Business Risk Management Strategies

By Ben Youn
Copyright 2014 Quantum Business House
WELCOME to QUANTUM BUSINESS HOUSE

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- Business Forum
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1. Setting up business structure (June 04)
2. Buying a business (June 11)
3. Business Planning (June 18)
4. Marketing (June 25)
5. Raising Finance (July 02)
6. Financial Management (July 09)
7. Tax system and compliance issues (July 16)
8. Risk management (July 23)
9. Financial Health Check (July 30)
10. Business Evaluation (August 06)

 Identifying the possible business threats is
the first step
 Planning and implementation of risk
prevention or mitigation must come to action.
 Solid risk management can bring the benefits
of:
 Lower insurance premium
 Reduced chance that the business may be the
target of legal action
 Reduced loss of cash or stock etc
 Reduced business down time

1. Customer Related
 Heavy dependant on a small number of major
customers.
 Customers that take up a lot of resources
(time, costs, etc) but are less profitable than
other customers.

 Risk mitigation strategies:
 Locking in major customers through long-term
service contacts, regularly visiting them, or
continually asking their views about the
business’s products and services.
 Spreading the risk by developing smaller
customer base and developing existing minor
customers to larger customers through leverage.
 Seeking lower –cost ways of servicing the less
profitable customers.

2. Supplier Related
 If your business is heavily dependent on a
small number of major suppliers (a supplier
providing 30% or more of the total product
requirements), production, profit and cash
flows are likely affected if one of them fails or
stops supplying.

 2. Supplier Related
 Risk mitigation strategies:
 Locking in major suppliers through long-term
service contracts.
 Seeking alternative suppliers capable of
supplying similar items.

3. Staff Related
 Retaining key staff. If an employee is critical to the
business’s success, then sales and profits may suffer
if the employee is the in the competition position by
moving to competitor or setting up a business for
himself in the same industry.
 If some employees are largely autonomous when
dealing with key suppliers or customers, there is a
risk of fraud or collusion, or there could be
significant disruption to the business if they leave.

 Occupational Health & Safety Issue. Are your
employees working in a dirty or hazardous
environment, or do they travel extensively by
car?
 If staff works in dangerous environment, the
business could face fines and penalties, and
absenteeism with injury or even death.

 Risk Mitigation Strategies:
 Implementing recruitment procedures for finding right
employees.
 Confidentiality agreement put in place and / or reasonable
restraint agreements signed by key staff.
 Implementing a robust performance development system
for communication of performance expectations and
goals, monitoring performance and setting remuneration.
 Providing ongoing training for staff consistent with the
needs of the business.

 Allocating several people to fulfil key tasks and
provide backup in the event of illness or sudden
departure.
 Rotating employees through various functions or
departments to familiarise them with other areas of
the business.
 Implementing suitable OH&S policies to minimise
risks.
 Using equity/interests, profit sharing or other
incentives to help retain key personnel and let them
share the success they created for the business.

4. Location Related
 If the business heavily dependent on its location
to generate sales, a move to premises outside
the immediate vicinity of the current location
may disrupt the business by affecting customers,
staff and supplier access.
 Another risk is physical damages by fire, flood
and other natural disasters. Also, businesses
should have a plan for expansion when their
current locations cannot meet the needs of the
business as they grow.

4. Location Related
 Seeking a number of alternatives for customers, staff and
suppliers.
 Where the current premises suit the business’s long-term
requirements, then consider take a long-term lease or right of
first option when the lease expires.
 Managing the business to predict future space requirements
yearly.
 Consider to purchase the current premise if only the current
premise meet the business’s long-term requirements including
future expansion.

5. Goodwill and Market Reputation Related
 If there is a large scale of product recall,
fraud, or any similar incidents, the business
reputation in the market could be in danger.
This could cause immediate distress and
disruption to the business with trouble and
costs or reworking.

5. Goodwill and Market Reputation Related
 Incorporating robust review of process and
quality assurance systems.
 Investing in research and development and
keeping up-to-date technological advances.
 Compulsory training and development programs
for staff.

7. Financial Transactions Related
7.1 Liquidity Risk
 If business is running out of money for
operations, there could be significant risks to
the business and its owners and directors
being personally liable for the debts of the
business.

