A Company Has A Negative Cash Flow From Operating Activities Risk Management – Some Practical Ideas on How to Minimise Risk in a Business

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Risk Management – Some Practical Ideas on How to Minimise Risk in a Business

Introduction

Risk is a given in every business and it can be harmful to the business and even threaten its survival. Therefore, it is essential to be aware of various risks, understand their potential impact on business and know how to manage them effectively. This article provides some practical guidance on how to reduce your risk. The discussion is conducted under the following headings:

  • Planning;
  • Relationships;
  • Risk protection;
  • Discipline.

Planning

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 venture through an appropriate feasibility study.
  • Business planning. The business plan details how, when and by whom the strategic objectives will be achieved.
  • Cash flow projections. Too many businesses fail due to preventable cash flow problems. It is necessary to plan the anticipated cash inflows and outflows and their timing.
  • Financial planning. Good financial planning covers many things including projected management accounts and fundamental ratios. Preventive observation and correction of all potential problems with profitability, liquidity and solvency reduces the risk of falling into financial problems.
  • Project planning. Any significant ad-hoc project in an enterprise is usually handled more efficiently with 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 deadliest risk factors. Relationships should be nurtured. Specific relationships that are important include the following:

  • Suppliers. Good relationships with suppliers are just as important as with any other stakeholder in business. It makes business sense to negotiate good credit terms with suppliers and pay them as late as possible, but once an agreement is made, commitments must be honored.
  • Customers. Customers should always receive excellent service and be treated fairly and with respect. Much of the business usually comes from existing clients. A specific bad practice is to try to make a quick buck from a client through very high margins.
  • Employees. Companies often talk about the importance of their employees in words. Confidentiality agreements and trade restrictions can reduce some risk of disgruntled or dishonest staff, but they can never be as effective as a team of loyal and motivated employees.
  • Financiers. Transparency and information are essential for investors and bankers. No one likes to be blindsided or have unpleasant surprises. Delivering more than promised is also good practice. In tough times, funding can mean survival.
  • Other StakeholdeRs. Relationships with all other stakeholders should also be maintained. This can be local government, industry governing bodies, service providers and others.

Risk protection

The essence of hedging is to avoid a potential negative effect in business through an action, product, etc. Hedging is typical in the financial domain, but with smart work it can be achieved (to a certain extent) at the operational level as well. Some of the ways to protect business operations are listed below:

  • Suppliers. Having subsidiary suppliers (especially for critical products, raw materials and services) is a good practice. This prevents the company from being ransomed by an uncooperative or out-of-stock supplier.
  • Products. Every company should constantly add new products to its offer. Relying on just a few good products can be very risky.
  • Production. It is worth considering different production facilities (if the size of the company justifies it). Business risk due to factors such as natural disasters and labor disputes is thereby reduced.
  • Distribution. Auxiliary warehouses and distribution channels are recommended.
  • Customers. We have seen successful companies that had serious problems when they lost their biggest customers. Customer risk can be significantly reduced if you have many (and loyal) customers.
  • Geography. Political or economic instability in a country can be very dangerous for companies operating there. Wherever possible, it is advisable to spread the risk over several geographical areas.
  • Seasonality. Offering products and services adapted to different seasons has a very positive effect on cash flows and reduces the possible risks associated with it.
  • ICT. Very few companies can survive without adequate information and communication technology. Backup procedures and off-site facilities reduce potential risk.
  • Financially. Financial risk management is very widespread in large international companies. If you sell your products internationally, there are many products available to protect against different risks. Risks that need to be addressed include currency risk, interest rate risk and commodity price risk.

Discipline

Discipline can reduce risks in all aspects of business. Discipline should address all aspects discussed above, as well as the following:

  • expenses. Costs need to be kept under control – especially in times of abundance.
  • Debt. Debt helps businesses grow. However, a company with too much debt is very vulnerable to liquidation in unfavorable conditions.
  • Cash flow. Lack of sufficient cash flow is a potentially fatal business risk. Cash flows should be managed diligently.
  • Growth. Business growth requires additional working capital. Uncontrolled growth can lead to financial difficulties and even bankruptcy and should be avoided.

Abstract

Risk in business is a reality. When these risks are successfully managed, the rewards can be substantial. Otherwise, the company may run into serious problems and even fail. It is unnecessary (and foolish) to ignore the risks. By following a few basic principles, these risks can be drastically reduced.

Copyright © 2008 – Wim Venter

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