How to Create a Risk Management and Loss Prevention Program

For many state and federal government contractors, risk management programs are required. However, even if you don't fulfill government contracts, a risk management and loss prevention program benefits your business by helping you identify and evaluate risks so you can prevent losses or minimize them when they happen. To create a risk management and loss prevention program, designate a risk management coordinator to spearhead the effort to identify and analyze potential risks so you can implement strategies to eliminate or minimize them.^{[1]XResearch source}

Part 1

Part 1 of 3:

Identifying Risks

1
Put someone in charge. To create a risk management and loss prevention program, you must designate a particular employee – typically someone at the management level – who will oversee and coordinate the program.^{[2]XResearch source}
- Having a single individual coordinating your risk management and loss prevention program ensures organization and helps you avoid a duplication of effort.
- Choose someone who is detail-oriented and analytical, as their job will entail reading and analyzing reports as well as creating comprehensive solutions to potential problems to help safeguard the company's assets and resources.
2
Evaluate your business's physical environment. Physical risks include not only the security of your physical property against theft, but also any weaknesses or potential problems in the structure itself.^{[3]XResearch source}
- You want to assess the structure of the building in which your business is located for potential defects, such as faulty wiring or substantial cracks in walls or ceilings, that could present a risk to your business.
- If you lease rather than own the premises, these may not be things you can have repaired right away, but your risk management coordinator should identify and keep track of them.
- Some problems, such as a broken lock on a back entrance, are glaring security problems that should be fixed immediately.
- Physical risks also can relate to employee work habits or procedures. For example, if warehouse workers routinely put a cinder block in the back door when they go out for a smoke break rather than closing the door completely, this could present a security risk.
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3
Assess potential legal vulnerabilities. Depending on your business's industry, the legal or regulatory environment could present challenges to your operations and budget for which you will need to account.^{[4]XResearch source}^{[5]XTrustworthy SourceUS Food and Drug AdministrationU.S. government agency responsible for promoting public healthGo to source}
- For example, the FDA announced in 2016 that it would regulate e-cigarettes the same way it does regular cigarettes. If you own a business that manufactures or distributes vaping products, this announcement represents a significant change in the regulatory environment for your products.
- Employment regulations also should be considered when assessing legal vulnerabilities. If your risk management coordinator doesn't have significant legal experience, consider working with a business attorney to assess the areas in which your company might be vulnerable.
- Health and safety regulations are an issue for many small businesses, including restaurants and retail stores. Watching employees can help you identify areas in which you risk being cited for violations of these regulations.
4
Consider personnel issues. Regardless of the size of your workforce, you need to identify risks created by problems with employees and the intersection of state and federal employment law with your business's policies and procedures.^{[6]XResearch source}
- Arrange for regular audits of your personnel and payroll files and make sure they are up to date and accurate.
- Review your company policies and handbooks to identify areas in which you're at risk of a lawsuit for failing to meet the requirements of state or federal employment laws.
- If you have state or federal contracts, you may have to comply with additional reporting requirements designed to encourage diversity in your workforce.
5
Conduct financial audits. Regular audits can detect vulnerabilities in your budget that may expose you to more risks, as well as discovering discrepancies that may indicate potential losses or accounting inaccuracies.^{[7]XResearch source}^{[8]XResearch source}
- Pay close attention to areas or departments that tend to have excessive expenses or exhibit larger loss margins than others.
- If you have employees who travel for business and turn in mileage and expense reports for reimbursement, these should be carefully evaluated to ensure minimal loss.
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Part 2

Part 2 of 3:

