Risk is a given in any business and it will be damaging to a business and even threatens its survival. It’s subsequently essential to be aware of the assorted risks, to understand its potential impact on a enterprise and to know how to handle it effectively. This article provides some practical guidelines on how to minimise risk. The dialogue is done under the following headings:
Planning;
Relationships;
Hedging;
Discipline.
Planning
Detail planning goes a protracted way in reducing risk. Planning ought to embody the next:
Feasibility studies. It is important to ascertain the viability of a new venture by a proper feasibility study.
Enterprise planning. A marketing strategy gives the element of how, when and by whom the strategic goals will be achieved.
Moneyflow projections. Too many companies go under attributable to cashflow problems that would have been prevented. It’s essential to plan for anticipated money in- and outflows and the timings thereof.
Monetary planning. Good monetary planning covers many things including projected management accounts and the undermendacity ratios. Pre-emptive observation and correction of any potential profitability-, liquidity and solvency problems reduce the risk of running into financial troubles.
Project planning. Any substantial ad-hoc project in an organization is normally handled more efficiently via proper project management. This includes mergers and acquisitions, new product launches and expansion into new territories.
Relationships
When firms evaluate risks they usually overlook in regards to the human element. This is potentially one of the crucial deadly risk factors. Relationships needs to be nurtured. Specific relationships which are vital embody the following:
Suppliers. Good relationships with suppliers are just as vital as with another stakeholder in a business. It makes enterprise sense to barter good credit terms with suppliers and to pay them as late as doable, but once an agreement is in place commitments have to be honoured.
Customers. Clients should always receive glorious service and be handled pretty and with respect. A big proportion of enterprise usually emanates from current clients. A specific bad observe is to attempt to make a quick buck out of a consumer by means of very high margins.
Employees. Firms typically pay lip service so far as the significance of their employees are concerned. Confidentiality agreements and restraints of trade can reduce some risk of unhappy or dishonest personnel, however it can by no means be as effective as a crew of loyal and motivated employees.
Financiers. Transparency and information is essential for investors and bankers. Nobody likes to be blindsided or to get unpleasant surprises. To deliver more than what is promised can be a very good practice. In tough occasions financing can imply survival.
Other Stakeholders. Relationships with all different stakeholders should also be kept in place. This might be the local government, governing our bodies within the industry, service providers and others.
Hedging
The essence of hedging is to avoid a possible negative impact in enterprise by means of an motion, product, etc. Hedging is typical within the monetary domain, however by working cleverly it can also be achieved (to a sure extent) on an operational level. Some of the ways to hedge the operations of a business are given under:
Suppliers. To have back-up suppliers (particularly for critical products, raw materials and services) is a good practice. This keeps a company from being held ransom by an un-cooperative or out-of-stock supplier.
Products. Any company ought to regularly add new products to its offering. To depend on only a few good products can be very risky.
Manufacturing. It is worthwhile to consider different manufacturing plants (if the scale of the business justify it). The risk on the enterprise as a result of factors similar to natural disasters and labour disputes is thereby reduced.
Distribution. Back-up warehousing facilities and distribution channels are advisable.
Customers. We’ve seen successful companies that had severe problems once they lost their biggest customers. Customer risk can substantially be reduced via having many (and constant) customers.
Geography. Political or financial instability in a country can be very dangerous for the businesses that operate there. Wherever possible it is advisable to spread the risk over many geographical areas.
Seasonality. Product- and service offerings that cater for numerous seasons have a really positive impact on moneyflows and minimise the potential risks associated with it.
ICT. Only a few corporations can survive without proper information and communication technology. Back-up procedures and of-site facilities reduce the potential risk.
Financial. Financial risk management is very prevalent in large worldwide businesses. In case you sell your products in the worldwide arena there are lots of products available to hedge the assorted risks. Risks that must be catered for include currency, interest rate and commodity price risks.
Self-discipline
Discipline can reduce risks in all facet of business. Self-discipline should apply to all features discussed above as well as to the following:
Expenditure. Bills needs to be kept under management -particularly in times of affluence.
Debt. Debt assists a enterprise to grow. A enterprise with too much debt is, however, very vulnerable for liquidation in adverse conditions.
Cashflow. A lack of ample cashflow is a probably deadly business risk. Moneyflows must be managed diligently.
Growth. Enterprise growth requires additional working capital. Uncontrolled growth can lead to financial distress and even bankruptcy and must be avoided.
Abstract
Risk in enterprise is a reality. When these risks are successfully managed the rewards will be substantial. If not, a business can run into serious problems and even collapse. It is unnecessary (and stupid) to ignore risks. By adhering to a couple primary principles these risks will be reduced drastically.
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