How To Control The Business Risk By Mr. Praveen Nirmana Gunawardena
Today we are going to talk with our Business
Tomorrow Facebook page 1000th fan Mr. Praveen Nirmana Gunawardena.
As his area of specialty is risk management we asked him to discuss about
Business risk management for the readers of Business Tomorrow.
Praveen
tell us about your background in brief?
I am Praveen, Praveen
Nirmana Gunawardena, and I studied at Nalanda College, Colombo 10. I am an
Accounting special graduate from University of Sri Jayewardenepura and an
Associate member of Chartered Institute of Management Accountants. I have
gained experience in different industries in different capacities including
risk management, project management, financial reporting, and financial
modeling. Currently I am attached to Nations Trust Bank PLC as an Integrated
Risk Manager.
Mr.
Praveen what is business risk?
In simple terms Risk implies future uncertainty about deviation
from expected outcome. Business Risk is the possibilities a company will have
lower than anticipated profits or experience a loss rather than making a
profit. I will focus on risks associate with Start-ups and Small-scale
businesses since our audience consist with mostly entrepreneurs and prospective
enthusiastic individuals. I will list and take through various risks the
entrepreneurs should be cautious about as they endeavor on their journey.
1.Capability Risk
This is the most common risk; it is to
do with inability to identify the capabilities.
2.Design Risk
It’s about the product or service
design does not meet the required performance standard.
3.Development Risk
The risk that development of the
product or service is not completed on time, within budget or to defined
specifications.
4. Economic Risk
The company’s success is sensitive to
external economic factors.
5. Economic Life Risk
The product or services useful life in
the marketplace is shorter than originally anticipated or projected.
6. Funding Risk
Funding will not be available at a level or timing required for
the startup to succeed.
7. Regulatory Risk
Regulatory and policy changes will result in
higher costs to the startup.
8. Management Risk
The management team lacks the
skill sets and experience to execute the startups’ business plan.
9. Operations Risk
The risk that operating costs are greater than
budgeted, or that the service cannot be provided at the projected costs.
10.Research Risk
It is the quality of the initial research upon which key company
assumptions were based was flawed in an meaningful way.
11.Technology Risk
Less than optimal
technology is developed or utilized.
12. Demand
risk
The actual
market’s demand for the product or service will not yield the projected sales volumes.
How can a young businessman identify business risks?
How do you actually mitigate different types of risk? How do you convince
yourself that you have feasible Product/Service? How do you persuade investors
and employees that you can build a lasting company? How do you demonstrate to
early adopters that you're good at what you do? Most commonly used and
convenient method is to use a spectrum and evaluate your different risks; for a
start, entrepreneurs can use above mentioned risks types and you can customize
depending on their requirements. The entries on each risk spectrum are rated
from 1 (high risk) to 5 (low risk). Goal should be to move away from the 1's
and toward the 5's. For an example if we take Funding risk, then the spectrum
might look like this;
1.
Your business will not sustain for a long
time, and you are dependent on raising capital from different investors.
2.
You have successfully raised some capital
before. (Can be a previous experience or Can be for this business itself)
3.
You have good funds currently, and it will
help you to raise more when it is required.
4.
With some effort and sacrifices, you would be
able to get to break-even without any additional capital.
5.
You are not dependent on additional capital
because you can easily manage with business cash flows.
For this exercise entrepreneurs need
to follow below steps and remember principles in mind;
Steps
Step 1: Do an honest self-assessment
of your business major risk areas.
Step 2: List ways to move from high
risk to low risk along each risk spectrum. If you are not sure what you can do,
get consulting from institutes like AENZ International.
Step 3: Create short-term and long-term
risk mitigation plans for your business to sustain.
Principles
Principle 1: Showing is better than
telling (example: You think you can raise capital vs you actually doing this)
Principle 2: External validations are
stronger than personal opinions (example: You claim you have successful
business vs. Customers give positive reviews)
Principle 3: More data is always
better (example: you have raised 10% capital vs you have raise 50% capital)
With this simple exercise
entrepreneurs can identify their risk levels easily and gain a good understand
where their business stands.
What are the strategies available to mitigate the business risk?
Once entrepreneurs understand their risks
levels and current stance it is easy to come up with solution and move forward.
