Risk is real and it should not be relegated to the corner, in hopes that it will never happen. It will and can occur to anyone at any time.
Concerned business owners need to be consciously and consistently aware that financial loss resulting from an unexpected event could disrupt everything – it may even lead to the winding-up of the business. Worst still, their personal estate may also be affected, be it sole proprietorships, partnerships or even companies.
Whilst risk exposure cannot be eliminated totally, it is possible to better manage risk. Risk can be managed through PART: Prevention, Avoidance, Retention and Transfer.
Let’s take a look at how risk impacts different stakeholders:
Stakeholder #1: Banks and Lending Institutions
A financial institution may demand immediate settlement of outstanding loans. This will definitely threaten the continued operation of a business, as business is most likely dependent on these funds for working capital. This may result in business closure and the reduction of value of the shares to business owners.
Even if the financial institution does not seek immediate settlement, the institution may charge higher interest rates, demand more collateral, reject further loans or demand additional or replacement of guarantors. This will negatively impact business performance, profitability (due to increase in the cost of funding), and return on investment.
Stakeholder #2: Creditors
Suppliers may demand immediate repayment of outstanding debts, decide not to give any credit terms or shorten credit terms for future orders and require letters of credit before any orders will be fulfilled. They may also reject future orders except on a cash basis.
In turn, the business may start to face cash flow issues due to the actions taken by the suppliers. The business may not be able to fulfil orders, or there may be a shortage of stock available for sale.
Stakeholder #3: Debtors
Customers may begin to lose confidence in the company. They might source for alternate suppliers or pull out from future deals with the company. Some debtors may take the opportunity to delay payment or even default on payment.
Again, this will affect profitability. Production may cease and the sales team will have to look for other customers in order to maintain the same level of sales. The cash flow of the company will be badly affected if debtors delay payment. The cumulative effect on the possible actions of debtors will result in lower returns for business owners.
Stakeholder #4: Partners or Fellow Shareholders
The surviving partners may leave the company; consider setting up their own firm or buy out the interest of a deceased partner. Of course, it is possible that the surviving partners may work much harder to ensure that the business can continue operations even after the demise of one of the partners.
The actions of the surviving partners will have an impact on the business and, ultimately, the partners themselves. If the surviving partners decide to buy over the interest of the deceased partner and assuming it is successful, there will be little impact to the business. The surviving partners will discover that the returns on their investment actually increase. This is possible if the partners have prior arrangement for the sale and purchase of shares amongst partners, and the funding of such sales and purchases are made through insurance.
In the case where there is no prior arrangement to buy over the shares and the surviving partners are not able to strike a deal with the family of the deceased, the business is likely to be affected and may even result in the closure of the business.
Stakeholder #5: Investors
Investors may lose faith in the business, reducing their capital investment or even pulling out completely. Potential investors may rethink their willingness to invest in the business or they might not invest at all.
The withdrawal of capital by investors could cause the business to experience shortage of funds and working capital. The business owners will have to pump in more money or seek alternate funding. Otherwise, their investment may not achieve the expected returns.
Stakeholder #6: Employees
Words have an impact, especially if employees start to engage in unhealthy internal gossip. With the feeling that their livelihood is at stake, they may decide to resign and leave the business. Key employees will also be likely candidates for recruitment head-hunters during this period.
When this happens, the business will not be able to operate smoothly. There may be a shortage of staff to operate the company at its usual capacity; possibly leading to collapse and the dire situation where business owners lose their investment.
Stakeholder #7: Business Associates
When risk occurs, business associates are likely to become more careful in their dealings with the company. They may not renew existing contracts or agreements. Worse still, they could terminate existing contracts and agreements. These are telling signs that they have lost confidence in the company. Potential business associates wanting to sign contracts with the company may defer or turn to another company.
The business will definitely be affected. Turnover will be reduced and the whole chain of events will affect the profitability of the business. Again, the return on investment will be reduced and the value of shares will drop.
Stakeholder #8: Business Owner (You) and Family
As the business owner, you and your family are likely to be the ones that are directly impacted by the occurrence of the risk. For example: You own a factory and it has caught fire. The unfortunate event has disrupted production schedules, which would in turn delay sales and your company may face cash flow issues. In another instance of risk such as the event of your premature death, the salary that you used to bring home will stop.
Your loved ones’ standard of living may be direly affected due to the adverse cash flow faced by the company when there is a fire or when the company stops crediting the salary to your bank account. Without proper risk management plans in place, your family will have to become involved in the business or may have to deal with your surviving partners.
Speak with us and find out how Corporate Risk Management funded by insurance can help you tide over the unsavoury impact of risk.