Managing Business Risk

Managing risk as a business owner can be critical to success. While contracts, partnerships and transactions can all help grow your business, a bad business deal could harm your business, or at least cause you a great deal of unnecessary stress. Below you’ll find information on the types of risk your business may face, as well as tips on how to help minimize and manage risk.

Types of Risk You May Face

Your business’s sensitive data could be vulnerable to criminals, especially if you don’t asses the risk in your digital supply chain. For a small business, losing data or trade secrets could be detrimental. Look into where your technology and security might be vulnerable and consider take steps like the ones listed in the article to help safeguard your data.

For more help, check out 8 Tips to Protect Your Business from Viruses, Hackers & Data Theft

A negative review or post can sometimes have a huge impact on a company, and backlash can often happen in a matter of hours. Ironically, the same places others may post negative information about your business are some of the places where you can help manage your reputation. With social listening tools, small business owners have the ability to see what’s being said about them online, and if they are vigilant, they can use negative comments or reviews as an opportunity to highlight their customer service or commitment to customers. Try to make it a habit to respond to negative information about your company to help manage reputational risk.

Sometimes you don’t get to choose or build your reputation. If your business is a spinoff, it may already have a reputation, and it may not be a good one. When Arkos, an aftermarket gas compression service company,  formed their business as a spinoff, they inherited a fixer-upper of a reputation.

“We felt our business credit score was affecting the Company negatively all around, said Larry Sumrall, Supply Chain Manager of Arkos. “It was hindering our ability to get credit extended from vendors and seemed to be negatively impacting rates from our insurance carriers. It was becoming a real problem and I was tasked to figure out how to fix it.”

In an effort to improve their company’s reputation with vendors, Arkos started working with a Dun & Bradstreet Concierge Manager, who helped impact the company’s scores and ratings.

“Because of her work, we’ve been able to go back to vendors that have been difficult to deal with in terms of increasing our credit limit or extending our terms and tell them to check out our Dun & Bradstreet scores again to see where we are today,” Sumrall said. When they do, they’ve increased our limit and have extended credit.”

Learn more about managing a reputation you inherit.

It may be hard to accept, but your own employees can be a risk to your business. Employees can become injured on the job, can commit internal fraud that comprises the company and its data, or simply make a mistake that costs the company. It can also be risky to be too reliant on key individuals. If one of those crucial employees decides to move on, not only will he/she have vast amounts of information about the company, but you may face a lag in productivity while trying to train someone new for the position. Consider cross training certain positions to help minimize this risk.

You also face the risk that your employees may become unhappy or unruly. They may unionize, strike, or start leaving the company in leaps and bounds. Use these tips to help prevent labor unrest in your business.

When it comes to handling money and extending credit, how do you make critical decisions for your business? When dealing with other businesses, managing finances can become even more complicated. To help avoid risky financial situations, consider monitoring your partner’s business credit file before and after the contract is signed.
Managing your cash flow can be hard enough on a normal day; imagine what it could be like in the event of an emergency, like a fire, flood, or chemical leak. These dangers can cause a business to lose revenue, which can impact its cash flow, as can supply chain disruptions – when vendors don’t deliver on terms, the whole chain can be interrupted, negatively impacting cash flow.

How to Help Minimize Risk

Think about what you can do to help prevent or reduce the damage caused by each potential risk above. It’s important to list all effective actions, including those you probably wouldn’t employ. In the end, you should have several possible mitigation options for each risk factor.

Some risk factors can be mitigated by employing strategies to limit the business’s exposure. For instance, businesses concerned about employee health care costs being a risk can implement employee wellness programs. In addition, businesses whose employees regularly access sensitive data from their mobile devices can create data security policies, and implement safeguards to help limit the chances of that data falling into the wrong hands. If the business is located in an area prone to natural disasters like hurricanes or earthquakes, having a plan for rebuilding after a natural disaster and the right insurance policies can help. Some other ways to help reduce risk are insurance policies, and supply chain segmentation. Learn more below.

Insurance policies

Insurance policies can be a key component of any small business’s risk management plan. Many small-business owners opt for umbrella policies that cover the risks common to most small businesses, and supplement their coverage with plans designed to protect against threats unique to their business. In addition, most business owners may not want to overlook purchasing workers’ compensation insurance, as failure to do so can leave them exposed to a high degree of liability. It can be crucial for small-business owners to have liability insurance policies that will reimburse their legal fees and pay for damages resulting from lawsuits.

Another type of insurance some business owners might not be aware of is Credit Insurance. Credit insurance helps protect businesses against the risk of bad debt and can be useful for companies that rely on contracts with other businesses for growth. Euler Hermes provides a solution specifically for small businesses.

