Risk Management for small businesses
Risk. It’s a scary concept. And whilst large corporations often have dedicated teams to manage and minimise risk, most small businesses take an alternative approach; the ‘she’ll be right mate’, bury your head in the sand approach. So what can you do in your business to better manage (and mitigate) risk?
Let’s start by examining some of your key exposures as a small business…
You. The owner / manager / driver. How well equipped is your business to deal with your absence. What happens should you be hit by the metaphorical tram? Or, if you want to take extended leave? Can your business cope with your temporary or permanent absence? If your business can’t function in your absence, the goodwill is you, which is a massive drag on value (and the business is likely to evaporate without you). Not to mention your personal financial situation – can you survive in the absence of the business earnings?
People risk. Are your management team replaceable? It’s critical to have good people, but equally important to build documented systems around what they do and to build back up within the team.
Customer risk. Do you have a reliance on one or two major customers? And do you understand the impact of losing that customer on cash flow and profit? And whilst many businesses may be crippled by the loss of a major customer, some are actually better off without them – do you understand the margins you make off your customers?
Product risk. You may have the best product or service in the world – but will it be there tomorrow? Can technology, legislation or other factors take your product away? Don’t have a Kodak moment in your business – stay nimble and build innovation into your product strategy.
Supplier risk. Equally, a reliance on a key supplier can expose your business to significant risk. Be aware of the issues that can arise with overseas suppliers with exchange rates, regulation and shipping. Consider whether you utilise any key components that can only be sourced from once place.
Credit risk. How robust is your credit management process? On what basis do you offer accounts to customers, and how do often do you review them? Is your debt collection process robust enough to mitigate the risk of bad debts to your business?
Working capital. You may make money, but can your business survive expansion, contraction or changes in the economic cycle? Do you understand the impact of change in your business and do you have appropriate debt and equity funding in place? How exposed is your business should interest rates rise?
Economic factors. Whist all might be well today, are there economic factors beyond your control that expose your business to risk? These could be localised to your industry, or extend across the domestic economy. Can your business survive the next recession?
Regulatory and Legal issues. Are you fully compliant with the regulatory environment in which you operate in? Whilst some businesses are highly regulated, all business have multiple layers of red tape to manage; employment law, premises, taxation to name a few.
Location. Does your business depend on location or premises to derive its earnings? And if so, is your future tenancy secured and managed? Do you have sufficient space for growth, or should you require less space, can you extract yourself from rental commitments?
IT and data. The reliance modern business has on technology is unfathomable compared to even ten years ago. But still, many small businesses have inadequate backup and recovery processes in place and don’t understand the risk of system failure and data loss. The advent of cloud technology means that vital business data can be stored, and potentially shared, across the world. And then there’s social networking and the reputational risk that your customers and employees can expose you to in the digital world.
Insurance. I’ve left what will often be the first factor, to last. Insurance is fundamentally important and must be taken into account in any risk management strategy. Most businesses are insured, but many will be underinsured. Importantly, you need to understand it, but you also need to build internal processes to minimise the need for it. Insurance does not replace the need to manage the impact of risk to your business. The best insurance is avoiding the issue in the first place.
So what can your business do to better manage risk? Here’s some suggestions:
- Undertake a review. (You could use the above as a starting checklist). For each of the major areas consider both how your business is exposed (high/medium/low risk) and the impact on your business.
- Focus on high risk areas with high impact and implement strategies to mitigate these risks where possible
- Don’t do it as a once off! Review and revisit this at least annually as part of your business planning cycle
- And if it all seems too hard, engage an expert to help you out. The biggest risk you face is inaction.
We are well equipped to assist small businesses in developing risk management strategies. Further, our Audit Specialists are experts in reviewing financial systems and identifying internal control risks and developing strategies to mitigate transactional risk in your organisation. Contact our Advisory Specialists today on (03) 9835 8200.