Business Risks – and How to Avoid Them

By Larry Ventimiglio

 

Success in business is a mix of earning acceptable returns and mitigating or avoiding risks. While risks are an inevitable reality in business, properly planning and modifying operations, as needed, goes a long way toward steering your business through dangerous waters. From financial risks, such as investments in plant expansion, to new market competition, to changes in customer preferences, business threats can emerge at any time and threaten your business. Knowing and understanding different types of business risks can help business owners and managers develop a clearer forward vision in distinguishing opportunities versus the potential economic dangers which may pose threats, and adjust their business models accordingly.

 

So What’s a Business Risk?

A risk can be defined as any uncertainty that is related to a particular circumstance that could result in financial insecurities for a company, or render a business inoperable. The business owner, or manager, is required to properly position the enterprise with risk management strategies capable of meeting and successfully mitigating those risks head-on. Obviously, risks come in many forms, and it is important to know and understand the different types of risks so you can properly assess the potential exposures applicable to your particular enterprise. Risks can emerge from either the internal or external business environment. Several internal sources of risks include financial, marketing, operational, strategic, and work force, while external sources include a changing economy, new market competitors, technology, or natural disasters.

 

Typical Risks Worth Highlighting

Financial Risks – Both publicly traded and privately owned businesses are subject to risk exposures related to financial market fluctuations. Interest rates and loan requirements for business loans will vary over time. Lack of capital is a major risk all companies face when conducting business operations. Additionally, investment activities and income earned from those activities are directly impacted by both external political and market forces you cannot control. Most companies need capital to purchase property, plant, and equipment for producing goods or services. Companies raise this money through bank loans or issuing stock. During economic periods of tight credit rules, bank loans may not be easy to secure. A business’ poor historical cash flow may cause both bankers and investors to be wary of either loan or investment risks for them.

Operations – Inefficient production operations produce goods or services at a higher cost than efficient ones – thus raising the selling price to customers versus the competition. If goods or services are offered at higher selling prices than the market average, companies face difficulties in selling their goods AND generating a profitable return. Slower sales demand may increase inventory on hand, which can increase other fixed expenses. Operating inefficiencies can result in a vicious downward spiraling cycle for any business. This is also true for other major cost categories on the profit and loss statement, including selling, general and administrative expenses. Each business functional area needs to make a positive contribution to income AND each needs to be in proper proportional “balance” with the other areas. If not, the numbers won’t work!

Labor – While risks associated with labor include lack of skills, high turn-over rates, ineffective training and lack of creativity, these risks are truly more management-based. Management needs to drive effective recruiting and hiring processes, in conjunction with the HR support team, by properly defining accurate job descriptions, identifying appropriate skill-sets required for the employee to succeed in the job, screening candidates effectively, and hiring a best-qualified candidate for the position. But this isn’t where the process ends – this is just the beginning. Management also needs to be the driving force after the hire. Areas like training, routine monitoring, productive feed-back to employees, clear actions for improvement within specific time-frames, and team-building, morale-building, timely performance reviews, and effective rewards for positive performance, are all elements of effective management. A company’s labor force is only as effective as its management.

Competition – The free market is full of competition for all businesses. If a new market is profitable, competitors will enter the market seeking profits from high customer demand. New competitors sometimes force more mature companies to change their business strategies, from lowering costs to reducing output. Over-saturated markets quickly place inefficient companies out of business, leaving only the stronger companies to supply the market with goods and services. Any change to business operations can quickly increase the risks of conducting business. Like it or not, business IS survival of the fittest!

Business Decisions – A business is only as good as its decision-makers. Business risks include investment decisions, marketing, and product development, dealing with competitive and external market forces, as well as planning, and CHANGE. Incorrect business decisions may cause lower than expected profits reduced financial liquidity and loss of competitive advantage. Effective planning can help the business owner, or manager, understand what the business is designed to accomplish, who the customers are, and whether the business is meeting its pre-determined goals. Effective decision-makers are properly trained, experienced, pragmatic, and objective.

 

So How Can I Minimize Business Risks?

Be Cash-Conscious – The number-one risk for most small businesses is improper cash-flow management. This is a common sense thing. Cash needs to be managed on a daily basis, because in business, there is nothing more important to the survival of the business than effective cash management. Spend less than you receive, look forward in projecting cash receipts versus disbursement needs, and routinely monitor accounts payable and accounts receivable aging schedules. Every business needs to effectively balance cash receipts from customers against cash disbursements to vendors. This is the most important survival skill area in successful business management.

Internal Controls Go a Long Way – Create and periodically review systems of internal controls. These provide checks and balances for every aspect of a business. Examples include an asset identification system for fixed assets, work zone safety checklists of precautions, segregation of approving expenditures and signing checks, and limiting the number of employees having Internet access, or access to company records.

Insure Against Specific Risks – Standard insurance coverages don’t cut it any longer. You must understand specific risks your business faces and insure against them. Examples include business-interruption coverage, environmental coverage, specific workers’ compensation coverage for specific types of work (i.e.; confined space, elevations, marine locations, etc.), and information technology, employee crime, directors’ and officers’ liability. If your business changes, your insurance should change, as well. Additionally, you may need to consider insuring key employees. A good insurance brokerage team is priceless.

Develop a Contingency Plan – So how do you deal with risks you aren’t insured against? That’s where a contingency plan comes in. A contingency plan identifies what the business will do if a particular event occurs. The plan should be written, reviewed and updated periodically. Managers and employees should be trained on it, and a copy should be placed in an off-site location.

Use Contractual Indemnification Language – Contracts and purchase orders should include adequate indemnification language to protect your business from potential damages caused by other businesses or other people your business relies on. Also, carefully review customers’ indemnification language required on their contracts and purchase orders with your business.

Know When to Say When – New business relationships or ventures should include language that provides the trigger events, methods, and/or timing identifying when/how the relationship may end. Learn how to cut your losses.

 

What about YOUR business? Do you need help maneuvering through these types of risks and uncertainties? Perhaps I can help!

What does “success” mean to YOU?

 

For more information on how I may be able to support YOUR business, please contact me at 843-245-9753, and visit my website: www.LJVBusinessSolutions.com