You’re in business. Risks are all around you and many of them are capable of doing major harm to your business. Some could even destroy your business.
This is a given. So how do you manage your risk exposures. For SME businesses this is a difficult, and often poorly managed, element of accountability. There is usually some focus on liquidity risk (having enough cash) and this is from necessity.
Many SME businesses manage key risk exposures such as product risk or system risk through well developed Quality Assurance procedures. Once again, often through necessity (e.g. I can’t supply Coles or Woolworths without their risk managers signing off on our QA system integrity).
But how do you manage the many other risk exposures that you face? And of course all risk exposures ultimately end up with either an ongoing drain on cash or a sudden and serious outflow of cash from the business.
Now as a small or medium sized business, you have limited resources to allocate to this task. So how will you manage risk areas such as volatile foreign exchange rates, suppliers unable to meet deadlines or quality requirements, lack of capacity at key times, losing key personnel, changes in legislation, changes in technology, changes in your market, political changes, a high percentage of sales with a few customers, non-compliance with industrial relations requirements, workplace behaviour risk and so on?
With limited resources you may not be able to develop detailed risk mitigation strategies. Nor might you be able to do the level of research to fully appreciate the probability of experiencing these risk events.
However, the SME business can at least ensure that these issues are “front of mind” issues. This can be as simple as developing a regular reporting structure that results in management discussing the issues and constantly assessing the seriousness of these exposures. As the risk exposure in a specific area becomes more serious, the business can allocate resource into developing risk mitigation actions.
Working with a virtual CFO is ideal for addressing this area. A virtual CFO is involved in the strategic planning of the business and constructing the financial models that map the business’ financial performance. The virtual CFO will be providing a range of analyses and is well placed to assess the impact of risk events on the business.
Some simple actions can be taken to ensure that potential risk events are “front of mind” include:
- Document the risk exposures of the business and allocate a ranking to each (e.g. a ranking number such as 5 = Extreme; 4 = High; 3 = Moderate; 2 = Low and 1 = Insignificant), or more simply
- Prepare a regular traffic light report that summarised these risk exposures
- Agree a management policy that requires the high risk exposures to have a mitigation strategy in place and an implementation plan agreed
If this relates to your business and you cannot justify the costs of a full-time, experienced CFO you should consider a virtual CFO to help manage your risk exposures.