Tuesday 9th Jun 2020
Risk management should be an everyday consideration for businesses of all sizes, and in times of crisis or downturn, it is even more important that hazards are guarded against. However, effectively responding to risk means being proactive about your management of it; you cannot simply react. With that in mind, we have four key points to bear in mind when it comes to proactivity. While they are focused towards the way in which businesses expose themselves to financial risk through their customers, the concepts are true for all kinds of risk management.
Determine risk appetite
All businesses will expose themselves to a certain degree of risk, and it’s up to the leadership to determine how far that should go. Some businesses will pursue extensive and ambitious investment with the potential for great rewards, while preparing for considerable risk. Others will of course take a more conservative approach. In order to be effective when it comes to managing risk in the future, you need to have a clear picture of how the business will operate in this regard. Much of this will come down to the financial profile of the business, and its ability to manage risk.
Identify credit risks
Not all businesses will have credit risks, but for those that do, it is one of the largest potential hazards. Knowing where risks are likely to come from is hugely beneficial, as it allows you to prepare in advance. Take a look at those that you work with, are there customers that are likely to leave you with bad debts as a matter of course? And in the event of an economic downturn, are some of those businesses more or less exposed to risk themselves? Leave yourself less exposed to these kinds of customers wherever possible, unless you’re in such a position that you can afford to take on the risk. Excellent credit control will be essential here.
Plan for defaults
Failing to plan is planning to fail. And this is certainly true when it comes to businesses that accept they will have a certain degree of risk. For businesses that demand payment upfront for goods and services, this is likely to be less of a concern, but any business that offers contract terms need to have a plan for when customers do not pay. Build this into your business strategy, and it will be less of a material shock when it happens.
Signals are critical for determining when risk is increasing or decreasing. This means that prudent monitoring of various metrics can really help to decide how risky the business is at any given point. With the right signals, you can change your strategy to become more or less risk averse. Additionally, the modern market presents the astute risk manager with a wealth of options to choose from. Keep an eye on those you do business with by setting up alerts for things like profit warnings and other adverse events.