Risk management: some practical ideas on how to minimize risk in a company

Introduction

Risk is a given in any business and it can be detrimental to a business and even threaten its survival. Therefore, it is essential to be aware of the various risks, understand their potential impact on a business, and know how to manage them effectively. This article provides some practical guidelines on how to minimize risk. The discussion takes place under the following headings:

• Calendar;
• relations;
• Coverage;
• Discipline.

Calendar

Detailed planning goes a long way in reducing risk. Planning should include the following:

• Feasibility studies. It is important to determine the viability of a new business through a proper feasibility study.
• Business planning. A business plan details how, when and by whom the strategic objectives will be achieved.
• Cash flow projections. Too many companies go bankrupt due to cash flow problems that could have been avoided. It is essential to plan anticipated cash inflows and outflows and their timing.
• Financial planning. Good financial planning covers many things, including projected management accounts and underlying ratios. Preventive observation and correction of any potential profitability, liquidity and solvency problems reduce the risk of running into financial problems.
• Project planning. Any substantial ad-hoc project in a company is normally handled more efficiently through proper project management. This includes mergers and acquisitions, new product launches, and expansion into new territories.

Relations

When companies assess risks, they often forget about the human element. This is potentially one of the most fatal risk factors. Relationships must be nurtured. Specific relationships that are important include the following:

• Providers. Good relationships with suppliers are just as important as with any other stakeholder in a business. It makes good business sense to negotiate good credit terms with suppliers and pay them as late as possible, but once an agreement is in place, commitments need to be honored.
• Customers. Customers should always receive excellent service and be treated with fairness and respect. A large proportion of business normally emanates from existing customers. A specific bad practice is trying to make a quick buck from a customer through very high margins.
• Employees. Companies often pay lip service when it comes to the importance of their employees. Confidentiality agreements and business restrictions may reduce some risk of disgruntled or dishonest staff, but they can never be as effective as a team of loyal and motivated employees.
• Financial. Transparency and information are essential for investors and bankers. Nobody likes to be surprised or receive unpleasant surprises. Delivering more than promised is also a good practice. In tough times, funding can mean survival.
• Other participationofrs. Relationships with all other stakeholders must also be maintained. This can be local government, industry governing bodies, service providers and others.

coverage

The essence of hedging is to avoid a possible negative effect on the business through an action, product, etc. Coverage is typical in the financial realm, but by working smart it can also be achieved (to some extent) at the operational level. Some of the ways to cover the operations of a business are given below:

• Providers. Having backup suppliers (especially for critical products, raw materials and services) is a good practice. This prevents a business from being bailed out by an uncooperative or out-of-stock supplier.
• Products. Any business must continually add new products to its offering. Trusting only a few good products can be very risky.
• Manufacturing. It is worth considering different manufacturing plants (if the size of the business warrants it). In this way, the risk in the business due to factors such as natural disasters and labor conflicts is reduced.
• Distribution. Storage facilities and backup distribution channels are recommended.
• Customers. We have seen successful companies that had serious problems when they lost their main clients. Customer risk can be substantially reduced by having many (and loyal) customers.
• Geography. Political or economic instability in a country can be very dangerous for companies operating there. Whenever possible, it is advisable to spread the risk among many geographical areas.
• Seasonality. Product and service offerings that are tailored to various seasons have a very positive effect on cash flows and minimize the potential risks associated with it.
• TIC. Very few companies can survive without adequate information and communication technology. Backup procedures and off-site facilities reduce potential risk.
• Financial. Financial risk management is very common in large international companies. If you sell your products internationally, there are many products available to cover the various risks. The risks that must be addressed include the risks of exchange rate, interest rate and price of raw materials.

Discipline

Discipline can reduce risk in all aspects of business. Discipline should apply to all aspects discussed above, as well as the following:

• Spent. Expenses must be kept under control, especially in times of prosperity.
• debt. Debt helps a business grow. However, a company with too much debt is highly vulnerable to liquidation under adverse conditions.
• Cash Flow. Lack of sufficient cash flow is a potentially fatal business risk. Cash flows must be managed diligently.
• Increase. Business growth requires additional working capital. Uncontrolled growth can lead to financial problems and even bankruptcy and should be avoided.

Summary

Risk in business is a reality. When these risks are successfully managed, the rewards can be substantial. Otherwise, a business can have serious problems and even collapse. It is unnecessary (and stupid) to ignore the risks. By adhering to a few basic principles, these risks can be drastically reduced.

Copyright © 2008 – Wim Venter