Companies face a plethora of different risks they need to prepare for, protect against and deal with in order to stay successful. When assessing risks, it’s essential to have both an awareness of potential threats as well as access to the tools and technology that help to identify, evaluate, and mitigate them.
In this article, we’ll investigate the different risks businesses face, the importance of monitoring and managing risks, and how Red Flag Alert can help.
Risks Business Face and How to Integrate Solid Risk Assessment Policies to Avoid Them
When deciding on a risk management strategy, it’s important to identify the different categories of risk facing your company.
Below are some of the most important areas to consider.
Financial and Credit Risk
Financial issues such as insufficient cash flow and debt are major risks to businesses.
One of the most common ways clients end up with cash flow issues is because of a debtor going insolvent or entering administration. This can cause a ripple effect which in turn can cause your business to experience cash flow problems.
In this particular occurrence, it solely depends on the percentage of your business’s turnover generated by a single client. If your clients consist of small companies, it won’t have a dire impact on your business if one can’t pay, however, if one company provides a large percentage of your revenue (e.g., >30%) you will face a significant problem if it fails. Similarly, if several small clients default on their debts in a short space of time the solvency of your business could be at risk.
Insufficient cash flow is huge threat to businesses. If a business doesn’t have the money available to pay its debts as they fall due they may be technically insolvent and at risk of being wound up.
The business environment is especially unpredictable at present and dealing with companies that are surviving on thin margins is a risk; as they are vulnerable to inflation, increased costs or environmental shift and very quickly can become insolvent.
How to Spot Financial Risk
It’s essential for your business to be aware of industry specific risks and track them closely. Using a business data tool which shows the level of risk associated with businesses you deal with can be one of the best ways to do this. Checking potential suppliers, partners, clients, as well as existing ones shields your business from financial risk, and means you can act fast in the event of a threat.
Some of the most prevalent warning signs you should look for include:
- County Court Judgements (CCJs)
- Bad debt
- Creditor days
- Declining profits
Putting in place procedures to prevent risk before it starts help you mitigate risk in a range of scenarios e.g., companies with a bad financial health rating will require in an depth look into their financial data before you consider going into business with them.
Scenarios it’s advisable to implement measures include:
- Onboarding new customers
Avoid accepting customers who are facing financial distress which could harm your business.
- Monitoring current clients
Any warning signs listed above or other financial distress detected early means you have ample time to put measures in place to manage the risk or cut the business entirely if needed.
- Identifying new customers
Save your sales team time and money by identifying viable clients and avoiding generating leads that won’t pass credit control.
- Supplier management
A supplier failing can have a severe impact on your business, tracking suppliers’ financial health means you’ll see problems coming and can act accordingly in advance.
Strategic Risk
One of the biggest ‘killers’ of new businesses is strategic risk. This is often because new businesses fail to consider all aspects of their go-to-market plan, however strategic risk also has the potential to cause business failure in existing successful companies that fail to adjust to a changing environment or take a wrong turn.
A common strategic risk is new competitors in a market. If a competitor has access to new disruptive technology that allows them to make a better/cheaper product, it can cause a devastating ripple effect on existing companies in an industry.
Large corporations from other markets pivoting to entering your market can also cause major issues:
- Ability to sustain large losses you cannot.
- Access to better resources.
- Capability to benefit from economies of scale to produce a product cheaper.
How to Make Better Strategic Decisions
Gaining an overview of how your specific sector is performing is one of the best ways to improve strategic decisions e.g., if you notice other businesses in the industry struggling, being extra vigilant and looking out for potential issues could help prevent or minimise damage.
Another important element to monitor is identifying new competitors and new entrants to the market that could potentially be future competition. Watching their records allows you to monitor their growth; rapidly growing start-ups may offer a big threat and will require you to take action to protect your market position.
Performing due diligence before an acquisition can allow you to make more informed purchasing decisions. Before attempting to acquire another company, setting targets important to you such as growth trajectory, comparison to competitors etc. allows you to make sure you’re acquiring a company that is right for your business.
While it’s recommended companies should make the changes suggested above, doing so can also be a risk. For example, if your business plans to buy a competitor to cement its place in the market and warn off other new entrants, however if you fail to research the target company properly and the acquisition fails, it can put strain on the finances of the original business.
Compliance and Legal Risk
Ever evolving rules and regulations make building a robust compliance system a challenge. One of the biggest changes in recent years is the implementation on GDPR. GDPR introduced strict requirements on how customer data is handled by companies, aside from a higher maximum fine for companies that have been found not following regulations.
Anti-money laundering (AML) compliance requirements are also evolving. Some changes include the Bank Secrecy Act and the implementation of its regulations; sometimes called ‘AML rules’. The reasoning behind these changes includes the ability to detect and report suspicious activity, this will help cut down on money laundering, especially base offenses such as securities fraud and market manipulation.
It’s vital to ensure you’re up to date with any changes or additions to legislation and regulations as your business could also face challenges from a legal dispute. To avoid this, keep a close eye on measures implemented to stay compliant.
How to Remain Compliant
To avoid risks associated with companies involved in illicit activity, it’s essential to build processes compliant with GDPR and anti-money laundering (AML).
International policymakers focus heavily on AML due to London often being regarded as the money laundering capital of the world. Punishments often include huge fines and prison time, however, with £88bn laundered through the UK every year, it’s expected policymakers will continue to crack down on the problem through enforcing even harsher regulations and punishments.
It’s critical to have a close eye on any new regulations (or changes to existing ones) and update your process accordingly to manage them. AML services, such as Red Flag Alert, enable services to remain complaint and make the process much easier.
Additional Important Factors to Consider
Economic Factors every business is affected by the wider economic environment, however some are more exposed than others. For example, exchange rate fluctuations can negatively affect international companies. To prevent risk, stay updated with different economic factors that could impact your business/industry and put measures in place. Consumer spending, government strategy, and interest rates amongst many others can all impact the success of a business.
Operational and Process Risk this is more manageable for well-organised businesses and can home in all kinds of ways. For example, a machine breaking that requires costly repairs or a hard drive failing which has data crucial to the survival of your business. Processes such as backing up data in the cloud regularly, and health checks on machinery significantly reduce the effects of these issues, showing the importance of staying organised. You should assign this role to multiple people as the risk of process failure e.g., people forgetting to back up data, exposes your business to risk.
How Red Flag Alert Can Help
Red Flag Alert helps businesses build good risk assessment procedures through providing several solutions designed to address many of the above issues. Benefits include:
- Full range of risk level checking
- Unbeatable match rates
- ID verification
- Enhanced due diligence.
- Detailed and easy to understand company reports that contain a full picture of a company’s financial situation.
- Unique clear rating system that lets you know the level of risk attached to a company.
- Search function with other 100 filters that let you prospect for only the lowest risk, most financially stable companies.
- Portfolio management with real time alerts.
Keep your business thriving and risk free by starting your free trial today.
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