Managing Risk: Taking action

Having undertaken these processes, you can group your key risks and prioritise where you need to direct your attention and where you should take action.

Of course, the key risks to your business are going to be unique, but for the purposes of this overview, we are going to assume that they can be grouped into five key headings:

1. Reduced demand
2. Supply chain
3. Cost pressure
4. Efficiency
5. Cash losses

You will have set your own priorities, but we will just deal with them in order here.

What are we talking about here?

In the short term, demand may have been impacted by your customers or end-users of your product or service being closed, preventing them from purchasing from you.

In the medium term, as we emerge from lockdown, there may not be a return to normal levels of demand, for instance if your customers’ buying habits have changed, if some customers have gone out of business or if there is a general reduction in economic activity as a result of the recession which has been created by COVID-19.

What are the business implications?

Reduced demand ultimately results in lower profits and less cash coming into the business. If you are unable to generate enough turnover to cover fixed costs, then the harsh reality is the business will not be able to continue for long.

What can you be doing to address this?

• Demand is not just a revenue issue; you may also need to address the cost side of your business
• On the revenue side, if the issue has been how to access your traditional market, have you been able to diversify or find new ways of distributing your product or service?
• Can these new revenue streams continue alongside your historical sales post-lockdown, or indeed replace them?
• A general drop in demand caused by the recession is a different matter. In a smaller market, you need to gain more market share. What is your competitive advantage? How can you direct your promotional and sales activity to capture more of the market?
• Bear in mind that in a downturn, many of your competitors will turn off their marketing spend as it’s discretionary and easy to cut. If you have the resources to promote your business, you could get ahead
• Pricing can be a powerful tool to increase revenue. You need to understand your market, the price-elasticity of demand and what your competitors are up to. If volumes are down, but your customers are not too concerned by price, then a price increase could lead to more revenue, up to a point where you do become too expensive
• If in your market, price is a key factor in buying decisions, then discounting may boost your volumes, but you need to do your sums and work out how much more volume you expect to get and whether this more than offsets the loss from the price cut. If your competitors are heavily discounting to try to fill overcapacity, then there is a danger of a race to the bottom
• On the cost side, it’s a question of adapting your cost base to be the right size for the revenue you are expecting to be able to generate. Some costs are fixed and unavoidable, for example you can’t easily reduce the cost of your premises in the short-term.  Others can be managed in order to ‘cut your cloth’ accordingly but the biggest variable cost in many businesses is, of course, wages
• The furlough scheme enabled a rapid cost-free adjustment of wage costs to match demand during lockdown, but this scheme is temporary and by default, your wage bill will return to pre-crisis levels in the coming months. If you anticipate a lower level of demand then you may not be able to afford the same number of people as you employed pre-crisis. If that is the case then consult with an employment lawyer on how to manage this process
• For some businesses, you might choose to carry some surplus headcount for a short time to facilitate your plans to capture market share and grow back to pre-crisis levels. That is an investment decision, and one which will need to be monitored and reviewed frequently. Carrying surplus head count in the hope that business will pick up is not the same thing, and this will deplete cash reserves that the business will need to survive. This will be a tough pill to swallow for many business owners.

What are we talking about here?

Lockdowns have been in place in many countries around the world.  Many of the producers of the goods your business needs for its production and sales are therefore likely to have been closed for a period and will take time to get back up to full operation. There may therefore potentially be disruptions to your supply chains you’ll need to think about.

What are the business implications?

In the worst case, non-availability of your inputs may mean your workers have nothing to produce with, with implications for your need for labour. If you have no product, there is nothing to sell once your stock is depleted.

The time it may take for this to flow through the supply chain may mean your business is still feeling the effect beyond the end of the furlough scheme.

Assuming product is available, extended lead times within your supply chain may impact on logistics and production planning and on your ability to meet customers’ delivery dates.

What can you be doing to address this?

• Talk to your suppliers and understand their issues and expectations and work that into your plans
• If this impacts your workforce resulting in a need for short time working, talk to them too and make plans
• If this may result in varying employment terms or any redundancies, then take advice from your employment lawyer
• Explain the supply chain issues to your customers and understand what you can do to help them
• Are there alternative sources of supply that could meet your needs and timescales?
• If their prices are different to your usual supplier, can you pass any increase on to customers?
• Is it worth accepting a lower margin to be able to make sales and keep the business running?

NB As with the effects of altering your prices, this is something you can calculate to compare the effect on contribution (sales less direct costs) to overheads against the cost of the plant operating below capacity (fixed costs that are not being covered).

There has been much speculation in the press as to whether the effect of the pandemic on supply chains will reverse globalisation by exposing the vulnerabilities inherent in importing. It will probably remain the case that some countries will have a cost-advantage and therefore the economic benefits remain from sourcing internationally. However, we would expect to see a greater diversification of where goods come from to help protect supply chains from disruption.

What are we talking about here?

Linked to supply chain disruption, a shortage of certain materials may drive up prices if the demand for them exceeds that restricted supply. This may a short-term effect, but there could be extended price pressure if your suppliers are needing to raise their prices in order to cover fixed costs with lower volumes or recoup the costs of implementing additional health and safety measures (which will vary by country).