Segment Suppliers

Segmenting your suppliers can help reduce risk. If something were to happen to one of your core or strategic suppliers (for example, they went bankrupt or were struck by a natural disaster), it could have a devastating effect on your business. By segmenting your suppliers and creating governance agreements based on a supplier’s role and importance in the supply chain, you can better anticipate and prevent disruption. It may also be a good idea to continuously monitor top-tier suppliers so you can further anticipate disruptions and reduce risk.

Risk managers play an important role in the risk mitigation of a business. They assess and identify areas of risk, and then develop controls to help solidify the company’s security. Risk managers can help develop and implement new policies, review third-party providers, review existing insurance policies, and more. Consider hiring a risk manager for your business.
If your business is structured as a sole proprietorship, then you and your business are one entity. Anything you do (that’s illegal) can result in legal problems for your business and vice-versa. You can keep yourself separate from your business by structuring it as an LLC or a corporation, or by setting up a trust with yourself as the primary business owner.
Data breaches happen to some of the biggest corporations on the planet, so if it can happen to them, it can happen to you. To help, you can keep your data protected and backed up at an off-site location and shred any sensitive documents after reviewing them. You can also utilize DOD-certified data destruction when liquidating IT assets. You should have an emergency plan of action ready for times of natural disaster (this will help ensure that you are still able to meet important business obligations despite the current situation).

Continuous Auditing

Continuous auditing can help you manage your business risk. This technology-driven process can help you monitor your data in real time to detect errors as early as possible. Learn more about this risk management technique below.

What Is Continuous Auditing?

At its core, continuous auditing is an automatic process that is used to perform certain auditing activities within the company’s accounting practices on a routine basis. Continuous auditing is technology-driven, and it works behind the scenes to help facilitate error checking and data verification in real time. If an error or anomaly is detected, then the system will generate an alarm.

What Does Continuous Mean in Terms of Continuous Auditing?

Although the process is called continuous auditing, it is not happening around-the-clock. Most businesses automate their processes to begin and end according to a set of inputs, such as once a day, once a month, etc. Some continuous auditing programs even allow the user to input different settings for different processes. This allows a company to customize their auditing to their highest risk factors.

The 3 Keys to Implementing Continuous Auditing

Before you can initiate a continuing auditing process within your company’s infrastructure, there are three key things you need to consider and address:

  1. What are your primary organizational risks?
  2. Which electronic auditing tool will best help your company meet its risk mitigation needs?
  3. What kind of data is currently available in your accounting systems?

By discovering the answers to these three questions, you will be better capable of initiating a continuous auditing process that works well with your unique business.

Fighting the Slow Payment Plague

For some small businesses, receivables come in at a slower pace. In many cases, clients are able to pay, but often want to hang onto their cash as long as possible in an uncertain economy. You may not be able to eliminate slow payment problems, but you can certainly help manage the risk.

Here are four tips that are especially relevant to small businesses:

1. Start with an Ounce of Prevention

Checking a customer’s business credit file is a great way to evaluate risk in terms of slow-paying customers. Business credit data, when properly compiled and analyzed, can help predict if a business will make slow or late payments, which can help you decide who to contract with, how much trade credit to extend, or whether or not you may have cash flow problems down the road.

You don’t want to treat business credit files as static documents, though. It can be important to conduct regular reviews, even with established customers, to catch potential problems. As a business owner, you know things are always changing, so you should stay on top of your customer’s business credit, to help make sure it won’t affect you. You can easily monitor changes to your customers’ and partners’ business credit risk with Business Monitor, for free*.

Bonus tip: You should also manage your own business credit file in case others are analyzing it for similar reasons. CreditSignal®* is a free product that will alert you to changes in your scores and ratings, so you can better know what’s going on with your file.

Learn more below on how business credit can help you manage different kinds of risks.

2. Always Get it in Writing

Handshake or verbal agreements don’t benefit anyone in the long run. Business circumstances can change, employees come and go, and “informal” agreements are difficult to enforce. That’s why a written contract or letter of agreement is one of the best risk management tools that any business – of any size – can have.

Bonus tip: Make sure the agreement lists payment dates and amounts explicitly and clearly. Avoiding confusion can only make the process easier.

3. Dangle a Pre-payment Discount Carrot

Some businesses focus on late-payment penalties: late fees, interest charges, and the like. Others, however, have discovered that discounts for paying in advance are an even more effective way to avoid late payments.

Bonus tip: If a 10 percent pre-payment discount reduces late payment problems, then the discounts may pay for themselves – and then some.

4. Consider a Credit Card Backup Requirement

You may want to ask customers to provide a credit card number when they sign a purchase agreement. If a payment is late, you can bill the customer’s credit card instead – or simply arrange automatic credit card payments (possibly with a discount). This tactic has its limits, especially if you’re dealing with a very large corporate customer. Apply it when and where you can, and it will play an important role in your collection and credit risk strategy.

