The need to manage risk is a fact of life in the current economic climate. Andrew Duncan, partner with Bridge Business Recovery, explains how an effective risk policy could be the difference between success and failure.

Every business faces risks that could threaten its very survival. Risk doesn’t discriminate. It doesn’t matter what sector you operate in or what size your organisation is, whether you are doing well or not so well.

The only way to manage risk effectively is, to first of all, understand the risks your business faces and how you are able to mitigate them.  External risks can be financial, such as exchange rate fluctuations, or strategic, such as the loss of a major customer. Internal risks can be operational in the form of accounting controls or employee fraud.

Effective risk management means identifying the worst case scenarios, asking the ‘what if’ questions, and having a clear strategy to deal with these potential eventualities.  These could include:

• If the majority of the business’s turnover is sourced from one customer, then it’s time to consider expanding your customer base.
• If one employee alone is key to a particular function of the business, it’s time to invest in training and/or recruitment.

Having identified the risks and put a plan in place to take appropriate action, next consider minimising costs.  Monitoring of overheads should always be a priority during the good times and the bad. The key areas to consider are not only maximising returns on outgoings, but also reducing these through the potential outsourcing of overhead functions such as, marketing or human resources.

Production and selling costs should also be scrutinised, reducing stock levels, and simplifying supply chains can yield substantial savings.

However, targeted additional spending, for example in IT, if well planned, almost invariably increases efficiency.

Cash really is King in a recession.  Businesses managing cash and working capital effectively have the opportunity to make strategic acquisitions, or build turnover by supplying to the customers of failed competitors.  Even small businesses should prepare cash flow forecasts, to help them prepare for ‘pinch-points’, so a potential problem does not become a disaster. Have a clear credit control procedure and consider insurance against bad debts. And consider alternative sources of funding – in the wake of the banking crisis, this has become increasingly popular, particularly with traditional lenders retrenching for the moment. Products like factoring or invoice discounting, asset and inventory finance can help ease cash flow worries and are increasing in popularity.

Finally, don’t be afraid to ask advice. The fact that 5,483 businesses went into insolvency in the first quarter of 2009 (up 57% on the same period last year), shows not enough people are seeking professional advice at an early enough stage. Make sure you are not one of them come the next quarter.

Managing risk is about identifying what could go wrong, and developing strategies to deal with potential problems. It sounds simple, but in these troubled economic times, an effective risk management policy is vital, and could potentially be the difference between success and failure.

Andrew Duncan, partner with Bridge Business Recovery