Are You Ready for the Next Katrina?

When most business owners hear the term "risk management," they think of property and casualty insurance. And while an adequate level of insurance is part of a good risk management plan, there are many aspects of a business in which daily risk decisions must be made. For instance, decisions involving computer system purchases, hiring of employees and even where and what to advertise all involve various levels of risk management.

A good risk management system for your business involves a three step process. First, you must recognize the risks that you face. Second, you must devise a plan to mitigate these risks. And third, you must execute on this plan. The recent catastrophes caused by Hurricanes Katrina and Rita provided horrific case studies of the importance of a good risk management system.

Most of the businesses that had prepared with this three step process survived in some form. However, the businesses that had not properly considered risk management issues generally suffered fatal damage.

For equipment rental business owners, nearly all risk management decisions can be narrowed down to six key areas: operational, reputation, regulatory, legal, liquidity and disaster.

Operational risk

Operational risk is concentrated in three areas: 1) equipment; 2) information risk; and 3) human risk. If your equipment is older and prone to high maintenance expense, then your operational risk is high. Frequent equipment problems can lead to high levels of downtime and waste, both of which can be very expensive for a small equipment rental business. If you have had significant problems with your equipment, you should consider replacing it. While the initial cost might seem prohibitive, you might actually find in putting a pencil to it that the improved productivity and efficiency would more than cover the cost of the new equipment.

Information risk pertains primarily to your computer system. If your system is antiquated and slow, then you are taking undue risk in the quality and availability of your information. For instance, your system should be able to provide up-to-date inventory records. Without this information, you might underestimate the availability of certain items. Your system also should provide you with frequent profit-and-loss information, so you know how your business is performing.

Information risk also involves frequent backups of your data to ensure that it isn't lost in the event of a fire or power outage. To mitigate this aspect of information risk, you should backup your data on a regular basis (a state-of-the-art computer system should be able to backup the information daily) and store the backed up data at a different site or in a fireproof safe or vault. The third area of operational risk is human risk, which can manifest itself in the form or human error, fraud or in excessive reliance on the impact of one or two key employees. Human error risk can be mitigated by well defined policies and procedures, good training and targeted hiring practices. Employee fraud can be prevented by thorough and targeted hiring practices and good checks and balances in your cash control system. And you can avoid excessive reliance on one or two employees by cross-training and well documented policies and procedures.

Reputation risk

Reputation risk is one that is often over-looked, but one that can have a significant impact on the viability of a business. A good reputation is hard to obtain, but easy to lose. The best way to keep up a good reputation is by striving to under-promise and over-deliver.For instance, if you are out of a certain inventory item and must order if for a customer, don't promise it will be in within three days when it normally takes five.

You also can significantly impact your reputation in the type and content of advertising you do. Since your advertising dollars are limited, use them to emphasize a trait or traits which differentiate you from the competition. For instance, if you are the only store in town with a certain line of inventory, advertise that. Or if your location is superior to those of your competitors, make this an advertising focal point.