The Roman philosopher Seneca said “reckon on everything, expect everything”. His point was that while we expect consistency in life, misfortune is not abnormal. Despite the knowledge that bad things happen, most people expect that tomorrow will be similar to today. But what if it’s not? This month, we explore the practical ways you can prepare for the unexpected.

Running and growing a business consumes a huge amount of time and energy. Often, planning for the unexpected is so low on the priority list that it is never addressed. Managing business risk is not just about making sure that it can survive unexpected events; it’s also about protecting the value of your business. Developing and maintaining systems and methods of protecting against risk can increase the value of your business and reduce the uncertainty that a potential purchaser might have. In addition, risk management is a philosophy that should be instilled at every level of the business to ensure that the business is focussed on those things that drive and deliver value.

Imagine this; your business sells its products to major retailers across the Australia. Most customers are repeat purchasers. Your primary product, proprietary software and hardware, is sourced from a US company. The supply agreement has been in place for 6 years, generating 85% of your sales and contributing a 20% net profit margin. The relationship with the US supplier is transactional. You know who the key people are but aside from trying to negotiate better terms for the supply of product, there is no rapport. The supply agreement restrains your business from dealing with other suppliers of similar products.

From your side, the supplier is difficult and doesn’t seem to be interested in making life easier for you to improve sales. Cash flow is tight and the terms of supply mean that you need to tightly manage every sale.

From the US supplier’s perspective, Australia is a small market and expectations of the sales volume achievable is higher than what has been achieved; although this has never been articulated.

You start demanding better terms to increase sales growth.

The supplier loses patience and collapses the supply agreement, giving it to a competitor who has been courting them.

Overnight, your business, built almost exclusively on the supply agreement, has stalled. While you can get another supplier, it will take time and your customer base might not have the patience to wait for you to get back up and running again. Plus, they know the product you were selling and might be unwilling to change.

What would you have done to prevent the risk of the supply agreement collapsing and what would you have done if the worst happened?

Or, another scenario using the same business: The owner and operator of the business is aged over 60. The business can run without him but he controls the primary relationships with the supplier and the customers. There is no formal record of these relationships and any contact, other than sales and supply transactions, is all held in his head (after all, who has time for additional paper work when the sales are coming in!). The business has consumed his life to the extent that there really hasn’t been time to exercise or look after his heath but he’s genetically lucky and can still beat his granddaughter in a race to the back fence.

One lunch time he walks out of his office to talk to his accounts people and feels odd. The next thing he knows he wakes up in hospital after a major stroke. The left hand side of his body is paralysed. The prognosis isn’t great and rehabilitation will only go so far. He has insurance to cover his death but nothing that recognises the contribution he makes to his business or his family’s income.

The reality is that it is not the business owner’s age that is important. It is the business’s dependency on him that is and as a result, needs to be managed as part of any risk management plan. Health issues and accidents occur at every age and we should always plan for the unexpected.

How dependant is your business on your ongoing health and wellbeing? And if it is heavily dependant, what measures do you have in place to reduce the risk to the business of something happening to you?

How to identify risk

Identifying the risks to your business is not always easy. In addition to external factors, you need to understand what drives your business and where your dependencies lie. Here are a series of risk areas to think about:

Suppliers – How reliant are you on individual suppliers? What are the terms of your supply agreements? If the supplier terminates the agreement, how much notice do they have to give you?

 

Customers – What sort of relationship does your business have with its customers (relationship/ account based or transactional)? Is your business highly dependent on a few key customers? If so, what would happen if they took their business elsewhere? Do you assess the suitability of customers before accepting them?

 

Staff – does your business depend on one or two key staff members to deliver results? If so, what are the terms of their employment agreements? Is there a risk that key team members will join a competitor and take the client relationship with them, or set up in competition to you? Is your business legally liable for the services you provide and are all of your staff suitably qualified to deliver this service? Does your business rely on you to keep it running? What would happen if you were unable to work?

 

Products – what products deliver the highest profit margin to your business? What stage of its lifecycle is the product in? Will you need to source replacement products for maturing products? Is your product at risk of tampering?
Compliance/ regulatory risk – how dependent are you on government policy or regulation? What would happen if the Government introduced sweeping reforms that impacted on your business or your customer base

 

External environment – How would external factors such as a flood, major power failure, fire or a terrorist attack impact on your business?

 

Position – is your business reliant on its geographical location? What would happen if there were road changes that diverted traffic away from you, or if your landlord did not renew your lease?

 

IT & systems – are your systems reliable? Is your client data protected? Where are your records kept and are they backed up? Are your systems and equipment current? If not, what would happen if your equipment failed?

 

Financial - What is the business’s current financial position? Are you able to fund growth? Is there a risk that the bank will call up a loan? What is your debtor management like and how and when do you extend credit?

 

Insurances – Does your product or service present a potential public or professional risk? Do you know the true and current replacement value of your business and are you underinsured? If the business is reliant on the owner/ operator or other key staff, do you have key man insurance in place? Do you know exactly what your current policies cover and who you are covered by?

 

The risks identified will vary from business to business and industry to industry. The important thing is to ensure that you identify risks that are critical to your business.

6 steps to reduce business risk

 

 

It’s a new financial year and you probably spent some time over the last month or so looking at your profit position, tax planning and superannuation. Now is the time to get your numbers in place for the coming year. Don’t wait until the year gets under way. Be prepared at the beginning and you will have the foundation to your financial management in place. Here are the numbers you should have in place:

• Sales budget