meant by risk,” he explained. “You need to know what, and where are the risks in your business, and then how do you mitigate those risks. For example, risk may be property risk, product risk, professional liability risk or a cyber based risk.”

Business Interruption Plan

The stage is set. A situation occurs and it stops your business from providing its deliverable. How do you recover from it? What is your disaster recovery plan? The thing to understand about an interruption to your business is, there is always a financial impact.

To get back up and running the money needed to recover will either have to come from the business itself, the owner’s pocket or a business interruption insurance policy.

“Business owners and managers need to spend time putting together a Disaster Recovery Plan or a Business Continuity Plan,” Ber advised. “Start with the question – what would we do if…? and come up with possible scenarios and then calculate the cost to recover from them. Its difficult to quantify all of the possible scenarios but what is important, is to think about them and develop a ‘costed’ recovery plan ahead of time.”

A disaster could be:
• damage to your property (e.g. manufacturing plant, office space, distribution centre)
• data/Network breach by a hacker or inadvertently by your staff (e.g. email scams, etc.)
• professional liability (e.g. failure to, or an error in the way you deliver your services that causes a financial loss to your clients)
• partnership issues (e.g. death of partner, disagreements and differing, exit strategies)

These all lead back to the question: What is the risk of your business being disrupted with one or more of these issues? How do you properly plan for and quantify the damage of these issues?

“The reality is every business is exposed to risk of disruption,” Ber points out. “The key to success is making sure that you have a plan and that the plan is in sync with your insurance coverage.”

Having answers to these questions help you fully grasp what is at stake:
a) Do you have a plan to recover from a disaster? (If so, who is responsible for the plan? Are we updating the plan as the business grows?)
b) Do we have the right insurance coverage?
c) What is the cost to recover from an issue and do you have sufficient coverage and the funds in your policy?
d) What is the go forward strategy?
e) Who and how will you implement the strategy and who is going to run the business while you rebuild and recover?
f) What don’t you know and who do you call to help you stick handle through this challenge?

Prevention is the medicine

Business owners are generally optimists in nature. They underestimate how long and how much it will cost will to recover from a disaster. Very few take the time to map out and cost out a business continuity plan to address disasters. “Not having a plan before a disaster hits will leave you scrambling to get back up and running,” Ber says. “This is why it’s very important to the life of a business, that you take the time to think through possible debilitating issues, then come up with a plan and keep the plan current as the business evolves.”

There is an old adage that prevention is the best medicine. Take a look at the categories mentioned earlier to have you mitigate the risk of interruption:

Cyber Breach

What can you do to mitigate this risk? What procedures are in place to educate staff about cyber attacks? How are emails responded to? What is the process and procedure in dealing with phone call inquiries about banking or payables?

Property Damage

What can you do to mitigate this risk? Can the business run without office space? Can the manufacturing plant still function? What types of machines are needed to operate production? Where would you source those machines? Locally or overseas? How long would it take to find a replacement? If the building is damaged, how long to get permits? How long to rebuild or repair the damages? Can you rebuild in the same location or do the bylaws preclude it? Do you rebuild or move?

Professional Liability

What can you do to mitigate this risk? How do you manage projects? Are you meeting with clients regularly to make sure you are meeting project commitments? Are you getting sign offs when you deliver products and or projects. What’s the problem resolution process? Do you have a procedure to resolve small problems before they become bigger problems?

“The concept of business insurance is the transfer of risk. The insurance company charges a premium to assume the risk. In the event of loss (which is covered by the policy) the insurance company agrees to pay you to put you back in the same position you were in before the loss,” Ber explains. “For most business owners it’s taken them years to build their businesses. The question is why wouldn’t you spend some time to determine what you need to do to protect the business, your clients and your staff?”

Costs to Protect

“A large percentage of the business owners I meet don’t have a well thought out disaster recovery plan or a handle on what it would take to recover from a major fire, flood or a cyber attack that could disrupt their business,” Ber says. “So I ask them, if not now, when?”

It is pretty obvious that if a company is a manufacturer, a disruption to the manufacturing process and/or the machines used in the manufacturing process, would have devastating effect on the business. In the event of a disaster, machinery and inventory may need to be replaced. “Machines and Inventory are covered with insurance,” he says. “The task is to decide what is the proper coverage needed? Do you have Replacement Cost coverage or Actual Cash Value? The amount of money available for the replacement of the machine will vary depending on the coverage.”

• Replacement Cost provides for replacement of the damaged machine with a similar machine, (i.e. the make, model and age if available)
• Actual Cash Value is the Replacement Cost less Depreciation, which can be significantly less than the amount required to replace the machine.

Imagine owning a restaurant. In the basement you have a wine cellar filled with vintage wines. You have collected them over many years. A disaster happens. Part of the building is damaged and including the wine cellar. In order to get back what is lost, your goal is to replace your fine wine inventory. Here is the twist. You need to make sure you have the proper coverage in place, so that your vintage wines, which appreciate over time, are properly scheduled and insured. Regular inventory may depreciate over time, but vintage wines actually appreciate. Do you have the proper coverage and limits in place to fund the replacement of the wine?

“The key thing is to properly evaluate what you have in your wine cellar and Inventory,” he said. “It is in your best interest to have an up to date inventory so that in the event of a loss you can properly quantify the dollar value of the loss.”

Disasters in business are not about if they will happen, but rather when. Ber’s final words were “Risk in your business is always there. Mitigating the risk should include insurance coverage. What is most important is. None of this matters, until it does.”

Whether your company is a service-based business, a manufacturing plant or distributor, reducing your risk and ensuring the continuity of your business in the event of a disaster, requires planning. Well thought plans include analyzing, evaluations and making sure you have the proper insurance coverage… there is never a better time than the present to prepare for the future.

Kevin Huhn is the Founder of Be Your Best Today, a public relations and communications firm and through its mission helps small to medium-sized businesses clarify their message, get known and drive traffic through media exposure. To learn more visit beyourbesttoday.ca