While you should always be analyzing risk, there is a heightened need with the recent pandemic and the ensuing fallout. Assessing your business risk and making appropriate improvements will help your organization minimize, or even prevent, the impact of time-consuming and costly situations, while also providing better security for navigating through difficult circumstances.
There are many areas within your business that can create increased risk. Assess the areas below and determine which areas are of greatest risk within your organization. Then, create specific action items to accomplish reducing risk in those areas, with specific target dates for completion and someone to lead each one. Continue with any remaining items you feel are not within an acceptable risk tolerance, until you feel you have made measurable improvements to minimizing your risk.
•Balance sheet strength: The most common metrics to evaluate balance sheet strength are Current Ratio (liquidity – your ability to meet current payment obligations), Return on Assets, and Capitalization Structure (debt to equity). Calculate and monitor these, and then measure them against the standards in your industry. Understand the key drivers that impact them and make adjustments, as necessary.
•Revenue diversification: As the old saying continues to hold true, don’t put all of your eggs in one basket. Are your revenue sources diversified across multiple products/services? Do you have recurring revenue streams? Do you have contracts or commitments with customers? If you’re not as diversified as you should be, look for opportunities to change this.
•Customer risk: Similar to revenue, assess the diversity of your customers and their industries. Don’t have too much reliance on one or two customers. Are most of your customers in the same or similar industries? In addition, if you are seeing any collection delays or concerns with current customers, you may need to assess the risk of continuing to offer an open account with them or increase down payment requirements.
•Supplier risk: Determine if you have too much reliance on a particular supplier. If they had disruptions in the production or supply chain, how would it impact your business? Also, understand your contracts and future commitments with your suppliers.
•Employee risk: Employees are always a high area of risk. Do you have too much reliance on an employee, or group of employees? If so, put a cross-training plan in place. Do you have a current handbook and company policies in place? Do you have confidentiality agreements in place with all employees? Consider doing an HR audit/assessment to reduce risk in this area.
•Owner risk: Similar to being concerned about too much reliance on a particular employee, the same goes for business owners. Can the company operate and function without you? Does management have the appropriate decisionmaking authority to keep the business moving forward during an unplanned absence?
In addition, do you have a written succession plan in place that lays out your wishes and decision-making authority in the case of an extended absence or unforeseen circumstance such as illness, disability or death?
•Management strength: It’s important to have the right people in place. The strength of your management team will extend the reach of impact within your organization. Promote ownership within the teams, invest in training, and make sure you have a culture that breathes leadership and accountability. This will allow the business to function without you and create a culture that provides results.
•Legal: Make sure you have the proper agreements in place to protect your intellectual property (trademark, patents, software, domains) and be sure to have the proper terms and conditions to prevent lawsuits and product liability claims.
•Internal controls: As a business begins to grow, internal controls can often get overlooked. Having the proper internal controls are key to protecting your cash and unappropriated used of funds. There should be an approval matrix in place that outlines spending authority and limits. Consider doing an audit/assessment of your internal controls and policies.
•Data/IT: You must make sure your data and infrastructure are well protected. Risks in this area continue to rise and can be detrimental to your business. Businesses can be “hijacked” and completely shut down. This is also an area where you may want to consider doing an audit/assessment to determine your level of exposure.
•Transferable/scalable systems – You should have documented processes in place that help reduce costly mistakes and help ensure consistent deliverables. If you have an unexpected or extended absence of one (or more) of your employees, would another employee be able to pick it up to reduce the impact to customers or cash into the business? Systems and processes will also better prepare your business for growth.
Make sure you get your team involved and get started on minimizing the risk in your business.
Jackie Bartanen is a certified public accountant and a consultant with Journey Consulting LLC.