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Entrepreneurship Success: Risk management (III)

So far in this series, we have defined what risk is; we have presented the importance of effective risk management and discussed types of risks…

So far in this series, we have defined what risk is; we have presented the importance of effective risk management and discussed types of risks and the three components of risk management. We also commenced discussions on the specific things you should do to ensure that your business is and remains alert to the risks it faces and that appropriate measures are put in place to avoid, eliminate, mitigate, or accept risks only deliberately as may be appropriate. We will conclude this series with a few more such issues and measures that you should be aware of. 

• IT systems: With growing significance of information technology in businesses, it is important that you take specific measures to protect your IT assets and secure the information you have. Make regular backups and ensure that you have at least one off-site backup. 

• Customers: It is important that you have deliberate measures in place to protect your business against the risks that customers could expose you to. You could, for instance, be forced out of business if you rely entirely on one or few customers. Customer and product diversification could shield you against that. Similarly, you can work to reduce the likelihood of disputes with you customers by having very clear, detailed and upfront contractual agreements. 

• Credit risk management: For various legitimate and commercial considerations, some businesses do extend credit to their customers. This might snowball into a big problem if you do not have pragmatic policies that minimises your exposure and protect you. But it is not sufficient to just have good policies in place. In addition to that, you will need to have the enforcement will that makes it clear to customers that your credit policies are alive and binding. 

• Vendors: As with customers, you should manage your vendor risk by procuring your supplies from a reasonable number of vendors. You should, however, be professional and upright by not divulging the confidential aspects of each relationship. Where appropriate and sensible, lock your vendors into long-term contracts.

• Service plans: Have service plans for the regular maintenance of your office and factory equipment. This is to reduce or eliminate the risk of breakdowns. Sometimes, it is necessary to include redundant assets at critical points in the office or the plant to eliminate risks of breakdowns.

• Understand risk propensities: Different people have different risk affinities. Ensure that between you and your team you are able to balance your collective risk inclinations. This is important to help ensure that your business is neither too risk-prone nor too risk-averse. There is always an optimum balance to strike that does not unnecessarily expose you to avoidable risks, on one hand, and does not stifle you from seizing opportunities, on the other.

• Regulatory compliance: We have in the past covered the issue of regulatory compliance. The regulators have the lawful authority to take several types of measures against you personally or your business. You could be prosecuted and your business sealed for failures or infringements. You should be clear about all regulations to do with you and your business and make sure you are always in compliance. Put in place a monitoring system to ensure compliance. Your lawyers, accountants, environmental specialists, etc., can help you be and remain on the right side of the law. 

• Natural disasters: Natural disasters are real and can cause a lot of damages or even wipe a business out of existence. Your location will, to some extent, determine this and you should be alert to them and take appropriate measures to eliminate or minimise the damage they can inflict. 

• Political risks: The state of our political development, our economy and the type of business we run can be expose us to political risks. This is especially for those that conduct business with the government. When elections are around the corner, this can be particularly important. Be aware of what political risks you may be facing at any point in time and take measures to mitigate them. 

• Health and safety risks: Many businesses in our environment are not alive to the health and safety issues that can expose their staff, customers, visitors, and the community they operate within to various risks. Does your business processes dangerous chemicals and discharge toxic effluents? Be sure to meet all required regulations on these issues, and perhaps introduce additional ones if appropriate. 

• Reputation: I think it is sad and unfortunate how many businessmen and women in our environment seemingly have no concern for the reputation of their businesses and theirs’ as individuals. This hurts all of us, as customers, business owners and the whole society. Societies make substantial progress when individuals and corporate operators are trustworthy, and they do what they should. Promise only what you can do and always do what you promised even if it comes at some other unexpected costs to you. You may, of course, renegotiate if you have valid reasons for doing so. But even at that it must be done honourably and respectfully. The costs of repairing a damaged reputation is always higher than the transient ‘benefits’ that caused the damage in the first instance.  

• Understand your company life cycle: The life cycle stage of a company often determines the risks that a company faces. A start up may be faced with tough cash flow issues, market acceptance challenges, etc. A fast-growing company may also have it resources stretched while a mature business might have indifferent and even lackadaisical staff whose actions or inactions can cost the company heavily. Be clear of where you are and the risks you may face at that point and time, and perhaps in the future as well. 

Managing risks is one of the key responsibilities you have to discharge diligently and competently to stand a good chance to succeed in business. It is about taking risks only knowingly and intelligently while avoiding or mitigating those that shouldn’t be taken partially or wholly. Next week, we will take up Business Performance Review.

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