Owning a business involves risks. Insurance policies can mitigate some risk by transferring the risk to the underwriter in exchange for paying a premium. Other risks can be managed through proactive attention to safety and risk vulnerabilities.
While the amount of risk you choose to be exposed to is believed to determine the financial upside to taking on the risk, the failure to proactively manage the risk exposure could lead to you losing everything despite the hoped-for returns for the risk exposure.
Overview
Risk Management encompasses identifying, analyzing, assessing, and controlling risk so that you can avoid, minimize, or eliminate unacceptable risks. Anytime you take on a new asset through debt or equity financing, you must assess the risks associated with any investment that, should it fail to produce, puts you at risk of losing more than the cost of the investment.
Once you understand the risk, you can either avoid the risk, retain the risk, or transfer the risk to a third party. If you can’t avoid the risk, your next best option is to monitor your exposure to the risk to minimize it if you can afford to cover the financial exposure of the risk. If the cost of risk is more than you can pay for through operating cash, then your best option is to acquire insurance for the area of risk to transfer that risk by paying insurance premiums.
Property damage, injury, liability, loss, or any other negative occurrence caused by external or internal vulnerabilities are different types of risks you want to be prepared to handle. You best prepare for these types of risks by having scenarios in place to deal with the risk’s downside. Many of these risks may be avoided through proactive action, yet no business will ever be risk-free.
Financial risk tied to an actual return on investment coming in lower than the expected return is defined as Capital risk, Country risk, Default risk, Delivery risk, Economic risk, Exchange rate risk, Interest rate risk, Liquidity risk, Operations risk, Payment system risk, Political risk, Refinancing risk, Reinvestment risk, Settlement risk, and Underwriting risk.
Owning a business involves risks. The amount of risk you choose to be exposed to will determine the financial upside to taking on the risk—failure to manage the risk correctly could lead to you losing everything. Hence the saying, don’t put all your eggs in one basket.