Sudden shocks can destabilise or derail a business completely, but many owners or managers turn a blind eye to the risks.
The potential cost of such oversights may be significant and long-lasting, eroding the confidence of customers, suppliers and employees while ruining any growth targets. Stress-testing a business to identify risks has multiple benefits, including forcing senior leaders to consider ‘what-if’ scenarios; enabling a business to respond quickly; and clarifying capital requirements.
Here are some common dangers to consider.
1. Bad debts
A good business can be brought down, through little fault of its own, by bad debts. Assess customers’ creditworthiness in advance and draw up clear terms and conditions of trade to help minimise payment defaults. Provisions for any possible bad debts should also be made in budgets to ensure that the business is better positioned to withstand such shocks. Trade Credit insurance may also be available to fully or mostly mitigate these risks.
2. Customer or supplier failure or loss
What happens if your best customer suddenly dumps you as supplier, or goes out of business? Markets are volatile, while in recent years the Australian Taxation Office has been filing more and more wind-up applications against SMEs. So be wary of relying on relationships with just a handful of customers and suppliers. This is called concentration risk.
If customer failure or supplier failure does occur, quickly contact them to find out what went wrong and shore up existing networks, or find new ones. Keep a cool head, review your cash-flow, speak to your financier and/or insurer and consider fast funding solutions such as debtor finance, debt recovery or an overdraft to help you trade through the issue.
3. Blow-outs in debtor days
Late payments are a cash-flow and growth killer for SMEs. You need effective solutions to bridge the gap between when you invoice and receive payments. First, your finance team has a role to play courtesy of prompt and accurate invoicing, plus clarity around payment terms. Second, weigh up options such as invoice discounting (letting you access up to 80 per cent of an invoice’s value very quickly) and debtor finance (similar to debtor financing, but with the extra component of outsourcing your accounts receivable service for better credit control).
4. Supply-chain delays
Internal and external supply chain risks are an issue for companies that make, move, store, service or sell products. Forging strong partnerships with suppliers is essential, along with having a reliable list of backup suppliers. Your risk managers also need to stay up to date with insurance and alternate financing options to deal with supply-chain disruptions.
5. Significant errors and product recalls
Just ask the automotive sector how debilitating product recalls can be. Recalls can damage your brand and wreck profitability and cash-flow. To counter this peril, carefully choose your suppliers in the first instance, build in the necessary contract provisions with those suppliers in the unfortunate event of a product recall, and consider appropriate insurance.
6. Technology downtime
Our reliance on modern technology is profound, so if a fire or flood shuts down your server room, or a reckless builder cuts through your fibre cable, it can leave you reeling for days or weeks. A business continuity or disaster recovery plan (DRP) should factor in elements such as cloud backup, remote data protection and disaster recovery services so you can quickly get back to business. Always ensure you anticipate what could go wrong when it comes to implementation of new technology and mitigate the risks accordingly.
7. Internal fraud
We inherently trust our staff, but internal fraud is all too common within SMEs. While deficient internal controls may be to blame, a committed thief is often hard to stop. Consider creating a ‘risk register’ to capture and put controls in place for all key risks, review who has what access to key systems, consider having two staff to review one another’s work and shuffle responsibilities around periodically.
8. Loss of key staff and management changes
Executive overhauls or losing good managers or staff internally can shake up a business, while personnel changes with key customers or suppliers may eliminate all-important networks overnight. Company culture has a big impact on employee satisfaction and retention, so foster career path opportunities for your management of talent as a form of ‘succession planning’. Look to develop your staff and where needed enrich their roles with new responsibilities or exposure to other areas of the business. Externally, it pays to strengthen your networks with ongoing face-to-face contact and even with referral business.
The above shocks can hit SMEs and start-ups at any stage, so be prepared and consider fast funding solutions now to protect you against risks tomorrow. If trouble strikes, it may just save your business.
