Risk Management: Formulating Plans Based on New Realities

Risk management is organic, last year’s risks may have evaporated and new ones may have surfaced this year. The main question is: Was your company prepared to deal with those threats when they appeared?

The responsibility for predicting and managing risk generally falls on your company’s board, audit committee, chief financial officer, and, if you’ve set one up, a risk-management committee.

The key to being prepared is to ask a simple question: What if? Take credit, for example. Ask: What would we do if lending dried up?  One reasonable response would be: Build up cash reserves and pay down debt to put the company in a position where it would more than likely survive the crunch.

Moreover, that strategy might put your enterprise into a position where it could acquire financially struggling companies at bargain prices. That could broaden your customer base, add experienced staff and eliminate at least some of the competition. (See right-hand box for ways to deal with competition.)

Keeping that in mind, here are some of the most pressing current business challenges and tips on how to help minimize their effect on your organization’s growth and bottom line:

Cash and Credit

There is no real estimate for when the economy will start sliding into a downturn, so your company must deal with issues of liquidity and its ability to obtain credit and manage cash flow. Your company should be able to forecast cash flow at least six weeks in advance and, better yet, three months ahead.

The fact of the matter is, although your company may be profitable, its cash flow may be eroding. Your business needs to get a firm grip on its liquidity situation and determine if it is experiencing sales slumps in any areas, having problems with delinquent accounts receivables, showing dips in profit margins and the like. You need to know that your business can generate enough cash from its operations and liquid assets to provide fuel for survival and growth. If your company has too much cash tied up in assets, it may be hurting from unnecessary interest payments, bad debts from receivables or excess inventory.

In a difficult economy, you may find it necessary, at least for the short term, to change your business plans and focus on acquiring and retaining cash rather than expanding operations. By improving operating efficiencies and conserving cash, your business can start investing in opportunities to prepare for the future.

Focusing on capital may involve taking steps to promptly collect receivables, negotiate longer payment terms with vendors, sweep excess cash into interest-bearing accounts and build strong relationships with lenders. It may also help to review the profitability of your products and services to determine if your company is in a position to increase prices to boost cash flow and profits.

Cost Cutting and Staff Management

Maintaining control over your company’s costs, while managing and retaining talented staff should always be high on the risk-management agenda. Among the steps that can help keep costs down are:

  • Reviewing overhead and eliminating unnecessary expenditures and unused property. Shed unprofitable products and services, and monitor ways your company may be using money for non-essential purposes, such as travel expenses, lunches, furniture, or subscriptions.
  • Auditing intellectual property your organization holds either on its own or in collaboration with other enterprises.
  • Reviewing cross-border contracts to assess your enterprise’s exposure to regional economic and regulatory differences that can boost costs and cut into revenue streams.

At the same time, be judicious when it comes to trimming staff. Imposing across-the-board layoffs may seem a quick way to lower costs, but it can compromise your company’s long-term objectives by weakening the human resources needed to sustain growth and stability. Retain and encourage your good employees while removing the nonessential and nonproductive.

Other business risks that need to be managed include potential changes in the regulatory environment, which may involve even more compliance with federal or provincial regulations, and the increasing demand for green production and products. As well, technological change and industry transitions may be making some of your business models obsolete, forcing you to consider ways to reinvent your corporate strategies and structures.

Competition

Strategic risk-management requires paying attention not only to your typical competitors but also to potential threats from businesses in other industries with the skills and knowledge to steal some of your business. To help manage these risks your company can:

  • Focus on potential customer loss: Consumer tastes change over time and some are likely to find another brand to accommodate their new needs. Conduct surveys to help determine what customers will likely want in the future, what they want now and aren’t getting, and the strength of their loyalty to your business. Then assess what your company is able to do by itself or through collaborations.
  • Forge alliances: Pooling strengths with other businesses may help everyone involved gain a competitive edge, find new markets, create economies of scale and reach new customers. Through business arrangements you may find added investment capital or expertise.