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RISK MANAGEMENT IN BUSINESS INVESTMENT PROJECTS
A PAPER
WIRTTEN BY
EKANEM, AKPASAM JOSEPH
DEPARTMENT OF ELECT/ ELECT COMPUTER ENGINEERING
UNIVERSITY OF UYO
JANUARY, 2016
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Table of Content
Cover Page
Table of content
Chapter one Introduction
1.1 Definition of Risk
1.2 Meaning of Risk management
1.3 Who is responsible for Business Risk Management
1.4 Importance of Risk management
1.5 Implementing a Risk Management Plan
1.6 Risk Management policy
Chapter Two Types of Risk
2.1 Internal Risk
2.1.1 Human Risk
2.1.2 Equipment and Information Technology Risk
2.1.3 Other Internal Risk
2.2 External Risk
2.2.1 Competition and market Risks
2.2.2 Business Environment Risk
2.2.3 Personal Conflict Risk
Chapter Three Business Investment Risk Management process
3.1 Risk Identification
3.2 Risk Assessment (Analysis and Evaluation)
3.2.1 Strenths, weaknesses, Oportunities, Threats(SWOT) Analysis
3.2.2 Other Resources
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3.3 Risk Management
3.4 Risk Control Management and Implementation
3.4.1 Equipment
3.4.2 Vendors
3.4.3 Business Continuity
3.4.4 Information Technology systems
3.4.5 Competition
3.5 Assets
3.5.1 Accounting and cash control
3.5.2 Employee Management
3.5.3 More on Risk Control Management and
Implementation
3.6 Exit Strategy
3.7 Treat the Risk(Action plan)
3.7.1 Risk Treatment strategies
3.7.2 Dignity of Risk and Duty of Care
3.8 Monitor and Review
3.9 Documentation
Chapter Four Other forms of Business Investment Risk Management Strategies
4.1 Employee and Owner Risk
4.1.1 Attracting and Retaining Employees
4.1.2 Ownership Conflict or Change
4.1.3 Loss of a Key Person
4.2 Economic Risk
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4.2.1 Currency and Interest rate fluctuation
4.2.2 Reduction in consumer and business spending
4.2.3 Supply chain cost fluctuation and disruptions
4.3 Credit Risk
4.3.1 Non-payment of accounts receivable
4.4 Operational Risks
4.4.1 Lawsuits and legal liability
4.4.2 Catastrophic Risk
Chapter Five Conclusion
References
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CHAPTER ONE INTRODUCTION
1.1 Definition of Risk
According to Australian Standard AS/NZS 4360:2004, Risk is the chance of something happening that will have an impact on an organization’s objectives. It is measured in terms of consequences [the outcome] and likelihood [the rate of occurrence] and if the risk will have a positive or negative impact.
1.2 Meaning of Risk Management
Risk Management:
Is a procedure to avoid any negative consequences and reduce potential legal liability Seeks to address potential problem areas before they occur and creates a safer
environment Is a process to test the effectiveness of measure to prevent events happening that may
result in negative outcomes?
Risk management applies to many aspects of business. Your business is subject to internal risks (weaknesses) and external (threats). Generally, we can control internal risks once we identify them. However, external risks may be out of control.
Not all risks come from negative sources. Risks may come from positive sources, or opportunities. Expansion and growth are opportunities, but they also bring additional risk.
The ultimate goal of risk management is to minimize the effects of risks in business.
Risk management is increasingly important for boards, volunteers, paid staff and stakeholders of all services and is an essential component of good corporate governance. It is part of organization’s culture, its philosophy, practices and business processes. It should not be viewed as a separate activity.
1.3 Who Is Responsible For Business Risk Management?
Managing risk is a shared responsibility of all members of an organization.Directors however, have a responsibility to lead and provide support.
Management of risk should be integrated into the philosophy of an organization. Directors are required to understand the needs of the organization and their legal responsibilities. Directors have a fiduciary duty in every aspect of the organization and to every transaction that the organization enters into.
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Cash flow Stability Credit Longevity
Directors must demonstrate that they are duly diligent and took all reasonable steps to prevent a reasonably foreseeable loss or injury occurring.
Due diligent is a legal requirement for directors to act with care and in the best interests of the organization when carrying out their governance role.
