Be prepared for whatever could go wrong

Identify threats you are facing today

Risk management

Last updated on March 29th, 2022 at 02:18 am

Risk management

As I’m writing this, I’m in the middle of a systems crash at my consulting firm.

Despite having backups, I find myself dependent on technology and its relationship to the intellectual property and administrative functions of my day-to-day existence. As I think about how I’ve gotten myself into this situation, I’m also reminded that it’s just one of the many risks businesses face daily.

Overall business success depends on two major items: First, cash flow and second, profitability.

Without both, no business will succeed in the long run. Positive cash flow and profitability build the foundation for the company and allow it to work on the most important parts of the business. Those include hiring great people, offering quality products and services, using unique delivery systems, and concentrating on other competitive advantages.

Businesses fail when management makes poor decisions about products, people, pricing, etc. The real cause of business failure can be traced back to incompetent management teams.

How to identify risks

How, then, can you strengthen your business? One way is to identify the variety of risks you face daily and find ways to mitigate, insure or accept potential risks as part of running a business. And have you made plans for if the worst should happen to your business? If not, then look at services like the ISO 22301 certification from Teamwork as that is a huge help with that.

Most organizations identify the risks they face during their strategic planning process when they perform a SWOT analysis. Business planning depends on knowing not only your strengths and opportunities, but also your weaknesses and threats. These types of risks should concern you:

Succession risk

It’s paramount during a leadership transition, like a retirement or death. All key workers must understand the succession plan. They don’t have to agree with it, but they must be willing to work with it or it will fail.

Customer risk

Companies often skirt this because they’re more focused on revenue. A customer that represents more than 25 percent of your business becomes an informal member of your management team.  A customer that represents more than half of your business becomes an informal shareholder.

Supplier risk

This surfaces when there are sole source agreements or when a product or service you deliver is harmed by the quality of what a supplier has provided. Consider food suppliers that pass on bad ingredients or tainted meat. If you don’t know about the problem until your product is in the customer’s hands, the result can be catastrophic. Remember the Tylenol murders in 1982?

Political risk

This occurs in a variety of ways. Consider the Affordable Care Act. The issue isn’t whether you like it, but that it results in higher insurance costs for many companies.

Control risk

This includes internal controls, quality of products, and human resource policy and procedures. The success of compliance depends on creating and then monitoring effective policies and practices, making corrections when needed and continuing to monitor.

Insurance risk

This addresses catastrophes such as fire, hurricanes and flooding.

Add to this list economic risk, technology and obsolescence risk, social risk, and environmental risk. Address them all from a four-quadrant approach:

  • If the risk is low and the potential impact is low, monitor the risk.
  • If the risk is high but the overall impact is low, monitor the risk.
  • If the impact is high but the risk is low, you might want to consider creating policies and procedures that help reduce the potential risk, and consider insurance for significant exposure.
  • If the risk is high and the likelihood is high, insure against the risk, mitigate the risk through policies and procedures, and educate employees about the extent of the risk.

When things go wrong

What do you do when something happens that results in unexpected exposure or crisis? It’s imperative that you have a comprehensive contingency or disaster plan. It should assign key employees to the crisis team.

The team should also include legal counsel and a public relations representative. The central issue is what the company will do to get back in business quickly.

Remember the three-part checklist on how to prepare: Identify your risks. Determine their impact. And understand how to mitigate or reduce the risks so that they don’t harm your business.

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Jim Lindell, CPA, CGMA, CSP is a Vistage Chair in southeast Wisconsin and president of Thorsten Consulting Group, Inc. He is an award-winning speaker and best-selling author.

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