Business Risk Management in 2009 |
Sink or Swim: Surviving the Financial Crisis
We all know that we are in the middle of a significant financial contraction but where are the major risk areas for business? While different businesses will be affected in different ways, there are three key areas to look out for: profit volatility; cash; and debt.
The greatest risks with profits will not come from your cost structure. It is more likely to be volatility in income. If you are in a sector that relies on discretionary spending or where your income is dependent on contracts from other major corporates, watch out for any downward trends or dependency on one or two key customers. The more you can spread that risk over a broad client base the lower your exposure. There will be some businesses that get caught out by the flow-on effect. In these situations there is generally nothing wrong with the business, it is simply caught in a sharply contracting supply chain. In the same way that you should avoid dependency on a few key customers you should also avoid dependency on a single product or service. Generally, risk will reduce with spread.
While your cost structure may not be the main problem, it is what will cause major problems if revenues fall. Keep your eye on your cost structure and make sensible cuts where appropriate. Make sure though in the search for savings you don’t cut to the bone of your business. If you do, you will remove the essential revenue generating capacity that you require.
A lack of profit will eventually erode your business but not enough cash will kill it stone dead. Businesses will fail because they don’t manage their cash position. You need to more aware than ever about your cash flow. This not only means closely monitoring your debtor collections and inventory but also running a rolling three month cash flow position. This should provide an early warning of problems coming. Try to create a cash buffer to manage the unexpected. With the best of planning and management, allow for the fact that the unexpected can still happen.
Manage your debt levels carefully – your financier is likely to. While there is nothing wrong with debt, it is likely that the banks will be closely watching customer accounts. Where you have loan facilities in place make sure that you understand the loan terms and any debt covenants that you have entered into. These covenants could include regular reporting to the bank, debtor and working capital ratios, or debt to equity ratios. Where the banks may have been more relaxed about these in the past, it is likely that 2009 will be the year of more active management of customer accounts. If you believe that you will need additional funding, talk to your bank early up. Don’t wait until the last minute. You’ll need to present your case on why you need it, how much, for how long and when it will be repaid.
Financial management will be essential in the coming months. You need to be close to your business numbers and manage them actively. The more relaxed your approach to your finances the higher your risk exposure. Cash flows, operating budgets, cost control and debt management all need to be part of your business management. The more in control you are the lower your risk position.
Talk to your Jims bookkeeper today about taking control of your business and improving your management reporting.
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Key areas to look out for: profit volatility, cash and debt. Create a cash buffer to manage the unexpected. Manage your debt levels carefully. Avoid dependency on a single product or service. Business risk management in 2008 article