Business Risk Management: Risk Versus Reward

If you are the type of business leader who is prepared to take risks, then you may often reap the rewards of your confidence. But how can you minimise the impact of negative consequences should those risks not pay off?

As a small business owner, it is important to understand potential consequences and rewards for the decisions you make, and you should try and find a balance between business risk and reward. Some business leaders can be over-diligent and unable to take a leap of faith, while other entrepreneurs chase opportunities without considering the pitfalls.

If your primary aim as a small business is growth, it’s good to take a chance, but keep a careful eye on the areas and aspects of your business that could be badly impacted because of a poor decision.

Assistant Head of Risk Underwriting, Paul Anderson, believes that failing to plan for a ‘shock’ is often the result of a business having seen success from risk-taking in the past. “It’s a mistake to assume ongoing success,” he explains. “Just because you have done okay in the past doesn’t guarantee it will continue to be so in future. For example, the bigger you get, the more you will appear on competitors’ radar, which is a risk in itself.”

There are multiple risk factors in play when you are a small business, including increasingly competitive environments, cash flow problems, bad debts, political risk and late payments. It is estimated that in 2021, UK SMEs are chasing more than £50bn owed by late payers.

There are ways to reduce risk with robust cash flow forecasting. Business failures are often preceded by money troubles, so checking customer profiles, calculating their average payment times and identifying late payers can help reduce the risk of currency casualty.

But credit controls can’t protect against so-called ‘black swan’ events – events that have huge impacts on a business and are completely unpredictable despite any pre-emptive measures. “A big reason why companies suffer from bad debt isn’t because they have poor credit control procedures, but because we are seeing huge companies going bust,” says Jack Kent, Team Manager South at Euler Hermes.

“Carillion had £850m [owing from] unsecured creditors when it collapsed and only £40m of the total was credit insured. When big companies become insolvent this has a knock-on effect all the way down the supplier chain to small businesses feeding in. We see quite a lot of companies suffering and, sadly, by the time they start to look for solutions such as insuring against bad debt, it’s generally too late.”

Addressing the main threats to your business and then acting on them will go a long way to securing your business’ future. Add layers of security to your business to neutralise as much financial risk as possible. You could do this by taking out adequate cover or looking at trade credit insurance.

Direct and Bank Distribution Underwriting Manager, Victoria Keeling favours a practical approach: “It just comes back to knowing the market, knowing where your obstacles and risks are and trying to prevent them via training and sharing information.”

Taking a level of precaution to balance out business risks could mean a brighter future. What are you prepared for?