Choosing a Business Partner Wisely

You have the opportunity to do business with a new company, but know very little about its operation. Before entering into any kind of agreement, or extending any amount of trade credit, it’s prudent to investigate whether or not the prospective client is likely to be a responsible business partner. Reviewing a company’s credit file can give you an idea of how it’s handled financial obligations in the past. In addition to checking the business’s credit scores and ratings, you should keep your eyes open for warning signs that may indicate a company is not all that it claims to be. While these red flags don’t prove that a business is making suspect claims, they do merit additional research. Here are seven signals you can watch out for to help manage credit risk:

  1. An over-eager owner

    If you come across a business that seems to be making an unusual amount of concessions in order to win a contract, it may be in a more perilous financial situation than you’d prefer. There’s nothing wrong with being congenial, but you’ll want to use your judgment about whether or not the business is suspect.

  2. Questionable business start date

    If the owner states that the business has been operating in your industry for 10 years — but you’ve never heard of it — take additional steps to confirm the claim. Ask your other suppliers or customers if they’ve done business with the company, and consider comparing the biographical data you have with information from business databases such as Hoover’s.

  3. A pretentious business name

    “Global Financial Equipment Sales” sounds impressive, until you find out the entire company consists of three brothers working out of a storefront. Don’t let a business name or flashy presentation color your initial perceptions of a company. While a pretentious name doesn’t indicate that anything is awry, it’s also of no value when trying to determine the true reputation and authority of a business.

  4. Unexpectedly robust financial statements

    Consider this scenario: the owner supplies information showing an unusually healthy debt-to-income ratio or net worth well above the industry median, but the company is a start-up. In this case, you should do a thorough business credit check. As a successful business owner, you should also trust your own instincts based upon experience. If financial data just doesn’t add up, you may be dealing with a deceptive business.

  5. Atypical trade references*

    If many of the companies provided as trade references are outside your industry, watch out— they may not be valid or relevant. You’ll want to consult references that have worked with the company on contracts of the same size you’re considering. It’s not particularly helpful to see that your prospective customer can pay a $200 cable bill when you’re considering extending $10,000 in trade credit each month.

  6. Trade references all from one partner

    In order to judge a business’s credibility, you should consult trade references from several independent companies. You probably wouldn’t hire a job applicant who listed a previous boss as a reference three times on his resume; the same goes for evaluating trade references.

  7. Business principals involved in other failed or fraudulent enterprises

    If you discover that the business’s owner or senior officers have run into legal or financial trouble in the past, you should consider whether or not your company can assume a potentially heightened level of risk.

Verifying Business Information

A business credit bureau such as Dun & Bradstreet can help you locate valuable information about a prospective partner. Business credit scores and ratings, financial statements, liens and legal judgments are among the details that Dun & Bradstreet seeks to collect.

D&B’s Business Information Report™ is useful for evaluating a new customer. This one-time report provides access to a company’s PAYDEX® Score, D&B Viability Rating®, and more. Business owners looking for additional guidance on setting trade credit limits may find Credit Reporter to be quite useful. You’ll receive recommendations on the amount of credit to extend to the company in question based upon its D&B® business credit scores and ratings.

It’s likely that you can do some sleuthing of your own to verify basic information. Look for news articles about the company you’re researching, or contact its local chamber of commerce. Ask your own trusted vendors and customers if they’ve had experience with the business. Finally, compare what the business owner has told you versus the information you’ve collected from other sources. There’s no way to avoid business credit risk entirely, but the ease with which information can be gathered and reviewed makes it easier than ever to set a reasonable limit.

How Business Credit Can Help You Manage Risk

Your Own Business Credit

Business credit monitoring services can help a business protect itself from fraud, credit-reporting errors and loss of access to capital. As a result, it can be imperative to monitor your business credit file on a regular basis so you can quickly identify unusual activities.

construction-main-icon3Get started monitoring changes to your scores and ratings with CreditSignal®*.

Others Business Credit

Monitoring partners’ business credit can help a business protect itself from risk associated with disruption to its supply chain. Frequently, the more a company grows, the more it may interact with and rely on other partners and organizations. As a risk-averse business owner, you’ll want to work with the most reliable vendors and customers.

Beyond having the goods you need and being a company that’s easy to do business with, you might also want to consider a supplier’s financial stability. If a potential or existing supplier has poor business credit scores and ratings, it might be a potential risk for closure or non-delivery. It can also be important to know about the supplier’s payment history and check its business credit report to help assess its financial health. There are different strategic considerations to keep in mind if you are waiting 90 days for a payment as opposed to 30 days.

construction-main-icon3Whether you’re getting supplies from a company or supplying to it, it can be helpful to monitor its D&B® business credit file so that you can plan accordingly. You can access another business’s information through Credit Reporter.

Featured Photo Credit: schebeh, Twenty20