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Five Ways to Identify and Mitigate Risk for Your Business

A hand pulls out a Jenga piece from the bottom portion of the tower. A hand pulls out a Jenga piece from the bottom portion of the tower.

Increased volatility is the norm these days. Volatility imparts uncertainty into all aspects of businesses, from demand planning all the way through to supply chains management, affecting everything from the markets to the value of your business. Professionals across all industries, including economists, ponder what’s to come in the next quarter, let alone next year. The risk associated with volatility often raises concerns, which lead many businesses to delay—or worse, ignore—making decisions.  This paralysis can carry through to your entire team and across all decision making.  While there is no crystal ball, identifying risks that confront your business allows for your team to assess such risks in an effort to mitigate them.

Understand What Drives Your Business

Are your customers institutions or individuals? Is your business driven by consumer confidence, business confidence, or both? Are your stakeholders local, national, or international? These are only a few questions that split the decision tree wider and wider. Macroeconomic factors trickle down and impact both corporations and households, but in different ways. Understanding the interactions of the global, national, and regional economies might not make the uncertain certain, but the understanding allows for more informed decision making.

Consider Strategies to Manage Risks

In recognizing what risks your business may be exposed to, you can make an active decision to manage them. When risks become reality for your business, often your entire organization is focused on reacting, which wastes resources. Include your teams in the proactive planning by seeking thoughts on risk identification, prioritization, and mitigation strategies. By documenting these risks, your team can be included in the process of planning and mitigating.

Do your contracts include variable pricing to pass dramatic input increases to the end user? Do you employ strategies to guarantee costs from your suppliers? Are you optimistic in procuring inventory when pricing is low? Much like the mantra of Wall Street analysts, you may have an opportunity to buy low and sell high. Input costs are just one of many risk considerations to think about.

Demand for labor seems to be felt across many industries. How are you attracting and retaining talent? It may seem less manageable, but creating a workplace where people feel valued and fulfilled may be a mitigant to this risk.

Plan in Scenarios

We’ve discussed ways to be proactive in thinking about risk, but how have these considerations been implemented operationally or financially? Are you positioned to handle increased volatility? If so, for how long? If not, what decisions can you make to enable your business to survive through market changes? Do your budgets consider increased labor costs? Do your teams lag behind in productivity if employee turnover increases? When planning, it is best to include probability in the assessment of risk.  Simply, knowing what is most and least likely expands your approach to the risks within your business.

Anticipate Changes in Drivers / Expected Impact On Value / Revisit Valuations Periodically

Business owners know what helps and what hurts their business. We’ve highlighted a lot of considerations to play a more active role in looking forward. How do these considerations impact your business’ worth? Stock prices increase with the announcement of good news. Whether that news is operational (increased margins) or economical (declining borrowing rates), new information changes company values. It’s important to be mindful of how your business drivers and risks faced can impact company valuations, even in advance of a transaction or event.

Each driver of business and risk can impact your business in isolation. In aggregate, these impacts may net out against one another, but they may work in tandem to affect value positively or negatively. Do you understand how these risks can impact your business?

Seek Resources / Consult Experts to Educate Yourself

The decision tree can quickly split so many times that it looks like it’s unraveling. It’s impossible to have perfect information, so what can you do to position your company for success? Keep up with industry happenings, seek intel from peers up the supply chain. While many economists offer differing opinions on some trends, there are many shared themes. Connecting with advisors to provide guidance and broaden your perspective can prove beneficial.

As a business owner, you might feel paralyzed when you don’t know what’s to come. Focus on the process to identify, understand, and address your risks. It’s important to not only recognize what risks your company faces, but also how risk management can impact your business. Assess the range of impacts, and most importantly the probability of occurrence. Document these and include your team in the planning, not just the reaction.

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