Risk Management for Small Business

By Howard, Jack L.; Jawahar, I. M. | Entrepreneurial Executive, Annual 2002 | Go to article overview

Risk Management for Small Business


Howard, Jack L., Jawahar, I. M., Entrepreneurial Executive


ABSTRACT

Every organization is exposed to risks associated with employment practices and must develop strategies to avoid and/or minimize risks. Risk management is particularly crucial for a small business because a single poorly managed risk could threaten survival. In this paper, a framework that small business owner/managers could use to systematically analyze risks is described, and various options to manage risks are identified. Next, a risk transfer device is discussed in detail. This discussion focuses on protections, coverage, cost, and benefits of obtaining employment practices liability insurance (EPLI). Finally, risk reduction tools and techniques to complement EPLI are discussed.

INTRODUCTION

Small businesses employ almost 58% of the workforce and represent 99 % of the organizations in United States (http://www.sba.gov/advo/stats/sbafaq.pdf). Every organization including small businesses is exposed to risks and must develop strategies to avoid and/or minimize risks and also to mitigate the effects of risks. In contrast to large organizations, small businesses do not have the resources to employ risk managers or risk management consultants to deal with risks. Yet, managing risks is, at least as much, if not more important, for smaller organizations than for larger organizations because a single poorly managed risk could drive a smaller organization to bankruptcy.

An organization engages in several operations or activities. Almost all of these activities, including technical activities (e.g., production, manufacture), commercial activities (e.g., buying supplies, selling products/services), financial activities (e.g., finding sources of capital, managing capital flows), accounting activities (e.g., recording and analyzing financial information), and human resource activities (e.g., hiring employees, disciplining employees) involve exposure to risks. The focus of this paper is on the risks posed to small businesses by human resource activities.

In large organizations human resource professionals and risk management specialists guide and help the organization manage the risks associated with human resources. In contrast, in small organizations, the owner or a manager directs all activities including those related to the management of human resources. The owner or manager must engage in several human resource/employee relations activities, such as hiring employees, promoting employees, resolving conflict among co-workers, disciplining employees, and terminating employees. Mistakes made in performing any of these activities will expose organizations to severe risks and consequences. For instance, disciplining employees in an inappropriate manner or terminating employees in an insensitive manner could lead to a discrimination lawsuit or charges of wrongful termination against the employer.

The primary purpose of this paper is to educate owners and/or managers of small businesses to better manage risks. First, an overview of the risk management process is presented to help managers/owners think about risk management issues in a systematic manner. Second, options available to managers/owners to manage risks are described. Third, a comprehensive discussion of EPLI is provided. Finally, tools and techniques that small businesses could use to complement EPLI are described.

OVERVIEW OF RISK MANAGEMENT

Knowledge of the risk management process will help small business owners and managers to think about risk management in a systematic matter. The risk management process consists of the following 6 basic steps (Vaughan, 1997).

Determining objectives

Identifying risks

Evaluating the risks

Considering alternatives and selecting the risk treatment device

Implementing the decision

Evaluating and reviewing the effectiveness of the decision

A brief description of each step is presented. The focus as each step is described is on the risks associated with employment practices that organizations face in an everyday manner. …

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