negative; after all, that is the nature of risk. Instead of being over-optimistic, ask yourself, “What can go wrong in my business?”
Management
The next step is to develop a strategy and processes to deal with the identified risks. Your strategy should be underpinned by three questions:
1 How can I prevent it from happening?
2 How can I detect that it has happened?
3 How can I quickly put out the fire and correct the damage when it happens?
Trust me, business owners who are defrauded or stolen from internally by their employees do not see it until it is too late because question 2 was never answered in their risk management strategy. Those who get their cars stolen and lose business did not answer question 3. Those who experience one crisis after another suffer because they neglected to answer question 1.
For almost every major or significant risk that your business faces, you must answer the questions above. You truly cannot get past the risk without satisfying yourself that the answers make sense.
A quick look at the business risks
If you reflect on it for a moment, your business is a risk from the day you start it to the day you get out of it one way or the other. In this book I will be discussing the risks and strategies to manage them in successive chapters, and covering the topics below:
Product
What if I go into business with the wrong product?
What if my product does not sell?
What if there is no sustainable market for my product?
Partnering
What if I get the wrong partners?
What if the structure of my business is wrong?
Finance
What if I cannot raise capital for my business?
What if the finance I get is too expensive for the business?
What if I do not make a profit?
What if my costs go up?
Competition
What if my business is wiped out by competitors?
What if the market prefers to buy from the competition?
Employees
What if I employ the wrong people for my business?
What if the employees go on strike?
What if the employees become redundant and costly?
Suppliers
What if the suppliers go out of business?
What if the suppliers take long to deliver?
What if the suppliers are expensive?
What if the suppliers deliver poor quality?
Taxes
What if I get on the wrong side of the law?
What if I fail to pay or declare my taxes?
The following diagram gives an indication of the risks to which a typical business is exposed in its life cycle:
| INCEPTION ➞ | OPERATION ➞ | DISPOSAL |
| Sector Valuation Finance Security Competition | Cash flow Losses Transport Suppliers Market Human resources Environment Taxes Legal | Valuation Economy Buyer availability |
I think we need to ponder on each one of these risks. You will see from the above diagram that there are just so many factors that can cause a business to collapse. Many are still missing, I am sure, but I have tried to capture those risks I would consider significant. Each risk may be so significant that it exerts strain on the business throughout its life. For instance, if you enter into an inappropriate finance contract, it can cause stressed cash flows and sustained losses, and, even on disposal, affect the valuation of the business so negatively that the buyers pick it up for next to nothing.
I had a business that was badly financed and structured. Every day was a battle, and every cent that I made seemed to be swallowed up by finance costs. The infrastructure was bigger than the operation. There was no way of getting out because of the unfavourable contracts I had entered into. Cash flows were severely strained and the business was eventually liquidated by the financiers, where it was sold under the hammer for a pittance. As I write this book, I am still recovering from the aftermath of my bad risk management! You would be wise to learn from the voice of experience and not let it happen to you.
Business risks in detail
I want us to look into these risks in greater detail. I am hoping that you will be able to identify where your business is and therefore which risks you should be managing.
RISK
INCEPTION
| Sector | ● The sector is not vibrant and sustainably profitable ● The sector is heavily legislated ● The business is not duly registered |
| Valuation | ● The business is overvalued ● The underlying value is not substantiated and cannot be realised ● You have inadequate capacity to unlock the value you will pay for |
| Finance | ● You do not have finance for the venture ● You may overcapitalise your business ● A financial institution studies your business plan and declines ● The business plan is of an inferior standard |
| Security | ● You do not have security for the finance ● Offering security exposes you and your family to more risks |
| Competition | ● Competitors are fierce and unforgiving ● There is just too much competition ● You do not have a competitive edge |
OPERATION
| Cash flow | ● Not enough cash to discharge obligations ● Not enough cash to buy needed material ● Bad credit rating due to non-payment |
| Losses | ● Break-ins ● Shrinkages |