In the longer term, governments around the world will need to pay for their increased spending during the crisis, either through increased taxation or potentially accepting higher inflation levels to reduce government debt in nominal terms.  Either approach could potentially push up prices for your suppliers.

What are the business implications?

Increases in your cost base will affect both profit and cash.

In the case of direct costs, passing these on to your customers (if that is possible in your competitive environment) may impact on demand for your product; and if you are unable to pass the costs on, then this reduces your margin.

In the case of overheads, any cost increases directly reduce the bottom line.

What can you be doing to address this?

Talking to your suppliers and understanding their issues can help you to plan your response. If prices are set by negotiation, then be prepared and try to protect your position. Price is not the only factor in your supplier relationship. Would they perhaps value having pre-agreed volumes, forward orders, or shorter payment terms as an alternative to putting their price up?  If they do have to increase prices, would they be prepared to offer a volume discount to mitigate this?

Alternatively, could you source from other suppliers with better prices? Although the pandemic was a global problem, different countries had different experiences and levels of government response. You may therefore find the lowest-cost suppliers are not the same as they were before (accepting that cost is not the only factor in choosing suppliers).

The large increase in unemployment which has arisen from the lockdown is likely to have affected the pressures in the wage market. This, and an awareness of the impact on businesses, means that pressure for workers for a wage increase is likely to be subdued for some time. However, the minimum wage is set by the government and therefore businesses may still face increases in wage costs from April next year.

What are we talking about here?

When times are difficult, your business needs to be as efficient as possible. We all might like to think we run a tight ship, but the reality is, business costs tend to accumulate when you have the luxury of being able to afford them.

The return from lockdown has the potential to adversely affect operational efficiency.

Additional health and safety measures could make it more difficult to operate, with cost implications.

Workers returning from furlough, or partially working from home, may take time to return to previous levels of effectiveness.

What are the business implications?

A loss of operational efficiency will increase the cost of production and therefore reduce margins, profit and ultimately cash. There is also the potential for non-financial impacts, for example difficulty in meeting customers’ delivery dates.

Unnecessary expenditure is a direct drain on profit and cash.

What can you be doing to address this?

• In the case of unnecessary expenditure go through your business’ expenditure line-by-line and you might find prices that aren’t benchmarked and tested in the market on renewal, service contracts for assets that were sold years ago, subscriptions for employees who no longer work for you, software licences that no-one uses, the list can go on
• Go through everything you spend and ask if it is necessary. Cut out everything you don’t need. And for the things you aren’t sure about…that probably means you don’t need them either
• Other costs may not be obvious to ‘switch off’ but could be scope for savings. For example, standard class travel rather than first class; or a video meeting instead of travelling at all.

Operational efficiency could be trickier to resolve. Whilst some short term impact is probably inevitable, it’s critical not to allow inefficiencies to become embedded and accepted as the norm, which will reduce your margins over the long term. Close monitoring of the situation and communication with your people will be key.

It’s often the case that efficiency problems are solved not by management but by those carrying out the tasks day-to-day who are better placed to see the way to easier operation.

Finally, whilst you need to keep a close watch on efficiency, freedom to innovate may achieve better results than a directive approach.

What are we talking about here?

The availability of cash is critically important in these times, so anything that causes cash to leak out of your business needs to be prevented.

Two obvious causes to address here are:

1. Customer non-payment (or slow payment)
2. Fraud

What are the business implications?

Running out of cash in the worst case, or needing to borrow, or at best, unnecessary stress.

What can you be doing to address this?

Let’s start with customer payments.

• It goes without saying that proper and well-organised credit control is essential and staying on top of this is more important than ever before and will help you avoid losses
• Many of your customers will be experiencing their own cash flow challenges and stretching payment terms. It might be a case of ‘whomever shouts loudest gets paid first’, so it’s essential to chase as soon as an invoice is due and then to keep chasing
• Ideally, you would like to avoid needing to chase by only dealing with reliable payers. Unfortunately the usual online credit checks are not going to be that helpful as these are based on historical data and with what has happened since the customer’s last year-end, so it’s probably fair to say all bets are off
• So, what can you do? Talk to the customer, find out how they are doing. Insist on shorter credit terms, or if you have doubts about their viability, insist on up-front payment. Sales people are of course reluctant to do that, because they fear losing the customer, but it’s a lot better to lose a sale than to make a sale that doesn’t pay, as then you lose the goods as well
• A ‘softer’ measure is to help your customers out with different payment options, for example regular instalments by direct debit, or the ability to pay by card online.

There is no doubt there will be a rise in business failure. If it happens to some of your customers, then you don’t want to be collateral damage.

As for fraud, it’s a sad fact of our lives that fraudsters find opportunity in crisis and have already started trying to exploit the circumstances. The wide range of government support measures created many new opportunities for fake emails and ‘phishing’ fraud, as has the rise in the use of video conferencing software. Be vigilant and reinforce the message to all of your people that they should be sceptical of unexpected email, avoid clicking links and certainly never enter their password into an external site.

In this article we have examined five categories of risk and various subsectors within them. We have also considered a wide range of responses that you may wish to consider. If we take a step back and look at the bigger picture then there are in fact a small handful of common themes running throughout this approach that will guide you in managing your risks, namely:

1. Preserve cash
2. Communicate with the relevant stakeholders
3. Understand your position and threats
4. Act on information