1.4 IMPORTANCE OF RISK MANAGEMENT
A level of risk occurs in all organizations. Governance principles and the occupational health and safety (OHS) act 2000 require that organizations take reasonable measures to prevent loss, harm or injury to the organization and all stakeholders.Accident and injury can happen even with rigorous OHS planning, and the fact that an injury occurs does not mean that someone is liable if all reasonable steps have been taken to prevent or minimize the risk.
Non-government organizations may be exposed to risk when: They do not have a well functioning governance structure Management plans, policies and processes are inadequate Staff and volunteer roles and responsibilities are unclear They do not require service users to sign consent forms or waivers Equipment and facilities are not safe for intended use They have not implemented a comprehensive OHS plan Insurance is inadequate or inappropriate Operations are not regularly evaluated
Minimizing and controlling the effects of risks can improve and maintain business cash flow. The continuation of cash flow creates stability for organization and helps sustain credit relationships, while helping to build additional credit.
Why is risk management important? Good risk management will help business continue in operation. Mitigated risk leads to better cash flow and greater stability. Creditors will see this stability and good cash flow reflected the company’s financial reports. Greater stability will mean that company will last into the future. The rewards of risk management are all linked together: good cash flow leads to stability, which leads to good credit, which leads to good longevity.
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1.5 Implementing a Risk Management PlanRisk management should be integrated into an organization’s operations.Organizations should develop a risk management policy and a plan for how the risk management process will be managed. Risk management plans should describe the: Commitment and leadership from management Delegation of defined tasks to ensure accountability Reporting system- including progress reports, reports on extraordinary Operating procedures Education and training programs for employees and volunteers Risk control monitoring process Risk reduction process Emergency response procedures Complaints handling procedures.
1.6 RISK MANAGEMENT POLICYRisk management policies should be brief, high-level documents that can be easily understood.A well drafted and regularly reviewed policy is a risk management tool in itself.Policies are an organizations first line of compliance and should be developed and treated as such.A risk management policy should be drafted to clearly identify legitimate interests for which the organization exists including: High quality service provision to meet the needs of the service users
Including people with disabilities, older people, children and carers The success and financial viability of the organization providing these services The proper organization and administration of the organization The rights of older people, people with disabilities and carers to choice, self determination,
Independence, privacy and confidentiality.External requirements and the public interest should also guide the policy and the following factors should be considered: The policy should be developed to clearly reflect the law and relevant standards. Where the system for the formulation, interpretation and enforcement of the policy works
properly and effectively, that policy is essentially in the public interest. A clearly expressed and well defined policy which provides for appeals, natural justice and
procedural fairness, strengthens arguments that the organization is operating in the public interest.
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CHAPTER TWO TYPES OF RISK
2.1 Internal Risks
Let’s begin with some internal risks.
2.1.1 Human Risks
The human component of any business is a source of risk. Think about these possible human risks to businesses:
Illness and death. A business owner or employee may be ill for a day or be unable to work for months. The death of a person involved in a business poses a risk to continued operations.
Theft and fraud. Most businesses want to have an honest working environment, yet theft by employees and employee fraud are major risks businesses face. Timecard fraud is a risk. Diverting funds to fictitious accounts are accounting risks.
Low employee morale. Unhappy employees can cost money through negligence or through willful acts. For example, an employee who forgets to reorder inventory is a risk to sales because back orders lead to cancellations.
2.1.2 Equipment and Information Technology Risks
Older equipment may run slower or require more maintenance than new equipment. New equipment may require adjustments to work with older equipment.Worn parts may cause damage or cause company vehicles to break down. What would a non-working delivery van cost a business for one day?Downtime from physical damage or outdated systems may slow business profits. Most businesses rely on a computer system to process credit cards. These systems are risk to continued business when they are not working, especially if no backup plan exists. Lack of administrative controls may lead to downtime, in addition to fraud and theft.
2.1.3 Other Internal RisksAnother source of risk might be the physical plant of your business. Phone lines and other utilities are risks to a business. The appearance of the building such as its walls, windows, and doors may require maintenance to continue drawing customers.Injuries and damages may be caused by your business or your business may receive damage. For example, a storm may cause damage to a business or a business may cause damage by selling a faulty product. Either way, injuries and damages come with a cost.
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Cash flow is the lifeline of a business. When unexpected costs affect the ability of a business to meet monthly expenses or when credit lines are lost, a business may fail. A plan to maintain cash flow is crucial.Even new financing has its own cost-associated risks. The risks can include the following: Appraisal Closing costs Costs for points to buy down rates Deposits placed on hold as collateral
2.2 External Risks
Now let’s look at some external risks.
