The start to 2011 has been one of the worst in history in our part of the world. From a business perspective there are still ‘knock on’ effects being felt, and will be for a while yet, of the floods, cyclone and earthquake. These events cause reflection on what’s really important personally and in business.

These events are natural, beyond our control and cause devastation of life and business. There are many other events though, that can be just as devastating to life and business, which are sometimes beyond our control but able to be avoided, mitigated or minimized.

In business we start up, grow and exit and these stages carry risk. To start a business takes one of the biggest risks of all. If you leave a well-paid job to start up a business you risk your own money to finance it or that of financiers. To grow a business you risk the funds required for growth as well as the livelihoods of those you employ. To exit a business you’ve worked hard to build, you risk leaving it in the hands of others. Business owners and entrepreneurs are, probably by their nature, less risk averse than those who are happy to work for someone else and let them take the risk. Being prepared to take a risk is necessary if business start-up and growth is to occur, but what is also necessary to succeed is the ability to avoid as much mishap as possible, through well thought out ‘risk management’. We can’t know all the potential risks we face, but we can certainly take steps to learn from those who have studied the subject.

I recently spoke with John Mutton of InterRisk who specialises in business risk management and he has shared with us his thoughts on this subject.

Has anybody ever said to you that most start-up businesses are likely to fail? I am sure the answer is yes, the reality is that the jury is still out and as long as we don’t have the tools to measure this, factually, we will never know. What we do know is that one of the greatest risks a business may face relates to its own growing pains. Many expansions, acquisitions and joint-ventures have failed through poor judgement and a lack of due-diligence ‘process’.

Risk Management, a term often linked to major corporations as a corporate governance requirement, is a useful process that SME’s can adopt to improve their chances of sustained and successful longevity. In recent times we have heard about the increase in frequency in natural events, including the QLD floods, Cyclone Yasi and more recently, the devastating Christchurch Earthquake. As most of the losses relating to these events are covered by insurance, the bigger risks to businesses are the less obvious risks that are not claimable through insurance policies. To assist you in avoiding losses, or to enable you to recover from a loss ‘better’, we believe that risk management is more important to your business now than ever before.

What is Risk Management?

In this context, Risk Management is simply a process that considers what can go wrong within a business, or a particular transaction. Risks come from a variety of sources but usually reside in the following categories:

• Commercial & Contract
• Regulatory & Compliance
• Financial
• Infrastructure
• Human Resource
• Environmental
• Business Process
• Information Technology

• OH&S

The last time you entered a new supply contract or considered expansion of some type, did you consider the myriad of risks that would fall under each of these categories? Well done if you did – don’t feel bad if you didn’t because most businesses would not have!

The following diagram provides a simple illustration of the Risk Management process:

The following actual examples provide context for the impact of poor due-diligence:

1. Company uses its own accountant to review the financials of a potential JV partner. Transaction proceeds only to find out 6 months later that a long-standing employee of the target business had been defrauding the business, small amounts over many years resulting in an $800,000 adverse impairment in enterprise value;

2. Company acquires a business without checking its OH&S history. On integration of the Work Cover policy, poor claims experience for the acquired company results in a $180,000 premium increase;

3. Company signs a new supply agreement with a major customer. On review of the agreement, the company has provided a full commercial indemnity in favour of its supplier, voiding its insurance coverage and exposing its own balance sheet; and

4. Company acquires a business without understanding its workplace culture. Months after the transaction is completed, the (new) owner receives a complaint from a former employee for workplace bullying and sexual harassment resulting in a $30,000 statutory penalty.

Issues of this nature are a regular occurrence. Don’t become a statistic of the future - ask for help when your business is looking to change.

Notes:

InterRISK Consulting Pty Ltd in partnership with CAD Partners CFO On-Call can assist you in identifying the risks within your business today as well as into the future. We have the skills and resource to assist you in developing a process that will increase your chances of a prosperous future.