How to Minimize Business Risk

5 Key Strategies

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As an entrepreneur, you’re operating in the casino known as the U.S. economy. The business environment changes almost daily. Even a cursory analysis of the stock market will show wild fluctuations as a result of China’s debt, oil prices or even a dictator’s latest real estate aspirations.

These fluctuations — along with the strength or weakness of the economy both nationally and locally — affect every aspect of your business environment.  Thus, wherever risk can be managed, that should be a key priority. Effectively managing your business risk is critical to sustaining superior performance and resultant value growth. Fail to control risk and you may not only see short-term dips in performance, but also a significant drag on company value. 

Follow these five essential strategies to minimize business risk in your company: 

1. Align your practices and procedures. Analyze all engagement letters, client contracts and deliverables: you want to ensure that what is being promised is being delivered, and that any limitations associated with the deliverables are clearly spelled out. Too often, practice deviates from written procedures. It’s highly likely that the procedures that were put in place to effectively manage risk are cumbersome and time-consuming. Then what happens is that what was once sharply drawn gets rounded off — to the point that risk is no longer being controlled.

2. Evaluate your insurance coverages. Take a closer look at the insurance covering your company. You need to determine whether it covers the appropriate risks at the appropriate limits. At minimum, this should include professional or product liability, property and casualty, employment practices, and umbrella coverage. 

3. Check your employment contracts. Analyze your company’s employment contracts: do the rights and responsibilities they set forth really mirror the actual course of conduct between parties? At minimum, make sure that your key employees’ contracts have provisions regarding trade secrets and your customer list. They should also include clear covenants against competition.

4. Analyze your accounting practices. Look carefully at your company’s accounting practices and procedures. If there’s nothing in place to minimize the risk of loss due to employee dishonesty, change it. This problem has been especially prevalent due to the tough economic times we have been experiencing. Strong internal accounting controls are essential to reliable, consistent and accurate financial reporting.

5. Upgrade your financial reporting. As a CPA I’ve seen what happens when companies haven’t paid attention to the quality of their financial reporting. Stronger and more accurate financial reporting will reduce the risk of employee dishonesty and  enhance your company’s ability to borrow from banks. To improve your level of financial reporting, consider raising the level of your financial statements from your CPA from a compilation to a review, or from a review to an audit.

The Importance of Process

Even the most harried business owner will occasionally engage the clutch and downshift when encountering the “what’s next” crossroad, an intersection that is fraught with risk.  Deciding what new products to add, where to build a new location or even which department gets the lion’s share of this year’s capital expenditures should never be a gut decision.

But without a process, that’s how many of these calls get made.  Unfortunately, many if not most entrepreneurs are unbridled optimists — much better at assessing an opportunity’s upside than its risks.

What sort of process takes these calls from gut check to checklist? All investments must pass a hurdle rate of return before the Company moves forward. Add to this a more subjective assessment of how the expansion affects and, one hopes, enhances the company’s brand. As always, your ability to rely on your team, facilities, suppliers and professionals helps to determine the likelihood of achieving your hurdle rate when responding to expansion opportunities. 

The key to consistent performance is good processes that are consistently followed.  Think of the franchise model. Wendy’s franchisees are provided with equipment packages, employee handbooks, wage data, reliable suppliers, menus, pricing and up to the minute sales data. Very little is left to chance. This ensures a consistent product and consistent excellent service. The result is high value.

Developing effective processes helps convert the merely profitable lifestyle businesses to companies with real transferable value. Buyers will pay more because the execution risk is reduced. This is important since one hundred percent of business owners will at some point stop being business owners. Likely, that includes you.

Success at business isn’t due to serendipity or luck. It’s due to applying logic to every aspect of your business at every juncture.

**Originally published at Entrepreneur Break

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