2.2.1 Competition and Market RisksCompetition can be tough and market changes can make life for your business tougher if you are not prepared. Consider these risks: Market changes will cause businesses to change. Competitors advertise sales, wholesale
costs go up and down, and oil and gasoline prices may affect costs and those of vendor. Employees may leave to go to a competitor’s shop, taking loyal customers with them. Rent increases may be caused by increased demand for space. For example, you may be able to lease space more cheaply in a building/ area under construction, but when the lease is up for renewal, an increased demand for space in the vicinity may result in your rent increasing.
2.2.2 Business Environment RisksYour environment is more than the space you rent or buy. What happens around your business affects it. Here are some examples of environmental changes: Federal, state, country, city, laws and ordinances can and will change Weather and natural disasters can shut down a business for a short period or close it. Structural changes in the community may be the result of progress or may be due to
empty stores and offices in a declining market. Your community may change as the needs, age groups, spending habits, and incomes of the population change.
2.2.3 Personal Conflict RisksPersonal conflicts are external risks for both business owners and employees. Families and home do not cease to exist at the start of a work day. Children become ill. Medical emergencies, or worse, may happen. Repairs and maintenance will be required at home.
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For a small business owner, involvement in the community creates visibility. However, the visibility comes with a cost, mainly time. Employees and their children are involved in outside activities as well. We don’t usually think of outside activities as a risk, but consider how you would handle this situation: your most reliable manager wants to attend an out of- town playoff game with her child on the busiest day of the month.
Even complacency is a risk. Complacency comes from being comfortable. Your business may be successful and has been for a while. You may be comfortable with the hours you are working, but you may miss opportunities for growth because you do not want to expend the extra effort. Now, multiply the effect of complacency also happens to employees.
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CHAPTER THREE
Business Investment Risk Management Process
3.1 Risk IdentificationRisk identification is one of the most important investments we can make in our business plan, especially when identifying risks. Creating a business plan will help us assess risk areas, those areas impacting our ability to continue business and to grow.
The continuation of our business, in the event of the event of any risk, should be addressed in our plan. We should look at anything that could halt, slow, or affect the profit of our business. List these risks, rank them in importance, and look at potential costs. Identifying and assessing risks is something that will require time and should be revisited periodically. We should be sure to schedule time in our calendar to identify areas of business risk.
We can also get help from outside sources in identifying areas of risk. Many of these sources are business specific. Organizations should identify actual and potential risks associated with the services they provide. Employees, drawing on their experience, can identify the:
Areas where they are exposed to risk Extent and severity of the risk Frequency of the occurrence which gives rise to the risk.
3.2 Risk Assessment (Analysis and Evaluation)
After identifying the general areas of risk, an assessment of the risks should be undertaken to determine how they should be treated. This requires estimating the potential and actual loss or harm which might arise from identified risks and will involve determining whether an activity should cease because the consequences of continuing the activity would create unnecessary risks, or too high a risk.
Once risks have been assessed, the severity and frequency of occurrence of risk should be examining – for example, the number of risks, potential loss and frequency. This will enable prioritization of the remediation of the risks.
Also evaluate risk with regard to potential expansion or future growth. On a day-to-day basis, we should consult with our operations managers, as they may be more alert to positive risk. In fact, we should consult with all the key people to enlist their input and communicate to them the risk that we see.
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3.2.1 Strengths, Weaknesses, Opportunities, Threats (SWOT) Analysis
Performing an analysis on our business’s internal strength and weaknesses and external opportunities and threats may uncover overlooked risk. To be effective a strength, weaknesses, opportunities threats (SWOT) analysis should be a very candid and honest assignment of the business. Remember, some risk can also be opportunities.
3.2.2 Other Resources
We can also Seek outside help when assessing business risk. The Small Business Administration (SBA) can provide many helpful resources. If funds permit, consider an auditing firm or Certified Public Accountant (CPA). We should talk with our bank or commercial lender about risk for our type of business. We may also consult a risk insurance provider. Internet resources can provide similar businesses or professional organizations which may share information on risk specific to our business.
3.3 Risk Measurement
Once risk are identified and evaluated for their potential consequences, they should be measured by how they affect earning, cash flow, and business operation.
A good example is water damage. A business that flooded may be cleaned up, reopen, and continue operation. But, the expense for cleanup put a strain on a budget for months to come. Lost income is not the only thing to consider. For example, customers may move to businesses that are not flooded and not return to your business. This customer migration may require new advertising or new products to renew interest.
