What your small business needs to know to manage risk

Dice

In recent years, New Zealand small and home businesses have found out the hard way how events outside their control, like earthquakes, floods or other natural disasters, can negatively affect them. While many of the losses relating to these events are covered by insurance, the bigger risks to businesses are the less obvious risks that are not claimable through insurance policies. Risk management for your business is more important now than ever before, and Sue Hirst explains how you can take some steps to mitigate potential threats.

Has anybody ever said to you that most start-up businesses are likely to fail? I am sure the answer is yes, the reality is that the jury is still out and as long as we don’t have the tools to measure this, factually, we will never know. What we do know is that one of the greatest risks a business may face relates to its own growing pains. Many expansions, acquisitions and joint-ventures have failed through poor judgement and a lack of due-diligence ‘process’.

Risk Management, a term often linked to major corporations as a corporate governance requirement, is a useful process that SME’s can adopt to improve their chances of sustained and successful longevity. In recent times we have heard about the increase in frequency in natural events, including the QLD floods, Cyclone Yasi and more recently, the devastating Christchurch earthquake. As most of the losses relating to these events are covered by insurance, the bigger risks to businesses are the less obvious risks that are not claimable through insurance policies. To assist you in avoiding losses, or to enable you to recover from a loss ‘better’, we believe that risk management is more important to your business now than ever before.

What is Risk Management?

In this context, Risk Management is simply a process that considers what can go wrong within a business, or a particular transaction. Risks come from a variety of sources but usually reside in the following categories:

  • Commercial & Contract
  • Regulatory & Compliance 
  • Business Process
  • Financial
  • Human Resource
  • Information Technology
  • Infrastructure
  • Environmental
  • Occupational health and safety

The last time you entered a new supply contract or considered expansion of some type, did you consider the myriad of risks that would fall under each of these categories? Well done if you did – don’t feel bad if you didn’t because most businesses would not have!

The following diagram provides a simple illustration of the Risk Management process:

 Manage your risk appropriately

 

 

 

 

 

 

 

 

The following actual examples provide context for the impact of poor due-diligence:

1. Company uses its own accountant to review the financials of a potential JV partner. Transaction proceeds only to find out 6 months later that a long-standing employee of the target business had been defrauding the business, small amounts over many years resulting in an $800,000 adverse impairment in enterprise value;

2. Company acquires a business without checking its OH&S history. On integration of the Work Cover policy, poor claims experience for the acquired company results in a $180,000 premium increase;

3. Company signs a new supply agreement with a major customer. On review of the agreement, the company has provided a full commercial indemnity in favour of its supplier, voiding its insurance coverage and exposing its own balance sheet; and

4. Company acquires a business without understanding its workplace culture. Months after the transaction is completed, the (new) owner receives a complaint from a former employee for workplace bullying and sexual harassment resulting in a $30,000 statutory penalty.

Issues of this nature are a regular occurrence. Don’t become a statistic of the future - ask for help when your business is looking to change.

Topics: 

  • Planning
  • Startup
  • Finance
  • Risk management

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Sue Hirst's picture

Sue Hirst is director of CFO On Call. CFO On Call is a team of financial and business advisors who work with open-minded people, committed to business growth and achieving success. They have been helping business owners achieve their goals for over 20 years. For help call them on 0800 180 400 or...