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RISK

INCEPTION

Sector	● The sector is not vibrant and sustainably profitable ● The sector is heavily legislated ● The business is not duly registered
Valuation	● The business is overvalued ● The underlying value is not substantiated and cannot be realised ● You have inadequate capacity to unlock the value you will pay for
Finance	● You do not have finance for the venture ● You may overcapitalise your business ● A financial institution studies your business plan and declines ● The business plan is of an inferior standard
Security	● You do not have security for the finance ● Offering security exposes you and your family to more risks
Competition	● Competitors are fierce and unforgiving ● There is just too much competition ● You do not have a competitive edge

OPERATION

Cash flow	● Not enough cash to discharge obligations ● Not enough cash to buy needed material ● Bad credit rating due to non-payment
Losses	● Break-ins ● Shrinkages
Transport	● Inadequate ● Not in a working condition ● High maintenance costs
Suppliers	● Insufficient, with heavy reliance on a few ● Expensive ● Delivery lead times not adequate ● Deliver poor quality
Market	● Too small ● Very fussy and makes many returns ● Unfavourable economic conditions, therefore poor payment ● Delays in payment affecting cash flows ● Aggressive and more tactical opposition
Human resources	● Non-availability of necessary skills ● Labour unrest ● Loss of necessary workforce ● Lack of productivity
Environment	● Product potentially harmful to the environment ● Environmental impact assessments not conducted on time
Taxes	● Late payments attracting interest and penalties ● Inadequate skills regarding tax issues and filing of returns
Legal	● Non-compliance with legislation ● Litigation by suppliers, employees and clients

DISPOSAL

Valuation	● Value of the business is too low ● Cannot find a business valuer at an affordable price
Economy	● Value is too low due to prevailing economic climate ● Non-affordability due to economic climate
Buyer availability	● Non-availability of serious buyers who can afford the price ● Inadequate purchase and sale contract

Managing the risks

Since you now know what risks your business faces, you are in a much better position to manage them. Remember that the process of identifying risks is an ongoing one and that the dynamics of your business will keep changing from time to time, exposing you to new risks. Do not regard this as a static process that unfolds only once in the life of your business, otherwise you will miss potential risks.

I will not deal with each risk here, because the strategies to manage them will vary from business to business and from person to person. Some of us are dangerous risk takers and will forge ahead despite the risk exposure. Although the accountant in me discourages that, I am reminded of what one of my friends said to me on this issue: “If you want to succeed in business, get rid of your accountant or risk manager. He will scare you sufficiently for you to want to do nothing eventually!” So take what I am saying with a pinch of salt, but please, at least know what risks you are up against before you take a decision on how to deal with them.

Prevention

Treatment, as I indicated earlier, can be preventive. As the doctors say, “Prevention is better than cure”, and the same principle applies in business. You want to put systems in place to ensure that the risk is prevented, because you will spend twice as much energy and resources to cure the problem if it materialises. Install burglar gates and alarms in your warehouse. Fit the company vehicles with immobilisers. Draw up Human Resources policies to instruct your employees on how you want things to be done. Invest in accounting and costing packages to ensure that the product costs are accurate and you do not sell at a loss. In other words, prevent the risks from happening.

Detection

Prevention systems are not a foolproof guarantee that risks will not occur, so you want to go to the next level of risk management – detection. You want to have systems in place to inform you that you have been hit. There is no point in going on with business as usual when things are seriously wrong in the heart of your business. You are losing food stock every day because your employees are stealing it. Your vehicles are travelling everywhere, costing you petrol and maintenance, but not bringing in any money. You want to be able to detect these things early enough, so your systems must allow for that. The stock must be counted frequently. The logbooks for the vehicles must be filled in, signed and checked. You or your senior people or yourself must contact the clients regularly to check whether they are happy with your service. Mechanisms to inform you that something is wrong must be put in place and applied diligently.

Correction

Believe it or not, both prevention and detection mechanisms may not be enough to ensure that the risk is being effectively managed. Sometimes they may be so costly that you want to minimise them and place more emphasis on corrective mechanisms. For example, the fact that I have an anti-hijack device, an immobiliser and a tracker in my car does not offer absolute protection against its being stolen or a guarantee that it will be recovered. The risk is still there – it may have been minimised, but it is still there. You may just want to go for a corrective control mechanism, one that suggests that you have been hit and places you in the same situation you were in before the risk occurred. In this case, just get insurance. You may also take out legal cover for potential litigation by suppliers and customers, and so on.

The risk of not managing risks

I want to drum this point home as much as I can. Not managing risks is risky in itself. It is negligent and not businesslike. You are exposing your business to unwanted, unpleasant surprises.

You are putting yourself and your employees in a fire-fighting mode and, believe me, you will be putting out fires for the rest of your life until you get this right.

The rest of this book is premised on effective risk management. In the chapters that follow, I propose solutions for managing fundamental risks that may cause your business not to grow as fast as you want or, at worst, to collapse. We will discuss issues of finance, employment, administration, competition and many others. All have risks associated with them that you need to manage. I would like you to follow me through this material and try to correct the mistakes before you make them. This will make your business thrive!