Business Advisory Blog Business management information from Robert Griffin.

September 15, 2011

Managing Risk – Get started

My last writing on this was the beginning of summer. At that point I stated that would be a good time to take a step back from the business and give some thought to where your business might be headed and asked if you had thought about what was ahead and if you were prepared for it. I also explained the need to assemble a team of managers and owners to do a  SWOT analysis of all aspects of the company.

Now that summer is coming to a close, fall is here and everyone is back from vacation this is a good time to get started. So where do we start, just take at look at the swings in the market every day and all the various predictions as to where the economy is headed, most of which are not good. Have you looked at how the various changes predicted for the economy might impact your business? What about the still shaky financial markets, is there a potential pitfall there to disrupt your business?

So how do we do a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis on the economy or the financial markets? By looking at how the various area of each of those could impact your company. To do that think about the following questions:

Where are your markets, do you sell in to Greece, Italy, Spain, Ireland, etc.? These are economies that are in trouble and therefore your business in those economies is
at risk. To take that thought one step further, do you supply product to any of your customers who are not in those countries but who sell into those economies? If you do then your business is at risk and therefore that is a weakness or a threat to the success of your business. On the other hand, if you do not, then it is a strength.

On the other side of that coin, do you buy raw materials or services from companies in those countries? If so then that supply chain is at risk. Economies and governments that are in financial trouble cause problems for businesses that import and export to those countries do to impacts on available financing, import an export restrictions, etc. So if this is the case you have a weakness that could significantly disrupt your business.

To bring this, what I call, external impacts analysis, closer to home, lets talk about your banking arrangement. I know, I know you’ve been dealing with the same bank for years, you’ve never missed a payment, you’ve had the same loan officer for a decade, you’ve always met your covenants, etc., etc.. I understand, and you’re not alone,  I’ve seen lots of those  situations. But I have also seen many times, in that same scenario, the following. You get a call from your long term loan officer and now friend and he wants to stop by and see you. You say sure, of course, and when he comes in he informs you that the board voted to change the banks credit profile based on the current banking environment and the uncertain economic conditions. Based on that change you no longer fit the profile of businesses they lend to. So they want you to pay your loan down by 50% within 90 days and they will then give you six months to find a new lender for the remainder. Can you meet that requirement? I would assume not otherwise you wouldn’t have borrowed the money n the first place. What would you do?

I could go on and on but my point is you need to start by looking at all of the things external to the company that could impact your business and if it did how would you recover. In some cases you will find the risk minimal and decide to live with it. In other cases where the risk is higher and the probability of occurrence is greater you should develop a contingency plan. But if the risk is significant and the probability is high you should find an alternative and implement it as soon as possible because the impact would be to great for the business to absorb.

The common thread with these three items, customers, suppliers and banks, is they are all external to your company and in the past not very many business managers looked at the economies of where there customers or suppliers where or thought about their bank much once they had one. That is not the case today, you must consider all of these things and  more on an ongoing basis.

Robert Griffin
http://www.griffinadvisoryservices.com

May 27, 2011

Managing Risk – So where do you start?

In my previous post on Risk Management “Managing Risk – So what should you do?” I stated that management needs to step out of the day to day details in order to look objectively at all the various aspects of the business. To make that meaningful I recommended using a SWOT analysis as a starting point.

OK so what does that mean?

A SWOT analysis looks at the (S)trengths, (W)eaknsses, (O)pportunity’s and (T)hreats of a business. In order to do that management, the owner, or preferably both, need to go through the process of reviewing all the various aspects of the business and determine which of these categories they currently belong in. Notice I said “currently” belong in not where you’d like them to be. But in order to do that they first need to do two things. (1) Determine who should be involved and, (2) Find someone to take the lead in this exercise.

The next question is, how do we do these two things? To answer that you first need to do #2, find the leader for this process, someone to keep the process moving and on target. This is not someone who will have all the answers, because that person does not exist, nor is it someone who knows the most about the business, or is even involved in day to day operations. It should be someone who is more “outside” the business and less involved “in” the day to day details of the business, someone with the knowledge and experience to ask hard questions across all aspects of the business. That could be someone on the board of directors, if you’re of a size that has a viable active board, an outside business advisor or consultant, a shameless plug for someone like me, with experience in Risk Management. These are good options because they come with no preconceived notions of what or who are the problems or solutions, and they bring a wealth of experience from other businesses of various types and sizes to draw on. Accounting firms will do some of this, although I find most tend to be financial risk focused, for obvious reasons. And while this is obviously about financial risk the sole focus is not just on the P&L and Balance Sheet, as you will see.

