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Understanding & Managing Business Risks |
It is scary to find out that some people are in business expecting a bright financial future with very little understanding of business risks and strategies for managing them. What is more worrying is that some charitable organisations who are receivers of large sums of monies from public sector bodies also display abysmal ignorance of their vulnerability to business risks and still expect to deliver their corporate goals and objectives. I would never forget my encounter with a director who openly and confidently informed me that their business was risk-free and there was no need to discuss their approach to risk management. At first, I had thought it was a joke but as the conversation proceeded I realised the director in question was serious. It was at that point that I concluded albeit quietly that the business was in for serious challenges in the future as its management team displayed very little understanding of the inherent risks of the operations they were managing on a day to day basis. Dare I say, the business ran into significant difficulties and of course the confident director who was of the view that the business was risk-free left the organisation in an unplanned way.
Before I proceed any further with this article, it is important to establish that there is no such thing as a risk-free business. Businesses of all types have risks and the degree to which they become successful will depend on how those risks are managed. It is fair to say that not all risks can be controlled but most risks can be managed and controlled. Without belabouring the point any further, let’s now quickly look at the definition of risks and in broad terms examine what they are.
Risks are events whose occurrence have a negative impact on the performance of a business. In short, any activity, behaviour or event that gives rise to negative consequences in a business is a risk. With this simple definition in mind, it is hard to see how anyone can possibly imagine their business is risk cocoon. In many respects, business risks arise because the environment businesses operate in is fraught with uncertainty. Even with the best business plan in the world, no one knows for certain at the start of their business whether they will attract and retain sufficient customers to yield the level of income required to meet their production expenses and continue delivering the services required by their market. The simple reason for this is because the business environment is complex, often influenced by multifaceted factors which businesses may not always understand immediately. However, the more agile, efficient and risk aware a business is, the greater its capacity to respond and manage risks appropriately.
In broad terms, most businesses are faced with common risks and these can be summarised as:
• Market risks- the risk that the demand for the goods and services sold may not be significant enough to generate the level of income needed to cover the cost of producing them. When this happens the viability of the business will be in jeopardy unless appropriate action is taken to address the cause of the problem. This type of risk can be managed through greater understanding of what customers’ requirements are so that the business will deliver goods and services customers need at the price they can afford. Over and above producing what customers need and want, a business needs to bring to customers’ attention the existence of the goods and services, as well as make the goods and services easily accessible to customers.
• Competition risk- this is the risk that customers may prefer to purchase their goods and services from competitors. There are numerous reasons for this to occur and moreover it is not always the case that price is the key determinant for customers’ purchasing choice. Customers may decide to purchase from competitors because of loyalty and trust, as well as a perceived higher quality of services provided by competitors (e.g. cleaner shop front; modern décor; polite, pleasant and helpful staff etc). Customer care is one big factor that some businesses underestimate but sadly customers put a huge premium on this aspect of a business, therefore a good customer care service should help improve competitiveness.
• Operational risk- this is the risk of delivering inefficient and ineffective goods or services (whether internally or externally) due to weaknesses in performance management and possibly other areas. Where a business fails to monitor its internal and external performance properly and does not put in place adequate systems to ensure that the staff it recruits are skilled and up to the job (as well as trained and developed continuously), the quality of its operations will ultimately suffer. When the operational activities of a business are weakened, customers will be provided with poor services or products. Notice that this is a catch twenty-two situation and unless operations are strengthened it is hardly likely that customers’ services and products will improve. Consequently, to ensure that operational risks are reduced, a business must map out all its business processes ensuring that they are up to standard and are adequately managed and monitored by its management staff. Those responsible for managing resources must possess the skills to do so; otherwise sooner or later every aspect of the business will be weakened by existing shortcomings.
• Economic risk- this is the risk of an increase in inflation, interest rates and foreign currency exchange rate. An increase in inflation will ultimately increase the prices of goods and services, which in turn will lead to an increase in the production costs of the goods and services. When this happens, businesses with little control over the price charged to customers for their goods and services will find it difficult to increase their fees/ prices and this will ultimately reduce future profitability. Even if selling prices can be increased, a business may be faced with a demand for higher wages or salaries from its workforce in an inflationary environment, which in turn will put pressure on future profitability when such demands are met. The same is true in situations of increase in interest rates, where the cost of capital soars. Businesses with loans are faced with a higher level of expenditure and a depressed profitability. There are a number of financial structures that can be used to reduce such economic risks such as SWAPs and Options; owing to their complexity they are not covered in this article.
• Political risks- this is the risk of changes in government regulations and policies, which in some cases may carry adverse consequences for businesses. They include increase in taxation rates and new types of taxes as well as control over the level of minimum wages and other forms of price controls. Political risk can also be internally generated when changes are made to the top management that result in policy changes that impact adversely on existing workforce and impair their performance. Political risk can be managed through greater awareness of government policies, clear communication of internally generated policies and planned changes, as well as greater organisational involvement in networks lobbying political bodies in a bid to safeguard the interest of the business
• Strategic risk- this is the risk of unclear direction of a business due to poor leadership. This can be mitigated by a clear understanding of the mission of the business and a commitments to pursue strategies to deliver the mission..
This article has merely summarised some of the common risks facing businesses. At the level of operational risks, a business will need to identify all activities that could lead to financial loss and determine how best to reduce the possibility of the risks occurring. Risks that are outside the control of businesses can be insured against as well as those that could bankrupt the business if they occur (employee lawsuit for breach of health and safety regulation). Furthermore, businesses must ensure that the responsibility for managing risk is shared across the organisation and that every member of staff is aware of his or her responsibility towards risk management. For advice and support on this subject, contact sheila@businessservicessupport.com
Sheila Elliott is an expert in business and personal development strategies. She is the founder of Business Services Support Limited and the author of My Business Is My Business- Learn How To Earn A Fortune. For more information about are free articles visit, http://www.businessservicessupport.com and http://www.sheilaelliott.com |
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