A business is a lot like a leaking bucket, you fill it up with profits but as holes develop the profit can leak out. Retaining your profits for all your hard earned effort is about trying to predict how those holes could appear and then planning to avoid or minimise those situations. There will always be some risk involved, but this should be calculated and at a level which is acceptable. If you don’t take any risks, then you are much less likely to get anywhere.
Risks in the business can be identified in a number of ways. On a simple level it could just be a brainstorming meeting of key staff to come up with a list. As a business grows it can become more sophisticated and can develop information systems such as customer feedback or employee feedback systems which help identify risks.
Once the risks are identified, the level of risk needs to be assessed. This will determine how much time and how much you spend mitigating and preventing the risk from happening. In assessing business risks, a good method to use is to assess the Likelihood and Consequence of each risk you can identify according to the following matrix:
This is a commonly used model and will give you a “risk score” and help you prioritise how much you invest in mitigating the respective risks. If for example as a consequence of a risk event occurring there could be an explosion or a death, and there was a reasonable likelihood that this could happen, mitigating that risk would be prioritised ahead of something else that might have lesser consequences.
Looking at your business, have you really thought through all the things that could happen and put mechanisms in place to protect your business ? As outlined this could be as simple as getting key people together, applying the matrix above and coming up with a list of priorities. To help you further, here are some typical areas of risk to consider:
Loss of a Major Customer
If you are growing you may have customers who represent a large portion of your revenue. What would happen if you lose one of those customers because they go elsewhere or go into liquidation ? Will you be able to reduce your costs especially your wages to cater for the lower revenue base or will you be able to absorb these costs ? These are questions you need to ask because it could determine how you engage resources and the types of resources you engage. Certain costs are more scalable that others like contractors and casual labour which can more readily be turned on or turned off to match revenue streams.
Customer files a major claim
Good terms of trade are essential in any business and making these work for you will help you defend any claim. But regardless of how “right” you are, defending a claim will take resources and your time away from profit making activities and then there are the legal costs which you may recover some of if the case goes to Court but many are settled well before then. Have you taken the steps to minimise claims and put yourself in the best position should a major claim arise ?
Cyber-attack and theft of personal information
The risks around Cyber-attacks and loss of personal information has been well documented in the media, so has your business taken all the reasonable steps required to mitigate this risk and prevent information from being compromised ? As an alternative, has your business taken steps to reduce the incidence where you collect personal information unnecessarily.
Major investor withdraws financial support
Cash planning is critical to any business and can be dependent on continued support of key investors. When a business is in the scale up phase it can be dependent on the financial support of its owners and third part investors. So how well have you locked in these third party investors ? Have you got shareholders agreements in place ? Is there a back-up plan if they withdraw support ?
Loss of key staff member
When a business grows resources are very tight as founders minimise overhead as best they can. Having staff who are supportive of your journey and commitment will be a key reason to your success. This can, however, also lead to over-dependency and failure to document and communicate key processes. The journey has probably also made your staff member more marketable. So what if they left? You will get one month’s notice and a story like they received an offer they could not refuse, how would you cope with them not being there?
Competitor reduces prices to gain Market share
Whether you are in large or small business, the business case for establishing the business in the first place will be based on an assumption of what you will sell your product or service for. In the business case phase, you will more than likely conduct some sensitivity analysis with best and worst case scenarios. When you are operating, you are now competing in the market place as things may happen that you did not anticipate. Disrupting businesses like Uber and Air BNB are good examples. What would your business response be ? Could you compete on price, how would you differentiate, how could you scale your costs ?
Phone interruption causing communication failure
Many businesses are dependent on certain infrastructure, phones and communications and merely one of those. When the phones don’t work, or the internet is down, how will your business function? Do you have a disaster recovery plan that incorporates this ? It might not be just a matter of diverting phones, resources are also displaced. Who will take the calls and will they be trained to deal with the situation ie fill an order or handle a support question ?
Loss of data
This is one that, thankfully, is most commonly addressed in a disaster recovery plan, but to what degree? Usually there will be a backup, but is that backup completely up to date and how long will it take to restore systems. Is there a communications plan to customers, suppliers and staff ?
This list is not exhaustive and does not include particular risks that may be prevalent in your industry or in your environment. The issue for most businesses is that they are so focussed on the core elements of the business, in winning customers, managing customers, servicing customers and administration that they overlook the “non-core” factors in their environment that could be detrimental to their business. The sad thing is that the solutions to mitigating risk are not always complex and many can be easily put in place with minimal cost. By considering these risks, we are protecting the business and making sure the profits are retained for the intended purpose.
ABOUT BRIAN DOUGHTY
Brian Doughty is founder of the outsourced CFO which is a part time CFO service for small to medium sized businesses. Brian’s experience in large corporates and small business is unique and has enabled him to develop a simple to understand set of tools which will help business owners engage staff, monitor performance and achieve their goals. For more information, visit www.theoutsourcedcfo.com.au.