Common Business Risks and How to Prepare for Them

By the Mercury Team

Running your own business can be a fulfilling experience, but it also has its fair share of risks that can jeopardize your assets, finances, and reputation. In this blog post, we’ll review what exactly a business risk is, the different types of risks you might encounter, and some steps you can take to prepare for them.

What Is Business Risk?

A business risk is any internal or external circumstance that may impact your company’s financial goals or cause your business to fail. While numerous factors can create business risks, the following are some of the most common examples:

• Damage by fire, flooding, or other natural disasters
• Cybersecurity threats
• Loss of important suppliers or customers
• Economic downturn
• Theft

Types of Business Risks

Here are several business risks to consider when running a company or organization:

Physical Risk

Physical risks threaten your company’s physical assets — e.g., employees, equipment, buildings, etc. Disasters such as fires, floods, and explosions are common causes of physical risks. As a result, you may have to pay to repair, replace, or rebuild your physical assets. Additionally, your employees and customers can be considered physical assets, and incidents such as bodily injury and property damage can bring litigation risk.

How to prepare: A business owners insurance policy often includes property coverage that can help pay to repair your business's physical location. This policy also typically includes business personal property (BPP) coverage, which helps cover things like furniture, machinery, supplies, and tools. Additionally, liability coverage can help protect you when bodily injury or property damage happens to an employee or customer. You may also want to create an inventory of all of your company’s property so you have a record of your business assets.

Operational Risk

Operational risk is when your company’s day-to-day activities create a risk of loss. Some common causes include internal and external fraud, employee errors, system failures, inadequate internal processes, and external events that make your location uninhabitable — e.g., natural disasters.

How to prepare: A standard business owners insurance policy offers coverages that can help protect you against operational risks, including:

• Business income — Helps cover the loss of business income up to a certain period or pay for extra expenses like rent for a temporary location.
• Equipment breakdown — Helps cover the loss or damage to property due to a mechanical breakdown or electrical failure.
• Employee dishonesty — Helps reimburse you for direct loss or damage to money, securities, or covered property due to dishonest employee actions.

Additionally, it’s important to establish a plan in case your business must temporarily relocate or close during repairs.

Compliance Risk

A compliance risk threatens your company’s finances or reputation due to a failure to comply with government laws and regulations. These risks include workplace health and safety violations, workplace discrimination or harassment, and environmental regulations. As a result, your business could pay fines or lose customers.

How to prepare: Business owners insurance can include employee practices liability, which can help protect you against claims involving sexual harassment, discrimination, or wrongful employment. Establishing expected behavior in your company and documenting it in your employee handbook is also crucial.

Security Risk

A security risk happens when your business fails to establish or follow traditional security measures and cybersecurity strategies. The following examples can all cause security risks, putting your company’s finances and reputation at risk:

• Data breaches
• Break-ins
• Vandalism
• Lack of employee training
• Lack of security equipment
• Outdated security system
• Ineffective software testing
• Insufficient policies for security

How to prepare: Your business owners insurance policy may offer cyber and data breach coverage, which is a comprehensive solution to help your business respond to numerous cyber incidents, such as an unauthorized intrusion into or interference with your computer systems, damage to data and systems, and cyber-related litigation. Additionally, invest time and resources in securing networks, utilizing firewall software, and encrypting. Training your employees on cybersecurity risks and mandating passwords to help protect your company's data is also important.

When it comes to traditional security measures, the property coverage in your business owners insurance policy may cover break-ins and vandalism. It’s also important to update your security system with high-resolution cameras, remote monitoring, and other newer technology. Additionally, Mercury Insurance offers a discount when you equip your building with an active central station burglar alarm to help protect your business from security threats.

How to Identify Business Risks

Take a look at some of the steps you can take to identify risks and helps protect your business:

• Perform a SWOT analysis — A SWOT analysis is a way to help evaluate your company’s performance by analyzing its strengths, weaknesses, opportunities, and threats. This method can help you understand risk management within your organization and show you the existing link between major problems and your business objectives.
• Survey risks at every level — After performing a SWOT analysis, look for risks at every level of your business. Anonymously surveying employees from entry-level positions to management can help you identify risks to each business area.
• Identify common industry risks — Performing market research can help you identify potential risks within your industry and establish policies and processes designed to mitigate these risks.
• Record risks — Establish a record for each risk to help you learn about continual threats to your finances or reputation. If you experience a recurring risk, you can create a policy or process to help protect your business.

Conclusion

Every business deals with a wide variety of risks, and preparation is one of the most important actions you can take to help protect your business from potential threats. One way you can do this is by purchasing business owners insurance from Mercury, where we offer best-in-class coverage at an affordable rate. We can work with you to create a policy that best fits your business needs so that you can protect your business from common risks associated with your industry.

Contact us for a fast, free quote!