Several years ago, I went on a backpacking trip with some friends in the Maine wilderness. Although I love the outdoors, I’m not a regular camper, so I made a point of preparing carefully. I followed an 11-step trip-planning process I found online. I also spent an afternoon at L.L.Bean. After talking at length with the camping department manager, I bought everything I thought would be needed for a safe, comfortable outdoors experience.
I felt confident as I went home that day, laden with hiking boots, waterproof clothing, a first-aid kit, sunscreen, bug spray, a camp stove, kitchen supplies, and even a small shovel. Finally, to be sure every detail was covered, I watched instructional videos on several topics, from setting up a tent to preparing the very best “cowboy coffee.”
On the first day of our trip, my friends and I starting hiking early. We stopped around noon to set up camp. After lunch, an afternoon foray to explore the beauty of the area was in order. Walking away from our outpost, I looked back with satisfaction at what appeared to be a first-rate camp setup.
A couple of hours later, we returned to find our campsite ransacked, undoubtedly by a bear (or bears). Our food for the next three days had been gobbled up, its packaging torn up and littered about. Even though our grass-fed beef jerky and fig Newtons had been polished off, we were terrified a hungry bear might come back and look to us for its next meal. Since we’d hiked a few miles into the wilderness and there were no stores around for 50 miles, we had no choice but to pack up what was left of our belongings and leave.
In life, as in business, there are essentially two types of risk to be managed: controllable and uncontrollable. Controllable risk can be reduced, but uncontrollable risk can’t be.
Could my friends and I have reduced the chances we’d have a camping disaster? I assumed that my purchases had addressed the most likely risks, including inclement weather, hiking mishaps, sunburn, and bug bites. And I’d completed the 11-step planning process, beginning with “Get a good durable pack for your things” and ending with “Done.” I thought I was done.
Yet, of course, I wasn’t fully prepared. Bears were not on my planning horizon. Although I couldn’t prevent that risk (short of avoiding the trip), how could I have been ready? We’ll revisit that question later.
As a small business owner, you can’t afford to ignore this topic, no matter how overwhelming it might seem. Your task is to reduce the incidence of controllable risks and influence a positive outcome on the uncontrollable ones. How?
Risk management is all about two key elements: planning and insuring.
Planning. Start with assessing the risks pertinent to your business. If you need help brainstorming, check out my blog post on understanding potential risks to your financial advisory practice. Next, think about each likely threat you’ve identified and ask yourself:
You’ll also need to consider what-if questions for possible risk scenarios. For instance, if your office were flooded overnight, think about:
Or, if your office were on fire, ask:
Once you’ve completed this exercise, you might worry about having missed something. That’s a common problem, but it can be mitigated. Let’s discuss.
Insuring. Thorough preparation for both controllable and uncontrollable events requires insurance. Undoubtedly, your firm has policies in place, but do you have enough coverage? Consider this list of insurance essentials:
When it comes to protecting yourself, I’m reminded of an old insurance sales question: “If you had a money machine in your basement that pumped out $600,000 a year, would you insure it?” Of course, the punch line is that you are the money machine. You need to be sure you’re protecting yourself against the losses that could derail your money machine.
And, remember, once your policies are in place, perform annual reviews to keep them up to date.
According to the Federal Emergency Management Association (FEMA), roughly 40 percent to 60 percent of small businesses do not reopen following a disaster. Don’t be one of those businesses! Take the right steps to have a thorough plan for managing business risk in place.
As for me, the next time I go backpacking, I’ll remember the truth that bears live in the Maine wilderness. And I’ll have insurance against that risk, thanks to a wonderful YouTube video called “How to Hang a Bear Bag—Backpacking Food Storage.”
What are you going to do to prepare fully for risks to your financial advisory practice?
Do you have any tips or advice about managing business risk? Please share your thoughts in the comments below!