Managing Business Risk
In my last blog, I looked at some external factors that affect the performance and profitability of a business.
Now let’s take a look at internal factors, particularly decisions to be considered around business risks such as bad debts and the loss of a key person in the business.
A reduction in debtors is generally where the performance improvement process starts. Overdue debtors can lose 20% of their value, affecting your net margin, due to the costs of collection and the time spent by staff on this process.
If your business sells goods and services on credit terms, and a substantial percentage of your working capital is up as accounts receivable, it may be worth considering Trade Credit insurance.
This way you can protect your accounts receivable from losses due to credit risks such as customer insolvency or payment default.
You may also wish to consider the following strategies to mitigate the possibility of a bad debt:
- Educate staff on the implications of overtrading on your business (i.e. creditors paid on 30-45 days but debtors paying on 45-60 days)
- Ensure all staff use the systems and procedures in place and fill out a credit application form, with references (i.e. customer relationship management, ensuring the “right” new customer)
- Use a Debtors Dashboard (including major overdue customers, stock on hand, creditors and bank balance). This way you can get rid of the numerous printed reports/spreadsheets and better manage your debtors
- Automate and track document delivery (e.g. email PDF of invoice for faster approval and payment)
- Follow up phone calls and note the commitments made in the CRM system.
Loss of a Key Person
Business succession planning ensures that the business survives after the death or critical illness of one of its principals.
This is often an area that is overlooked but can be critical in sorting out one’s affairs if there is a sudden loss of a principal from the business.
Generally a business succession plan will:
- Provide the owner (or their estate) with the option to sell their interest in the business to the remaining owners, and
- Can act as a funding mechanism for the remaining owner(s) to purchase the business.
A buy/sell agreement provides for the continuation of a business should the owner exit on short notice.
Certain benefits of the agreement can include retaining key employees and allowing for a smooth transition of owners rather than through a fire sale.
The agreement is usually funded through a combination of life, trauma and TPD insurance.
The funding is then used to buy out the deceased family’s estate.
I have touched on only a few matters which should be considered when managing business risk. In my next blog I will address further issues which can affect performance.
Kevin Higgins is a senior executive at Vantage Performance, one of Australia’s leading turnaround management and profit improvement firms – solving complex problems for businesses experiencing major change.