Risk Management in Small Business | Business Management

The financial news abounds with the talk of company risk and risk abatement. The boards of publicly traded companies are land blasted in newspaper cartoons, social media and the TV evening news for not managing risk. And then there is the government, or more correctly the bureaucrats in the halls of the Republic that are legislating risk management on all companies. The sad side of this is that those legislators do not understand the simple definition and concept of risk.

If we take a short step back in the history of commerce we will find that the present science of risk management is a relatively new concept. The 16th century definition of risk meant ? to seek prosperity. It is interesting to note that historically risk management did not emerge in the context as used today until about the 1960?s and became a financial management component in the 1980?s.

Sure the idea of risk has been around the shipping industry for centuries, which lead to the conception of insurance companies. But in terms of general business, risk management is relatively new.

So what was it before all the academics began to develop the formulas, write books and companies were formed to develop software so that businesses and boards of directors could find their way to manage risk? The answer is a stretch of the imagination in the 21st century. It is elusive, loosing its context in philosophical approaches like modernism and the emergence of software and computational models. What is this tool set of business practices that were before the advent of business intelligence and dashboards?

These ancient tools are: Common sense, good customer value and personal integrity. All of these apply to the various aspects of assessing business risk and mitigating it.

The most often used of these ancient tools has always been common sense.

Common sense is simply paying attention to the obvious and with experience and knowledge; making good decision with sound judgment. There are some problems with this simplicity in that common sense is not common anymore. Many businesses, especially small and medium businesses, start with minimal experience and knowledge in the key areas of leadership, managing finances, organizational structure and marketing.

There are key common sense indicators that businesses need to pay general attention to. These will raise the awareness on the obvious.

Simple and Quick Financial Indicators

? Cash flow ? I know that there are those that will argue this point. The tendency to look at business health has been in EBITDA (earnings before interest, taxes, depreciation and amortization). Although this is a good business indicator, there is nothing that defines business health better than cash flow.
? Accounts Receivable ? How much is outstanding, by whom and how long?
? Cost of Goods Sold (COGS) ? the simple point to this complex indicator is that if you do not know all the cost associated to your product or service then you cannot understand your margins which means that you have cash flow problems. Also consider employee performance as it relates to efficiencies in your product or service output as a component of COGS. I know for a fact that many businesses see this indicator in their accounting but do not always have all the proper components accurately included and therefore miss what this indicator is saying.
? Expenses ? knowing the details of your expenses other than COGS. Where does the cash go? This does not mean that you necessarily have to count every paper clip but it is amazing what extraneous expenses impact the cash flow.

Simple and Quick External Indicators

? Customer satisfaction ? What are you really hearing from your customers about the product or service?
? Competition and market ? What do you really know about them? Have you reviewed your SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis regularly?
? Access to capital ? What is happening with your bank and your relationship there? How do you finance new ideas and what is happening in the capital markets environment?

The essence of business is filled with risk. What used to be the family way of making a living using bartering as currency exchange has transformed into entrepreneurialism focused on profit and returns for investors. All businesses must evaluate what is happening, understanding risk in their enterprise, so that they can make appropriate decisions to improve their business operation and revenues. By taking the time to look under the covers at key internal and external indicators management can assess the details and construct a bigger picture to then apply sound judgment in decisions. That is what risk management is simply about. If the business is complex and the cost are justified with a solid return on investment analysis then good software tools are useful. The most important aspects to risk management are: knowledge ? know your business; experience ? trust your experience and that of your advisory board or board of directors and lastly, make sound judgments. Be a seeker of that elusive old school business tool ? common sense.

Source: http://catf2.org/risk-management-in-small-business.html

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