Against the current backdrop of uncertain times as a result of Brexit, economic cycles and continued change, Head of our Financial Restructuring & Recovery (FR&R) team, Andrew Thompson, looks at what businesses could be doing to protect themselves and deliver the best chance of success. Find out more in the third article of a four part series.
Understanding and managing risk
Risk is an inherent part of being in business. But it can be managed and its adverse outcomes can be mitigated. First, those risks must be identified.
Companies will routinely assess and insure against risks associated with property losses, liability losses and business interruption, for example. International companies will hedge against movements in currency.
But sometimes the risks that pose the biggest threat to the survival of a business are the least obvious. And too often companies are paying too little attention to understanding their own underlying vulnerabilities.
For example, a company we were working with went into administration because it was overtrading with House of Fraser and suffered an unsustainable bad debt when the retailer collapsed.
Well publicised problems at Jaguar Land Rover have also hurt a number of clients who only two or three years earlier were delighted to see their sales to the company soar.
When Brexit bit and diesel vehicle sales went into decline, these businesses ended up dangerously overexposed to a single client. Indeed, managing key customer risk is essential. Companies must be aware which clients are critical to their margins and ensure those relationships are protected for the future. In particular, they must ensure those customer exposures are credit protected.
Managing supplier risk is also imperative. Companies should ensure their suppliers are financially stable and that there are contingency plans in place should they fail. Key people risk, meanwhile, often receives too little attention. Particularly in smaller organisations, where there can be little depth of resource, key individuals can frequently be business critical.
It is important to note, that it is not always the most senior people who would be most badly missed. The surprise departure of the IT expert that everyone relies on; the experienced credit controller that knows all the customers and gets them to pay on time, or the administrator that gets all of the invoicing done correctly so that the company is paid by automated payment runs on the due date, can quickly cause a business to unravel.
Managing technology risk, from cyber threat to future proofing internal systems, is also increasingly important. And political and regulatory risk should not be underestimated. Businesses all over the UK are reeling from Brexit developments. But changes to laws, regulations and incentive schemes around specific sectors can also fundamentally change the operating landscape of an industry overnight.
Last year, we saw a direct mail business go into insolvency because it had not foreseen the dramatic reduction in sales that the new GDPR regulations would bring as its customers could no longer hold large information databases.
Indeed, too often we see businesses that have done an excellent job of spotting opportunity, acting quickly to adapt to changes in the market or in response to false moves from competitors. But these same companies have not paid adequate attention to the vulnerabilities within their operating ecosystem. Robust risk management is a prerequisite for business success – and survival.
Read the next article of a four part series here: A clear vision for success
Our FR&R team is comprised of specialists who support our clients in times of financial distress to reduce exposure to loss and where possible guide them through a transformation process to turnaround their business.