Life is risky in general but owning or operating a business can put you at risk in more specific ways. Here are five risks your business can easily avoid.
Five Risks Your Business Can Easily Avoid
In business, as with many facets of life, you will face risks that could affect your bottom line or at worst, the business itself. The risks that a business faces can be grouped by similarity in that they are interrelated and all need to be considered carefully. Here are five of the risks your business can easily avoid with some forethought, good policies and good practices.
1.Lack of Customers
If you have no customers to sell your product or services to, you will not make any money. This means that your business is essentially not running and any money which you may be investing is a loss. Customers make sure your revenue stream is healthy so that your business can operate and potentially turn a profit.
Competition is natural in business but sometimes it can be crippling if you do not have any strategy to combat it. For example, a price war where your competitors lower their prices drastically could lead to customers flocking to their business instead of yours. You will need to account for your competitors changing their strategies unexpectedly and critically consider your reaction. Simply acting in a moment of panic could reflect badly on your brand, particularly as you may not know the internal operations of your competitor. They may be trying to escape bankruptcy by drastically slashing prices, in order to show a revenue stream to shareholders. Concentrate on the customer needs first and foremost.
This is similar to competition, but it comes unexpectedly and with industry-wide implications. For example, Uber disrupted the traditional taxi industry model and affected not just a single business but many. You can never fully know if another organisation will disrupt your industry but imagining future possibilities and keeping up with technological advancements and industry news may help.
These apply mostly if you are dealing with commodities, financial markets or shipping – more so, the first two. Stock markets and other forms of commodities are prone to volatility in reaction to world events, such as the downfall of a ruler or loss in confidence in a leader. This could add a lot of pressure to a business which has hedged all its revenue based on commodities or certain financial assets.
It is common for B2B businesses to extend credit to their customers, but this could create credit risk because customers might not pay after receiving products or services. Customer defaults decrease cash flow and could lead to operational problems. You can mitigate this by having a policy of partial payments where full payment is not possible until deliverables have been handed over.
The concept of financial leverage refers to the amount of debt businesses carry. The higher the leverage, the higher the debt. This situation becomes bad news for your business if you consider interest rate fluctuations. The more debt you have, even a small interest rate hike could affect your cashflow and profit margins. The easiest way to mitigate this is to reduce your company’s debt and invest in cash-generating assets.
If you work in overseas markets, this plays a significant part in your business dealings. If the currency moves against your favour, you will incur exchange rate losses, affecting your revenue stream. It’s advisable to hedge your funds across different markets, in terms of investments to offset currency fluctuations.
The bane of most business’s existence. This should be priority number one for most businesses as without cashflow, operations come to a halt. Salaries cannot be paid on time, neither can creditors, suppliers etc. This risk can be mitigated by making sure that all company money is not tied up in assets which cannot immediately be liquidated. Investing in assets is a great idea for operational benefit but if you go and buy unnecessary equipment just in case you need it, you may be stuck with many depreciating assets and no money to complete day-to-day business dealings.
1.Poor Quality Control
Your business must have good quality control mechanisms and processes in place because if your deliverables to your customers are of low quality, you risk incurring losses because of refunds etc. This is particularly important in the service and product industries because your equity lies in your deliverables. If your customers see no value in what they are getting they will take their business elsewhere.
2.Employee Liability (Mistakes)
This is something which you can easily avoid if employees are trained well and refreshed on that training regularly. Mistakes by employees can cost you millions depending on the nature of your business. If you are a car manufacturer, for instance, and an engineer programs an incorrect parameter into an automated production line, that one mistake can cause an entire recall of the product as it may not meet regulatory standards. Also, if that mistake causes harm to others, it may result in legal liability.
