Why Risk Management Matters More than Increased Profits

In business, not all choices are an ‘either or’ proposition. Owners and managers often times believe the zero sum game approach to decision making must be the primary consideration when establishing priorities. “If I do ‘X’, I will not be able to do ‘Y’.” Yet, just the opposite is likely true, especially when delving into the world of risk management.

What is ‘risk management’? It is simply the effect of uncertainty on attainable objectives, followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risk management’s objective is to assure uncertainty does not deflect the endeavor from the business goals. Risk management focuses on identifying what could go wrong, evaluating which risks should be dealt with and implementing strategies to deal with those risks. Businesses that have identified the risks will be better prepared and have a more cost-effective way of dealing with them.

Purchasing insurance to pay for unexpected losses due to events beyond your control is one example. Such a simple example of risk management is easily understood. Where it gets more complicated is an owner or manager who must spend time and money on the front end to avoid the consequences of doing nothing that may materialize later on.

For instance, employee safety training to help avoid accidents and injuries in the workplace can seem expensive. The “cost/benefit” ratio is hard to appreciate when the benefit reaped by being proactive on the front end may never be readily apparent. The financial savings achieved by reducing the number, nature and severity of accidents and injuries over time will only become apparent if a comparison is made historically to what the experience was from earlier times. 

‘Short term pain for long term gain’ is an age old adage that we try to teach our children, and it holds true in the business world within the context of risk management. Being savvy about risk management mean owner/operators live by that adage. Yes, as an owner, I will spend some money training my employees on workplace safety compliance because I know and appreciate the fact that 1) it is the law; 2) people’s lives are at stake; and 3) it pays financially over time.  One back injury can cost a company and its insurer hundreds of thousands of dollars, or even millions.  In certain situations, the government may decide to impose civil fines, and in the worst case scenario, owners and managers can be criminally prosecuted for willfully failing to take required steps to train and protect employees. Business reputation also suffers in the process. The downside of ignoring risk management is a bottomless pit.

So, risk management considerations do matter and should be at the forefront of a business owner’s concerns. Responsible attention paid to risk management means more than money, but it also reaps financial benefits for everyone concerned.

This column first appeared on Goosmann Law Firm's Risk Manager on your Side blog.