Risk Management: A Business Owner Imperative

Want your business to endure? Then protect it from Murphy’s Law. This is risk management at its most basic.

Bad things happen. That’s why you take measures to protect yourself – wear a seat belt, don’t smoke, watch your weight and buy insurance. Bad things happen to businesses, too, so if you want your business to endure, identify what can hurt your business and find ways to protect it.

Jack Kelly did not protect his contract drilling business. He had just one rig and eight experienced employees but was netting about $600,000 per year – until a freak accident damaged the rig beyond repair. It was insured for $350,000, what he paid for it five years earlier. But Jack soon learned that a replacement rig would cost $750,000. Ouch. He was vastly underinsured. Still, he could handle that amount. But what he could NOT handle was that the earliest possible delivery of the replacement rig was estimated to be 12 months out: no drill, no revenue.

Compounding the problem was that skilled drill operators were both essential and scarce. Jack decided to bite the bullet and try to retain his talented team of operators, to the tune of $42,000 per month. After eight months and still no rig, he let them all go. Four months later, the rig arrived, but now Jack could not secure skilled operators. The story ended in bankruptcy and business liquidation.

It would not have been difficult for Mr. Kelly to identify the risk that brought down his business. All he had to do was initiate a two-hour get-together with his insurance specialist and attorney to brainstorm about risks and mitigation strategies. Odds are pretty good they’d have thought of the obvious: “What if the drill rig is destroyed?”

It’s too late for Jack, but what about you? What could hurt YOUR business? This issue of The Business Owner urges you to think long and hard about this. Then devise mitigation strategies and put them in place. Your business survival depends on it.