3.Loss of Key Skills or Lack of Skills
If you lose skilled people on your team it can mean a major blow to your operations which could in turn affect your long-term profitability. You would have invested time and energy in training someone on the specifics of your company and how it’s run and then – poof! – they’re gone. In this situation, the best mitigating factor would be to have an internal upskilling program running throughout the existence of your business. What this means is that others who may have been reporting to that person will have a similar skillset and will be able to take the reins when the other person is gone. It saves you from having to re-train someone from point A, but rather requires small tweaks to get the existing employee to the level you want them. They then teach someone else and the process continues. It removes a lot of legwork for hiring managers and keeps skills company-facing.
Poor management could have larger implications than mistakes by employees lower in the hierarchy. A manager could be controlling a large or small team, but team size is not a deciding factor here. It depends on responsibilities and duties. If someone is managing a specialised team of four and makes managerial errors (think of an internal auditor as an example), it could affect the business more than someone managing a team of 200 semi-skilled workers. Poor management amplifies the ramifications for your business.
5.Unexpected Risks (Natural Disasters, Pandemics etc.)
These risks are unexpected as the term explains and it is extremely difficult to plan for them. However, there are insurance products specifically set up within various industries to protect against this type of risk. An example would be a logistics company taking insurance out for natural disasters like earthquakes, hurricanes or tornadoes. This will affect their operations meaning they cannot make any money, but the insurance should cover them against any losses made during that period.
1.Cyber Security Risk
You need to protect your cyber assets such as website passwords, passwords to computers in your network and your network itself. This is usually best mitigated by having a dedicated team of IT technicians who can maintain network health and ensure that everything cyber-related is safe for all employees to use. There are also several tools which will help those IT technicians, including anti-virus software, password vaults and secure cloud platforms. With more important data being hosted offsite, there is less chance of a malicious attack affecting you as it would need to bypass several highly sophisticated cryptographical obstacles which are maintained regularly by cloud-hosting companies.
2.Software Architecture Risk
This is mostly related to software architecture which might not support your operations. It was more difficult before to find software which would scale with your business as you grew but now there are many affordable, cloud-based solutions which are not only modular but incredibly scalable.
1.Health and Safety Risk
This is one of the simplest risks to mitigate seeing as there are specialised Occupational Health and Safety (OHS) consultancies which can effectively and affordably check your OHS compliance and make the necessary recommendations. If you are building your own offices, you will need to get an accredited contractor who knows about the relevant laws to make sure you comply with legislation and regulations. And once this is done, it is also advisable to have a few different inspectors to check if everything is up to code. This will necessarily include OHS consultants. They are also necessary once operations have started and you should schedule regular checks with them to see if your building and operations are still compliant.
2.Corrupt Practices Risk
This is a risk which is suited for a compliance officer to find and assess and could mean a lot of trouble for your business if you are found to be non-compliant. An example would be bad faith insurance in the insurance industry. What this involves is an insurer attempting to escape paying out valid claims using legalese or contractual terms which were either not properly explained to the customer, or by declining a claim based on spurious investigations or claims assessments. A compliance officer will make sure that a company does not fall into corrupt practices risk by keeping them updated about necessary regulations and compliance measures.
3.Conflict of Interest Risk
This one happens in companies where roles and duties are not clearly demarcated, or people believe that they can shirk some of their contractual obligations. An example would be someone compensating another highly over and above his experience and responsibilities. Furthermore, in such a situation, that person would not have a bonus or commission structure set up in his contract, meaning that the money being given to him is not at all related to his employment. This also involves concepts such as a perverse incentive, where an executive would contractually get a large bonus if fired, meaning he is indirectly incentivised to fail, to get that bonus.
HOW TO MITIGATE YOUR BUSINESS RISKS
Many of the risks mentioned above can be mitigated with careful thought, planning and fair and equitable processes. As such, they are mostly a team effort and an organisation-wide goal should be the precedent to mitigate all types of risks. If you are interested in learning about mitigating compliance risks specifically, there are online compliance management short courses aimed at equipping people with a highly specialised skillset to evaluate an organisation’s regulatory risk profile and make recommendations accordingly. This is not a skillset which can easily be acquired through video tutorials or casual reading. It requires a structured, formal framework which will not only test your knowledge adequately but give you the qualifications which will allow you industry-wide recognition.