Risk management key to preventing disasters

We often hear about successful business owners who expand during the good times only to find that they lose everything when one deal goes sour. How could they get things so wrong?

The answer is quite simple: running a business is a risk. During tough times we tend to manage the risk more proactively, are frugal with our spending and keep a lid on outgoings.

When times are good, we get lazy. We tend to hedge our small good business on investments and business opportunities without taking time to consider the long-term consequences, we sign long leases, invest in new technology and take on new staff. But what happens when the economy turns, as it does every seven to nine years? The income stream, which is needed to feed the beast we’ve created, dries up. We start to “loan” funds we can’t afford to repay, to keep things running.

When the economy gets tight and things are not running as smoothly as they were, the business owner then seeks to maximise recovery and minimise expenditure. The problem is that by the time the business owner finally looks at properly managing the business, it is often too late- and creditors are lining up who may well be in same predicament as the initial owner. It’s a scenario insolvency practitioners see all too often – now, more than ever.

The key to preventing this debacle is risk management, which needs to occur when you first start your business and which needs to be constantly reviewed. The effect of every decision needs to be considered, risks need to be discussed and contingencies put in place should disaster strike.

So what do you need to consider?

Many things can be highlighted, some as obvious as ensuring proper documentation when dealing with other parties. Others are less so such as the need to watch the markets, keep on top of fluctuations in exchange rates and keep your ear to the ground regarding developments around the world. Although it is true that remaining aware assists in making decisions, everything has an element of unpredicatability. The key is controlling that which you can and following a few simple rules.

1. Structure. Complicated structures cost time and money. Too many administrative functions usually mean that you will be using most of your time on administration and not enough time running the business. A convoluted structure will also leave the way open for more potential mistakes, which can be harder to spot. A sound structure, good administration and keeping proper documentation are essential to any successful business.

2. Size matters. Review any planned increase. Growing too big, too quickly is a major risk. Is further capacity actually required? Is the current workforce being properly utilised? It’s surprising how many businesses employ more staff to cover the inadequacies of others, effectively paying two salaries for the same position. It is sometimes better to make the hard decisions when times are good than when times are bad.

3. Beware the IRD. Unlike other creditors who rely on your viability to be paid, the IRD does not. Not only are you dealing with a non corporate government entity which is attempting to prevent further erosion of the tax base by liquidating the business, you are also faced with crippling penalties and interest rates if you default. It is often the penalties and interest that make a small debt into an insurmountable one. Failure to pay PAYE and GST also exposes you to criminal charges and possible imprisonment.

4. Keep communicating. It might sound simple but open communication with your creditors can avoid confusion and prompt a reasonable compromise being reached during period of hardship. This allows both parties to work to ensure further business in the future. There are no foolproof ways in which to protect your business, but proper risk management will give you a better edge than those who throw caution to the wind.

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on anv matter and should not be relied upon tor that purpose.

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