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Why risk management is important to your business

Why you should practice risk management and not have all your eggs in one basket

Taking risks is part of every business and it comes with the territory when you accept responsibility for keeping the ship afloat. Moreover, they are essential if you want your business to grow and thrive in the long term. The good news is that there’s no reason you should lose sleep over them.

We’ve outlined some strategies that help you reduce your financial risk – to ensure you’re running the business, not the other way around.

Get covered

There are many sound reasons to take out insurance cover when running a business. On the personal side of things, life insurance can help cover costs if you pass away, or if injury or illness means you’re unable to work.

Key person insurance can provide financial support if an important individual within the business is no longer able to work. This is usually the owner but could be any employee or partner who is not easily replaced.

Plan ahead

Nothing lasts forever, so it’s important that you plan well in advance for your retirement. Superannuation offers tax advantages and better returns (and lower risk) than many other forms of investment.

Also, many owners don’t plan for their succession and, as a consequence, struggle to extract equity from the business when putting the company up for sale. Keep good records of the value of your equipment and other assets.

Other risks that can affect your business include fraud, bad-customer debts, not knowing your CGT (capital gains tax) obligations and defaulting on loans.

A risk management plan can help you identify various financial risks, the contributing factors underlying each and the probability of them occurring. Your analysis should include actions to limit their impact, such as reducing employee hours or selling business assets. Obviously, using personal assets (such as the family home) as collateral is usually only recommended if other options are not available.

Seek professional support

For many small business owners, financial risk management is just another demand on their time and doesn’t get the attention it deserves. Consider hiring a financial advisor who can help you to sort through the red tape. And make sure you hold on to your financial records – receipts, invoices and everything else – for at least five years in case the tax office wants to see them.

In a competitive marketplace, risks are an unavoidable fact of life. Managing them well is simply good business.