How to: protect your business from risks
- Bernard Tanner
- 3 November 2009
How to: protect your business from risks - Risk is an inevitable part of doing business. But that doesn't mean it can't be managed. Everyone who runs a business knows that opportunities always involve some risk. After all, risk is simply uncertainty - and every business venture has the potential to surprise us either on the upside or the downside. Bernard Tanner examines the top four risks that your business may face - interest rate risk, currency risk, import and export risk and risks to your key people - and what you can do about them.
Content provided by the Commonwealth bank of australia
As your business grows, the risks you face also grow. You have more at stake and the increasing complexity of your business makes risk harder to manage. That's when you need a robust risk-management approach.
The aim of risk management is to protect your business and give you greater certainty when planning for the future. It can come at a cost. There are the direct costs of putting risk management measures in place and, depending on the approach you take, there can also be opportunity costs, since greater certainty can sometimes mean less opportunity for profit.
The key is to choose a strategy that protects you from the downside while still giving you an opportunity to benefit from the upside.
1. The highs (and lows) of interest rates
For many businesses loan repayments are a significant part of the cost structure. This means that adverse interest rate movements can have a real impact on your bottom line.
Rising interest rates can squeeze your cash flow by driving up loan repayments at the same time as inflation is likely to be increasing other costs.
The challenge is to protect your business from potential rate rises while still taking advantage of a low interest rate environment.
Fortunately, there are some sophisticated tools that can help you manage the downside risk of fluctuating interest rates and benefit from the upside as well.
These tools include fixed interest rates, capped interest rates, an interest rate collar or a combination strategy.
When developing your strategy, it's important to analyse the risk to your business from interest rate fluctuations. It's desirable to reduce interest rate uncertainty while still gaining the greatest possible advantage from falling rates. Actively managing interest rate settings to suit your changing capital requirements is a very smart move.
2. Taking on the world
Trading overseas can help you tap into thousands of potential new customers and find new and more cost-effective suppliers and manufacturers. However, it also comes with some specific risks of its own.
Currency fluctuations are just one of the risks facing importers and exporters. Doing business with customers and suppliers overseas has other challenges.
“ ... choose a strategy that protects you from the downside while ... giving you an opportunity to benefit from the upside”
While there are well-developed procedures for handling the complexities of moving goods and making payments across international borders, there's also a lot that can go wrong. Leaving aside the risk of deliberate fraud, problems with transport and customs can leave you out of pocket - especially if you've already invested time and money in stock, suppliers and manufacturing.
The payment method you choose can have a significant impact on your cash flow and risk exposure. It determines how soon you pay (if you're importing) or get paid (if you're exporting). It also determines who runs the risk that the goods or the money won't be delivered as scheduled - the buyer or the seller.
3. Keeping track of the Aussie dollar
It isn't only importers and exporters who are exposed to currency fluctuations. If you source stock or equipment offshore, currency risk should be on your radar.
Much of Australia's economic strength is a result of our success as a trading nation, particularly as an exporter of raw materials. But that also has its pitfalls.
The Australian dollar is widely seen as a commodity-based currency. As commodity prices fluctuate, the chances of the dollar fluctuating rises. The Australian dollar is one of the world's more volatile currencies.
That has practical implications for you and your business.
For example, imagine that you had imported a piece of equipment costing US$100,000 in the second half of 2008. Unless you protected yourself against currency fluctuations, your equipment could have cost anywhere between AU$102,187 and AU$163,345, depending on the timing of your transaction.
When developing your risk management strategy, it's important to analyse and quantify currency risk in your business.
You should aim to protect your business from the negative impact of exchange rate fluctuations, at the lowest possible cost, balancing risk and return.
Avoid relying on timing transactions. Currency movements are unpredictable, and even professional currency traders can be caught out.
4. Protecting key people
Your people and key assets are essential to your ability to generate profits now and in the future. Protecting them is an integral part of any risk management plan.
It's a familiar paradox. While most business owners routinely insure assets like vehicles, which are of relatively little value, they often ignore the risk of losing their largest generators of wealth - themselves and the other key people in their business.
Depending on the structure and size of your business, the death or disablement of a key person may lead to a loss in revenue, impair your cashflow position and potentially raise the issue of business succession arrangements.
Then there are the other key assets that are crucial to the day-to-day operation of your business, such as buildings, plant and equipment. While disasters like floods and fires are relatively rare, their potentially catastrophic impact makes it essential to guard against them, especially since it can be achieved for a relatively low cost.
Unfortunately, while most businesses begin with adequate insurance cover, it's all too common for a growing asset base to outpace your level of cover, leaving you under-insured. That's why it's important to actively review and manage your insurance portfolio as your circumstances change.
When in doubt, seek advice
Importantly, if in doubt when developing your risk management plan, ask an expert. The nature of running a business requires owners to have general knowledge of all aspects of their business and the environment they operate in, but it is impossible to be an expert at everything. Engage professional advisers in discussions early for them to best understand the business and to achieve the best business outcome.
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Risk management for import and export
When developing your risk management strategy to include managing import and export risk, objectives to consider are:
Exporters
- Receive payment as soon as possible (preferably before manufacture and shipment)
- Retain control over the goods until you have been paid
- Finance the cashflow gap between investing in manufacture or stock purchases and being paid by your overseas customers
- Reduce the risk of fraudulent buyers, bad debtors or trading in unfamiliar markets
Importers
- Defer payment as long as possible
- Receive and examine the goods before paying your supplier
- Finance the cashflow gap between paying your overseas suppliers and being paid by your local customers
- Reduce the risk of fraudulent suppliers or trading in unfamiliar markets
Ask me how
Want to know more about how you can risk-proof your business? Perhaps you'd like to fine-tune your business risk management strategy? Email your questions to askbernard@cba.com.au and I'd be happy to help. I look forward to hearing from you. #
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