Now entrepreneurs want strategies to mitigate their identified and
assessed risks. Risk mitigation is defined as taking steps to reduce adverse
effects. There are four types of risk mitigation strategies that hold unique to
Business Continuity (BCP) and Disaster Recovery (DR). It is important to
develop a strategy that closely relates to and matches their company’s profile.
All risks have two dimensions to them: likelihood of occurrence, and severity
of the potential consequences. These two dimensions form four quadrants, which
in turn suggest how we might attempt to mitigate those risks
Risk
mitigation strategies are as follows
Risk Acceptance: Risk acceptance does
not reduce any effects however it is still considered a strategy. This strategy
is a common option when the cost of other risk management options such as
avoidance or limitation may outweigh the cost of the risk itself. A company that
doesn’t want to spend a lot of money on avoiding risks that do not have a high
possibility of occurring will use the risk acceptance strategy.
Risk Avoidance: Risk avoidance is the
opposite of risk acceptance. It is the action that avoids any exposure to the
risk whatsoever. Risk avoidance is usually the most expensive of all risk
mitigation options.
Risk Limitation: Risk limitation is the
most common risk management strategy used by businesses. This strategy limits a
company’s exposure by taking some action. It is a strategy employing a bit of
risk acceptance
along with a bit of risk avoidance or an average of both. An example of risk
limitation would be a company accepting that a disk drive may fail and avoiding
a long period of failure by having backups.
Risk Transference: Risk transference is
the involvement of handing risk off to a willing third party. For example,
numerous companies outsource certain operations such as customer service,
payroll services, etc. This can be beneficial for a company if a transferred
risk is not a core competency of that company. It can also be used so a company
can focus more on their core competencies.
Furthermore, I would like to list some
tactics especially for startups.
1. Mind the Cash flows
Be
conservative and conscious of cash flow. Make sure every vendor you work with
allow you to pay in 60 to 90 days and try to focus on cash sales. By doing
this, you can shift risk to the long term, and it will allow you manage cash
better.
2. Have sounds contracts
Have clear contracts that protect the
company first.
3. Get Lean
Use the Lean Startup method to validate the riskiest assumptions
around your product concept. Most startups fail because they waste a lot of
time and money building something that nobody wants. This way, you can validate
or invalidate your idea in a matter of days and mitigate your risk immensely.
4. Voice the Red Flags
Every
business has red flags that indicate trouble, might be a trouble with a client,
a process, a staff member or a vendor. Training your people to voice the red
flags is imperative to addressing them early, so they don’t become problems
that expose the company to real risks. Empower the people on the front lines.
Reward them for using their voices.
5. Create a “Private Limited”
One of the main benefits of a “Private
limited” is that its owners have limited liability, which means they are not
personally liable for the debts and liabilities of the company.
What will be the impact on development of business due to proper
risk management tactics?
Risk management process is considered as an important discipline
that the business has in its recent times. Many organizations tend to realize
the advantages of risk management. Following are few benefits of risk
management.
1. Benefits of risk identification
Risk identification helps in fostering the vigilance in times of
discipline and calm at the times of crisis. It implies all the risks in prior
that are most likely to happen and are planned to execute without any
assumptions that run.
2. Benefits of risk assessment
It focuses on the identified tasks on assisting the impact of
business. It has greatest advantage of dealing with the points that are
finalized with more possible solutions.
3. Minimization of risks
The risks that are handled within the given assessments plans are
foreseen within the business functions. It enables one to speed up the data to
change policies and contingencies that are made successful within the mapped
business functions.
4. Successful business strategies
Risk management strategy is not one-time activity and it has
different stages that modulate to lack of preparation, planning and successful
implementations of all the plans.
5. Saving cost & time
Proper risk management will save money, time and help the
businesses to focus on core business.
6. New opportunities
There are opportunities within the risks, if business can identify
it and assess it ahead, can be turned into opportunity.
7. Stability of earnings
Businesses can stabilize their earnings and it will help in the
budgeting and planning process.
8. Improved competitiveness
Risk management will help to improve businesses competitiveness
and help to understand nature and built-in risks. Understanding of the business
and associated risks is a key and with proper management it will be an edge
over competitors.
I will conclude my article with a
quote by Donald Gorman, which shows that there will be no reward without risks.
“Where's the fun in playing with knives if you can't draw a little blood?”
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The infographic on the minimum wage in Delhi is super handy—well done!
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