Risk Management

Do your financial perspective objectives take risk into account?
A. We simply ignore risk.
B. We are aware we need to assess the risk dimension of our strategy … and intend making a start.
C. Our financial perspective objectives informally review the risk dimension of our strategy.
D. Our financial perspective objectives address key elements of the risk dimension of our strategy.
E. Our financial perspective objectives address the risk dimension of our strategy in depth.
[Score:  A=0, B=1, C=2, D=3 and E=4]
Why is this question important?

In striving for effective revenue growth and business expansion you need to balance expected returns with the management of risk.

You may need to address risk dimensions in your strategy:

  • Diversify away from a single or narrow base of customers
  • Diversify away from one or two products or services
  • Diversify away from dependence on a particular geographic region

Customer Dependency

One of the key goals of many companies is to develop a number of large, steady customers. This can be the basis for long-term growth and stability.

When you have customers you can count on month after month, the secure steady cash flow gives the scope to consider expanding in new directions and developing additional markets.

What is desirable is that you have a number of customers.  When one customer accounts for 35% or more of a company’s total sales revenues, real and perhaps potentially dangerous financial dependency emerges.

To avoid such potential problems, it is beneficial if a company continues to focus on marketing and bringing in new business, thereby keeping any one customer’s business at a safe percentage of total revenue.

It is tempting to simply permit an existing customer to thrust more and more business at you – in one way it is much less difficult than marketing!  But you need to be mindful of any potential adverse impact on your company.

Where there is high ‘single customer’ dependency it is imperative that fixed asset investment is not ‘tied’ to that customer – ensure such investment is a ‘multi-customer’ asset.

Product / Service Dependency

Many businesses ‘see’ themselves as selling a single product or providing a single service.

However, in reality this is rarely the case – granted the product or service offering may well be very ‘tightly clustered’.

Practically all businesses offer customers a choice, however narrow – the butcher, the baker, the candle-stick maker …

Notwithstanding that, it is important to alleviate potential risk by ‘diversifying’, deepening or complimenting the product or service offering to gain some protection against marketplace changes.

Try to pro-actively expand, deepen and diversify the product / service offering not only to sell more to existing customers but to attract potential new customers and expand your overall business base.

Expansion & Growth – How a Cash-flow Forecast will help.

It projects your future cash needs – especially important if you are expanding rapidly and extending significant credit to new and existing customers.

It indicates whether you will have sufficient cash to meet:

  • supplier payments
  • payroll payments
  • other trading costs and expenses
  • lease, hire purchase & loan repayments
  • taxation payments
  • other contingencies

It acts as an early warning system, by red-flagging an emerging cash shortage in your business.

Your cash flow forecast shows the likely cash position of your business over a period of time.  You should normally prepare this on a month by month basis for one year.

Your cash position will show a deficit or surplus of cash by comparing your expected cash payments with your expected cash receipts for the period in question.

There are four distinct stages in preparing your cash flow forecast.

  1. calculate expected Cash Inflows
  2. calculate expected Cash Outflows
  3. compare the Inflows with the Outflows to establish the Net Cash Flow for the period
  4. add the Opening Cash Balance figure, if any, to the Net Cash Flow figure for the same period to get the Closing Cash Balance

To keep cash under control it must be monitored and actively managed continually.

In the final crunch cash is the one asset you must have to remain in business.