How A Small Company Deals With Risks

Most of us would consider prudence a virtue and paranoia as unreasonable fear. But when does one end and the other begin? Looking at the statements of top business leaders, you will see differing opinions. You hear Andy Grove, the former CEO of Intel, saying that only the paranoid survives. He advocates reacting aggressively to the slightest possibility of a threat to the business, even though Intel dominates the industry. On the other hand, there are those like Sir Richard Branson, the owner of the Virgin group, who does not seem to care about risk. He prefers to focus on his own bold ventures instead of worrying about risks.

Risky Business

Being too cautious is usually the less desirable course of action for most companies most of the time. At least three things are necessary for a company to be able to habitually indulge in anticipating all threats. First is an overabundance of resources. Trying to prevent even the unlikely threat from happening demands large expenditures that only giant companies could afford, simply because there are countless potential risks.

Second, the threat should be both of a strategic and significant nature. It is not enough that it has a long term or strategic impact. The amount of damage should be big enough to have a material effect. You can see giant companies paying billions of dollars for companies that are not even profitable because there is a possibility that they can later on challenge their business. They may buy a company just to make sure it does not fall into the hands of their competitors.

Third, and most important, is that the cost of the counter measure must be less than the potential damage from the risk. While this seems to be the most obvious, in actual practice this is difficult and sometimes impossible to estimate with an acceptable accuracy. It may be easy to know the cost of the damage, but how do you estimate the likelihood of occurrence? Even actuaries could not compute that without sufficient data.

You can see that few of the justifications for being over fearful are applicable to small companies. Still there are business risks that even small ventures must watch out for. Here are just some of the basic measures a small company can realistically use to overcome risks:

• Insure against major risks. While insurance is generally a good thing, it is neither possible nor affordable to insure against all threats. For one thing, insurance companies base their premiums on the potential payments they have to make, plus their operating expenses and profits. This makes it far more expensive to buy insurance than if you were to just bear the risk yourself if you have unlimited cash. Unfortunately, no company has unlimited cash, so there is a need for insurance, but only for the crucial risks that cannot be absorbed.

• Be active in trade organizations. Participating in industry meetings will keep you up-to-date on current trends like government or competitor actions that may affect your business. This may alert you to the need to change your business practices to avoid penalties or to anticipate competition.

• Use corporations or outsource. Since corporations have limited liability, you may choose to spin off a risky venture into another corporation so that losses would be limited. Another option is to outsource the risky option to a financially sound company that can shoulder whatever liability may occur.

• Have a sufficient cash reserve. As there are an infinite number of risks, you must have cash cushion to fall back on in case something occurs that you were not able to anticipate. This may also apply to risks you are aware of, but for which it is not possible to obtain an affordable insurance.

• Be prepared in case of disasters. Besides insurance, one of the safety measures you could undertake is to have off-site duplicate copies of critical documents, especially your receivables. Have not only the legally mandated safety requirement, but also invest in training your personnel so that they would know what to do during disasters.

• Risks of obsolescence. Be alert for technological breakthroughs that may threaten your business model. If you are a book printer, for example, you must be prepared to cope with the replacement of books with tablets. Oftentimes, the change will come just from a shift in trends. You may be able to spot emerging trends by monitoring new developments abroad.

• Eliminate or have contingency plans for single points of failure. While the term “single point of failure” is more common in the I.T. field, it is equally applicable to other industries where a single vulnerable aspect could lead to a shutdown or major damage to your company. An example is if you are an e-commerce company—you must have contingency plans in case your Internet connection fails since your operations depend on it. You could expand the concept to include critical functions. A dishonest cashier in a small business could easily cause bankruptcy if there are insufficient controls.

The management of business risks is one of the major responsibilities of business owners and top management. However, much of the advice given is applicable only to large companies . This may result in the misallocation of resources. It is the task of the entrepreneur to study what risk management strategy is applicable to his / her company.

*Originally published by the Manila Bulletin. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.