Limit Your Business Risk & Prepare for the Unexpected

No matter the size of your business – sole proprietor, partnership,LLC, or corporation – you daily face decisions and opportunities that affect your business risk. Many of the choices due to these circumstances are obvious and you will make good decisions guiding your future business operation toward safe territory. However, other choices may appear to be innocuous in their affect on your business but under dynamic market and business conditions can have a significant impact on your business, increasing your risk to grow and perpetuate the business.

At the beginning of the recent recession I was amazed at the number of companies that did not have sufficient cash reserves or line of credit to last more than a few weeks when sales dropped. They did not have enough freeboard in their business to withstand the economic storm and take corrective action to survive. Do you have enough freeboard to deal with the unexpected in your business?

Here are some positive steps that you can take to reduce the impact and risk in dealing with the unexpected?

  1. Managing Cash Reserves: Accruing cash to offset unexpected cash (either due to controllable events such as unplanned/ unforecasted expenditures or uncontrollable crisis) demand is difficult to do when you think you are in control. Putting cash on the sidelines may appear to be betting against yourself, that you have a good handle on the future, or that you are convinced that spending the money now versus putting it into an “idle” position is a better business decision. Remember once spent it is not easy to recreate cash when business tightens, squeezing your cash flow from positive to negative. Get counsel from your accountant or trusted advisors on what level of cash to keep in reserve. Rely on outside or objective perspective as your emotional commitment to the business may blur your objectivity.
  2. Employee Competence: The competence of key employees or contractors may not be a glaring problem during boom times but can become a critical factor when you least expect or can afford it – particularly during a down market. This may be expressed in what you hear from customers that your employees are promising or how they are servicing the account, which may be retarding additional sales. Employee loyalty is a diminishing characteristic in the work force today, which can result in unexpected turnover, loss of an account relationship or worse loss of a customer if they go with the employee. Choose employees wisely and review their performance regularly to make sure their performance and attitude is consistent with the needs of your business. Owners can become so focused on the tasks of managing the company that they take relationships with key employees for granted and overlook their shortcomings and miss signals indicting their dissatisfaction and potential for leaving.
  3. Customers: Customers are obviously important but what risk do they present to your business. Do you have good business agreements in force in case payments are stretched out? Does one customer have more than 10% of your business or margin? Do you have regular contact with customers to measure what is happening to their business and how it will affect your forecast? Good customers can adversely affect your business when you least expect it. Do you have the reserves to see through what ever interruption in normal business occurs, possibly even replacing them, until you are able to recover the loss? If you have customers that represent a significant part of your revenue or margin then you are well served to develop other clients to reduce the potential impact on your business by any unexpected loss of business from major accounts.
  4. Key Suppliers: A supplier of critical components or services can also have an adverse impact on your business. Remember you are not just buying a product or service to a specification but you are also dependant upon the quality of the management process to perform sufficiently to protect your interests with timely delivery, at the contracted price, and meeting or exceeding quality expectations. Do you have a strategy to use alternate sources of supply to preserve your ability to deliver to your customers reliably?

Will I avoid all risk if I invest in the areas cited above? No! But it will set a tone for how you and your organization manage the business. It is not a matter of making a mistake but how you respond to those mistakes and reduce them over time, Developing sound business practices and a balanced business strategy that is not only focused at developing the business but also addressing those issues that will impair your ability to deal with the unexpected – and the unexpected will occur!

Comments

  1. Good article Mike.

    Another area to watch carefully if you are a retailer, distributor or manufacturer are inventory levels. I once worked for a CEO who mentally classified inventory as a liability. Depending on your industry sometimes suppliers will allow you to take inventory essentially on consignment (think of Dell) and only be liable for it once you consume it. This allows you to have it available to meet customer demand but not have it impact your cash until you collect from your customers, assuming you offer 30 day terms to your customer and your supplier offers you 30 day terms to pay them. This helps avoid having inventory as a liability.

    Art Olsen

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