 Managing and monitoring cash flow on a daily,
weekly and monthly basis
 Forecasting cash flow including ‘what if’ analysis
 Seeking a committed line of credit from at least two
financial institutions
 Maintaining a strong relationship with a banker or
financial institutions to ensure they understand your
business and kept up-to-date with potential loan
requirements

 Monitoring market conditions to anticipate
seasonal fluctuations in cash flow (do not too
optimistic)
 Put significant efforts on debtor collections

7.2 Credit Risk
 Debtors may not able to pay, and this may
result in slow receipt of cash or even write off
a bad debt

 Checking the credit status of the customer before
making the sale
 Checking publicly available registers to verify
that the customer’s business is real and to find
out who is behind the business
 Ensuring the customers sign a ‘terms and
conditions of trade’ prior to supplying goods and
services to them

 Imposing credit limits to restrict your firm’s
overall exposure; obtaining personal
guarantees where possible
 Including a ‘retention of title’ clause for the
goods you supply
 Maintaining strong relationships with the
debtor to ensure their current liquidity status
is always known

7.3 Interest Rate Risk
 If the business is dependent on borrowed
funds income generated from savings, every
change in interest rates will affect the overall
profitability of the business through increase
in interest expenses or reduction in income
from interest.

 Consulting your bank for assistance in
managing interest rate exposure
 Borrowing or investing at a fixed rate to
provide certainty of interest expenses or
income
 Matching interest income against interest
expense to net the exposure

8. Competitors Related
 Every business has competitors. Competitors
can be threats by locating nearby (location
threat), reducing prices (price competition),
or launching new products in the market
(product competition). Thus, a business
needs to prepare for the risk from its
competitors.

 Researching consumer trends and tastes to respond to the
change
 Continually testing the market to see consumer preference and
sentiment
 Promoting products and services that sell better during
economic downturn
 Promoting goods and services that sell well and are profitable
 Using financial statements to benchmark financial and
operational performance against industry benchmarks

9. Risks from Business Owner or Key Members
 If there is no plan to deal with the departure
of the business’s owner due to death or
incapacity, the business might have to close
or be sold to a competitor to avoid putting
undue pressure on the remaining owner or
new owners.

 Consulting professional advisers who can assist
in business succession, will and estate planning
 Preparing a business succession plan and a will
that is consistent with the plan
 Undertaking insurance policies covering income
or a capital invested in the event of death or
incapacity of the owner or key members

 Consider a buy / sell agreement and funding
the agreement for the eventual transfer of the
business if there are two or more owners
 Documenting key processes and critical
information so that other people can continue
the business operations
 Training employees so that more than one
person knows how to perform each task

Advantages of Financial Control
 Good financial control will:
 Help align objectives of the business – to
ensure thorough reporting procedures and that
the activities carried out by the business are in
line with the business’s goals.
 Safeguard assets – ensuring the business’s
physical and monetary assets are protected
from fraud, theft and errors and allowing the
systems to identify those errors quickly.

 Encourage good management – allowing the manager
to receive timely and relevant information on
performance against targets, as well as key figures
that can indicate variances from target.
 Reduce exposure to risks – minimising the chance of
unexpected events.
 Ensuring proper financial reporting – maintaining
accurate and complete reports required by
registration and management, and minimising time
lost to rectifying errors and ensuring resources are
correctly and efficiently allocated.

 One of the most effective ways to protect the business against
risks is to undertake sufficient insurance covers. Before buying
insurance policies for your business, you may have to decide
which risks you need to cover with insurance and how much.
 Building and Contents Insurance
 This insurance covers the business buildings as well as contents
including inventory against loss.
 Business interruption or loss of profit cover
 This insurance covers business loss due to property damages by
fire or any other insured perils. The cover should ensure that
ongoing expenses are met and that anticipated net profit is
maintained through a provision of cash flow.

 Public Liability Insurance
 Public liability insurance covers the owner and
business against the financial risk of being liable
to a third party for death or injury , loss or
damage of property or economic loss resulting
from the business’s or the owner’s negligence.
 Worker’s Compensation Insurance
 It is compulsory to maintain appropriate accident
and sickness insurance for all employees and
certain contractors you engage in your business.

 Product Liability Insurance
 This insurance covers for injury of damage
caused by goods the business sells, supplies or
delivers – even in the form of repairs or services.
 As the type and level of cover needed requires an
assessment of the particular business needs, it is
necessary to seek an advice from an insurance
specialist to ensure your business is adequately
protected.

 Financial Health Check
 Business Evaluation

Business Risk Management Strategies

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