Evaluating Relative Threats

1
Consider contracting with an independent agency. There are many independent agencies that offer services designed to review and report on potential risks to which your business might be exposed, as well as advise you on options to prevent those risks or minimize your exposure.^{[9]XResearch source}
- Thoroughly vet any independent agency before you hire them. Keep in mind that many of these agencies are part of larger insurance companies and the ulterior purpose of their evaluations is to sell you additional insurance.
- If you have a relatively small business, you may find the benefits of hiring an independent agency to conduct risk assessments and evaluations do not justify the expense.
- However, state and federal government contracts typically include specific loss prevention requirements. If your business routinely works under such contracts, an independent agency can help ensure that your evaluations fulfill the government requirements.
2
Research the probabilities of various threats. You must understand how likely a threat is to happen so that you can prioritize your resources to counter those threats or minimize your business's exposure.^{[10]XResearch source}^{[11]XResearch source}
- Compare the relative probability to the cost of eliminating or mitigating that risk. Even if a particular risk has a very low chance of actually occurring, if it could be eliminating by replacing a cheap part, it's in your company's best interest to go ahead and do that.
- High-probability threats that also would be expensive to counter or control may require planning in multiple stages to gradually reduce the threat over time.
3
Review past responses to events. If your business has already faced any of the risks you identified, your past response can reveal additional safeguards that could be put in place or errors to be corrected.^{[12]XResearch source}^{[13]XResearch source}
- For example, if your business was the victim of a hack in which credit card numbers were stolen, your evaluation should include a summary of when and how you responded to the hack, what measures were taken to prevent it from happening again, and whether there are any lingering issues with customers that remain unresolved.
- Consider employee responses in situations such as accidents or injuries on the premises.
- If your business has been hit by a natural disaster, evaluate how the situation was handled immediately following the event, the response of your insurance company, and how well your business recovered.
4
Create detailed reports. Based on your evaluation, you should come up with a report for each significant risk that analyzes the likelihood that the risk will occur, the steps you've already taken to prevent it, and additional steps you can take to further decrease the likelihood of its occurrence.^{[14]XResearch source}
- The reports should not only analyze the business's vulnerability to particular risks, but also list possible actions that could reduce or eliminate the risk, along with the time it would take to implement those actions and what they would cost.
- For more large-scale problems, give your risk management coordinator the power to delegate specific tasks to other members of your staff or to hire experts to further evaluate the situation.
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Part 3

Part 3 of 3:

Treating Risk Exposure

1
Review company policies. You can effectively combat some risks, particularly those related to employees, by changing company policies so that the risk of a potential problem is reduced or eliminated.^{[15]XResearch source}
- For example, changing or clarifying termination proceedings can reduce the risk of a wrongful discharge lawsuit.
- Past experience also can be a guide. If someone exploited a loophole in a particular policy and it ended up costing the company significant time, money, or resources, you should modify your policy to close the loophole so the same thing cannot happen again.
- Designate specific employees to be in charge of handling employee complaints so your employees always know who they need to talk to. Establish procedures that require all actions taken to resolve a workplace dispute to be recorded in writing.
- If a significant policy overhaul is required, consider consulting with a business or employment attorney regarding the efficacy of your proposed policy changes.
2
Conduct regular employee training. All employees must be trained to fully understand the application of laws and regulations to their workplace, as well show to identify and respond to potential problems on a daily bases.^{[16]XResearch source}^{[17]XResearch source}
- Gender discrimination and sexual harassment training in particular can reduce the company's risk of being sued for sexual harassment in the workplace or a hostile work environment.
- Employees also should receive regular training on health and safety regulations that apply in your workplace.
- Make sure all managers and supervisors receive additional training on how to resolve disputes and effectively communicate with employees.
3
Maintain adequate insurance cover. A comprehensive liability insurance policy can protect your business from many potential risks, including the threat of a lawsuit if a customer is injured on your property.^{[18]XResearch source}
- Property insurance will protect you against the loss or damage of company property, while a liability policy protects you if there is an accident or injury on company grounds.
- Workers' compensation insurance, required in all states, covers you in the event an employee is injured on the job.
- If you have a professional business such as a law firm or a medical practice, you may be required by your state's law to carry malpractice insurance on all professional employees. Even if it isn't legally required, malpractice insurance is sound risk management.
- If your business is particularly susceptible to risks, you may want to consider purchasing additional umbrella insurance coverage.
4
Run regular security tests. Particularly if you make frequent use of computers and networks in your business operations, frequent security scans are a must to ensure that your business data is protected from theft or corruption.^{[19]XResearch source}
- You can contract an independent company to monitor your network and notify you of security risks.
- Make sure your wireless network is password-protected and all sensitive information is encrypted.
- Train your employees on the security of information, and make sure any passwords or access keys are not left out where anyone can see them, such as on a note taped to a computer monitor.
5
Create disaster response plans. In the event of an emergency, all employees should know how to secure and evacuate the facility to ensure minimal injuries or damage to the business's property and assets.^{[20]XResearch source}
- Keep in mind that if disaster strikes, you may be responsible not only for the lives of your employees but also any customers or clients on the premises.
- Train employees on evacuation procedures and post signs with evacuation routes in a prominent location, particularly if your business is located in an area that frequently is at risk of natural disasters.
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