By Philip Elworth
Business risk has many facets and can come at a business owner from any directions. So what is business risk? Many owners would probably agree with WiseGeek.com which defines Business Risk as being, “The risk that a company will not have adequate cash flow to meet its operating expenses”. Unfortunately this definition only scratches the surface of the risks that can cause such a shortfall. Many of my clients scratch their heads and become frustrated with the various types of risk they face every day without even know it. The reality is that any company can get caught in a risk situation that becomes intolerable if someone in the organization is not paying particular attention to the details.
Every business is faced with risk factors that may be the result of both external and internal elements often times beyond their control. External factors can encompass such things as a change in the demand for their goods and services. Therefore you may find yourself either under capacity or over capacity. One results in lost sales and profits while the other is a drain on cash. External factors can be the result of government regulation, where a company operating in multiple states does not realize they have a nexus situation in a particular state and finds itself with heavy fines and penalties a drain on both time and resources. How secure is your bank? Will they have the capital to loan you the funds you need at the appropriate time?
Internal risks can be the result of processes, internal controls, and lack of attention to financial data, key metrics or lack of a cash flow projection, all of which are necessary to properly manage a business. Other factors come into play as well. How is the financial health of your largest customer or supplier? Are you overly dependent upon one customer or supplier? What is your plan to diversify? Is your employee manual current with all the latest employment laws? If you are selling on the internet and taking possession of customer credit card information, are you properly controlling this sensitive data? Do you have the appropriate legal language on your website? Are you properly insured for all the types of coverage you are eligible for?
If there were a catastrophe in your primary place of business do you have a plan to get back into operation as quickly as possible? Are you properly covered with business interruption insurance? Is your intellectual property adequately protected? Is your technology platform appropriately secured? Do you have backup copies offsite of both your data files as well as your key software? How often is your system down, thus causing your business to be inefficient? Lost time and inefficiency of operations is as large a risk as having a faulty product.
The purpose of risk assessment is to understand the risks that apply to your business and having a plan to either mitigate the risk, accept the risk or offload the risk to a third party. This list is not all inclusive by any means and any plan needs to be tailored to your business. As a partner with B2B CFO® I am prepared to help you understand your risks, then implement a solution that fits the needs of your business.