Knowing how to manage risk in business is extremely important. In the world of business, uncertainty is a constant companion and the risks facing a business can be unpredictable in both type and impact.
Business finance can encompass everything from planning and monitoring of cash flow to controlling financial resources and achieving strategic organisational goals.
The landscape of business, and finance, is fraught with uncertainties, many of which cannot be controlled. Understanding how to effectively manage risk, even if it cannot be eliminated, is paramount in ensuring a company’s financial health and laying out the path to a sustainable, successful future.
In this article, we’ll explore what business finance means, the role of business risk management and how the ScotPac lending specialists can help.
The Balancing Act of Business Finance
Business finance is clearly a make-or-break-it aspect of a company’s success. Finance covers the facilitation of daily operations, the investment in critical assets, and the agility of a business to respond to growth opportunities and meet market demand.
However, there is always an element of risk even in the most well managed of business finance structures. To that end, having effective strategies to manage that risk is critical for decision making, resource allocating and operational success.
Understanding Business Risk
Before we can effectively manage or mitigate risk, we need to understand what we are talking about with risk in the context of business finance.
The risks incorporate anything that has the potential to cause adverse outcomes that can in turn impact the financial stability or performance of a company.
There are many different forms that risk can manifest as. There is always market volatility, on both the demand and supply side, there are economic downturns at the macro level, regulatory changes from government and industry, operational inefficiencies within the business and even unforeseen catastrophes and natural disasters, pandemics included.
Not all risks can be eliminated or even mitigated, but they can all be managed to a certain extent
Business Risk Management: Can it be done?
The answer is yes, it can. But part of effective risk management in business is also appreciating what can and cannot be managed.
Market risks, for example, can be effectively managed by diversifying investments and staying abreast of market trends, technological advances and changes in consumer behaviour. Businesses with effective market risk management can weather financial storms better than those without.
Operational risks, whether it’s in the form of employee training or technology adoption, are dependent on internal management strategies. This can and does include anything from strong management, streamlined protocols and procedures and even built-in redundancies.
Even credit risks, through credit assessments and credit management policies, can be mitigated effectively. Whether it’s through stronger payment terms or solutions such as Invoice Finance, minimising the risk of non-paying clients and customers can be managed, if not totally eliminated.
Of course, there are some risks that simply cannot be predicted let alone managed. Natural disasters, pandemics, and geopolitical risk are all external events that are out of a company’s control. Financial and operational contingency plans can and should be in place to weather unexpected storms and mitigate the impact on the business, but as far as the risk itself is considered, there is not much that can be managed.
Similarly, regulatory changes on a governmental or even industry level are often difficult if not impossible to manage. While there can be some input, such as the SME advocacy done right here by the ScotPac team, there is often little that can be done in managing this risk outside of building in flexibility and agility within the business’s operations to respond accordingly in a swift manner.
Effective Risk Management in Business
The important aspect to realise about effective risk management in business is that it is not about eliminating all risks or even all of a single risk, but about finding the right balance between potential reward and possible risk.
The best way to approach business risk management is:
1. Identify the risks and potential impacts.
2. Analyse each risk and impact as well as your business’s ability to respond and mitigate each risk.
3. Prioritise the risks according to severity, likelihood and importance.
4. Design and implement strategies to either mitigate the aspects of the risk in your control or, if possible, capitalise on them.
Tips on How to Manage Risk in Business
Comprehensive Risk Assessment
Regularly assess all of the potential risks your business might face, considering both internal and external factors. This will ensure a more holistic and comprehensive understanding of the risk landscape and the position and strength of your business to respond in kind.
Diversify Your Investments
Briefly mentioned earlier on in this article, the diversification of investments is important for both risk management in business as well as personal finance. Reducing the impact of market volatility is impossible but reducing the impact on your business can be done by spreading investments across different assets and markets to reduce the negative cost of any particular asset/market fluctuations unfavorably.
Robust Financial Planning
Ultimately, business risk management involves significant financial planning. Considering different possible scenarios and impacts and assessing a business’s financial ability to either rise to adapt to those challenges can be a defining determinant in a business’s ability to continue, grow and succeed.
Insurance Coverage
Investing in comprehensive insurance can help insulate a business against natural disasters, accidents, market risk and even legal liabilities. Without sufficient or correct insurance coverage, a business can be exposed to far more risk and liability than is necessary.
Internal Compliance Audits
Regulatory requirements and industry standards are constantly changing and being upgraded. Being compliant is not about setting and forgetting but investing the ongoing time, energy and resources in ensuring compliance with relevant laws and standards across the board.
Strategic Contingency Planning
Contingency plans, in a best case scenario, will prove not to have been required. But ensuring that your critical operations do have contingencies in place will ensure that if there is an unexpected interruption your business can adapt successfully to it.
Financial Stress Testing
Conducting stress tests on your financial models can help you ascertain how capable your business is at withstanding changing conditions, new risks and catastrophes. It will allow you to identify areas where you need to improve risk management and develop strategies for minimising the impact of potential risks.
Continuous Monitoring
Continuously monitoring the risk landscape and your internal levels of preparation will ensure that any vulnerabilities are addressed before they derail your business. Adapting new risk management strategies in response to changing circumstances will keep your business flexible and agile in the face of the unknown.
Employee Training and Awareness
Equipping your staff, from the top executive managerial level all the way down, with the knowledge and skills to address potential risks in their respective roles can help mitigate a lot of the negative impact associated with a variety of financial risks a business could face.
Managing Risk with Financial Solutions
The ScotPac team are specialists in providing fast, flexible funding solutions for businesses of all sizes.
Having reliable and fast access to working capital is a strong strategy for risk management in business.