Once a leader in place the other people that should be involved need to be chosen. These should be managers from each area of the business. I know all businesses are different but they all have key department heads or managers such as the CEO or President, a Chief financial Officer or Controller, and so on for the heads of Operations, Sales, Marketing, HR, R&D, IP, etc. again, all dependent on your particular business. This group must be able to remove themselves from the day to day workings of their position when involved with this analysis and work on the business for a change not in it.

So, as you work on finding a leader for this group, and who the others are that should participate, keep in mind, this is not an assignment to identify the biggest problem troubling the company right now and solving it. This is to review all aspects of the business to determine whether they are strengths, weaknesses, opportunities, or threats to the business.

Being this is Memorial Day weekend, the beginning of summer, and the economy continues it’s inconsistent way’s, what better time to take a step back and look at what your business is doing, and how it’s doing and give some thought to where it might be headed from here. Do you know what’s ahead? Are you prepared for it?

Give it some thought and we’ll delve further into it next time.

Robert Griffin
http://www.griffinadvisoryservices.com

September 27, 2010

Managing Risk – Who’s doing what?

There has been a lot of talk in the past two or three years about businesses managing risk, for obvious reasons. So what’s being done? Well the popular term is ERM or Enterprise Risk Management, which is the establishment of a system that if done properly and all inclusively would help manage, minimize or otherwise control the risks to your business.

Good, so we supposedly know what to do, are we doing it? Well if you look at a recent survey quoted on CFO.com done by the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA), “45% of U.S. respondents — many of whom are CFOs — report having no ERM framework in place and no plans to implement one.”

“What’s more, of companies with ERM systems in place, only 1.5% characterize their company’s risk-oversight processes as “very mature” or “robust.” The bulk, 84%, rate their company’s risk-oversight processes as ranging from “very immature” to “moderately mature.”

Did we not learn our lesson? it appears to me we do know what is needed but ERM is a complex undertaking, whether your big or small, requiring lots of resources.  So in a tough economy with the emphasis on generating cash companies are opting to keep the cash as a hedge against future risks. This, rather than spending the money to “hopefully” reduce that future risk, by implementing some complex ERM. It appears to me the simplified ERM plan is to maximize cash generation and then keep it. Do not hire, do not invest in plant and equipment, just keep the cash. It seems that is supported by the huge amounts of cash companies are keeping on their balance sheets, continued high unemployment and stagnant economic growth. So maybe we have learned our lesson, we are reducing/managing risk, but at the price of a painfully slow recovery and almost zero job growth.

If you want to read the entire CFO.com article go to my web site at griffinadvisoryservices.com under Recent News and Information.

Robert Griffin

Griffin Advisory services

July 1, 2010

Risky Business

Every business is at risk every day of having something happen that has a significant negative impact on that business. Ask BP!

Well, no kidding, everyone knows that.

Okay, if everyone knows that, how come so few can tell you what those risks are? (Besides the standard – lost sales, higher costs, and declining selling prices.) Worse yet, few of those who have at least thought about it that far, know what they’d do if any or all of those things happen.

So what else could go wrong?
• What if a key supplier goes out of business?
– Do you know how financially strong they are?
– What would you do? How long would it take to qualify a new supplier and get material?

• What if your bank calls your revolver or changes the terms so you have to write a big check to meet covenants? Do you have the wherewithal?
– You say, “That can’t happen to us. We have a long standing relationship with our bank and we’ve always met our covenants.” Well, you’re wrong. The board at the bank can vote to change terms anytime they want. It may have nothing to do with you. Maybe they just want to lower their risk profile; maybe they feel they have too much out in commercial revolvers in this economy. Whatever the reasoning, you will be impacted. Point is: they can change any time. I’ve seen it, and you will have to deal with it.

• What if you have a major business interruption, for example, a local power outage for two weeks. It happened here in Central MA two years ago. Or what if your business had a fire or other unexpected catastrophe?
– You can’t deliver to your customers. How will you get back up and running? And how long will it take?
• Your customers around the country and the world don’t know, nor care, about your localized problem. They’re worried about their own business. How do you keep them or get them back?
• Do you have business interruption insurance?
– If so, you’ve had to go through the steps of planning for this.
_ If not, you should at least look at planning for this type of occurrence.

Bottom line: You need to think about the things that can negatively impact your business and plan for them so you don’t become the BP of your industry. Obviously, even very deep pockets do not replace good planning.

As Dwight Eisenhower said, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.”

Robert Griffin
http://www.griffinadvisoryservices.com

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