Loss of future profit (due to customer migration, for example) may be more costly than the direct loss of income. Scrutiny of all the costs associate with a risk is important for measuring risk.
3.4 Risk Control Management and Implementation
A written business plan should not only include a list of possible risks, but also include controls and plans to manage risk. Remember to keep business plan current by readdressing changes in costs and by assessing new risks.
3.4.1 Equipment
Equipment that needs to be repaired may interrupt our business, but insurance or service plans may minimize the costs. For example, if our business is dependent on a high-speed printer or copier, a service plan may be a good way to control the risk of the copier breaking down. Parts
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for a copier can be expensive and take time to replace. To be prepared, copier vendors will plan for parts and service based on the copier they have sold to you, and the number of copies you make (service plans for copiers usually require an annual count of copies made). Higher usage may mean more maintenance.
3.4.2 Vendors
Vendors have risks, too- some of the same risks we face. Relying on only one vendor may be risky for for business. We may be able to avoid problems with our vendors by following these suggestions:
Have more than one supplier for products. Shop for vendors with the best price and service. Maintain relationships with multiple vendors by buying from each of them.
A multiple-vendor strategy may make vendors push for more of your business, resulting in lower prices. In any event, if one vendor is unable to deliver, you will have backup.
Do not be afraid to investigate the risks your vendor may face. Some of this risk information is provided by business credit reporting agencies or by insurance companies.
3.4.3 Business Continuity
Our operations manuals should include a business continuity plan. The plan should provide steps to take for short-and long-term situations. For example, if your business is unable to operate in its present location, is it possible to use another? If so, your plan should list the steps to take, by job position, for re-establishing operations at the backup site.
Create a set of standard operating procedures for completing tasks. Many businesses were started before extensive computer-based technology. Back then, these businesses operated by following manual steps. Describe the responsibilities for inputting manually-captured information into your computer system for when the system is running again. It is important to train staff on business continuity plans and alternative strategies. Have trial runs or periodic testing of manual systems.
Backup computers systems and keep copies in a secured offsite location. Keeping additional computer capability at another location can mean being down for a few hours, instead of days. Software or operating systems providers may be able to assist in disaster recovery plans. Review or discuss these plans with your vendors.
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In continuity plan, the following may be included:
Staff members duties Staff members work locations Contact names, such as email addresses and phone numbers Vendor, utility, and emergency phone numbers Employee notification “phone tree”(for example, an owner calls managers and
manager call their departments)
Just as we plan for these risks and the possible consequences, our vendors should as well. You may ask vendors about their business continuity plans. If they provide this information, add it to their file and include information that is pertinent to your own plan.
Keep a copy of your continuity plan in a place where your managers and staff can access it easily.
3.4.4 Information Technology Systems
Special risks are connected to information technology (IT) systems. Review the following risk prevention tips for IT special systems:
Safeguard login information Such as personal user names and passwords. Personal login information should not be shared with anyone outside the business, or any other employee. Most business requires employees to sign an IT statement that outlines the repercussions for sharing passwords.
Protect systems with firewalls to stop intrusions. Use software to scan for viruses or other irregularities. These protections may require additional setup time and annual renewal fees. However, consider the cost a hacker or virus could cause by shutting down your system. In most cases, the benefit of protection will probably outweigh the cost.
Institute levels of access Within our organization by job duty. Someone who ships out inventory or accepts returns, for example, should be reviewed periodically by using system-generated reports. Monitoring reports for out-of-the-ordinary transactions gives an added layer of security.
Generate system reports, Which might include reports on system access, attempted security breaches, and patterns of usage. Audits of these reports, as well as reviews of changes made by system administrators should be conducted regularly.
Sample transactions or use trial transactions to uncover changes in processing or fraudulent transactions.
Conduct scheduled and surprise audits of IT systems.
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3.4.5 COMPETITION
While the competition cannot be controlled, we can at least know what they are doing.
Are our prices higher or within the market? Are we losing sales to them or do we have a competitive edge? If we think we have an edge, how can we maintain it? If their prices are much lower, is it time to revisit pricing with our vendors or search for
new ones? Is their quality the same as ours?
3.5 Assets
3.5.1 Accounting and Cash Control
Potential for fraud or theft can exist without a separation of duties. The employee who accepts cash or payments, processes the work, deposits funds, and reconciles the related account may be tempted to commit theft. Consider setting up an audit trail with one person accepting and processing payments, another preparing the bank deposit, and perhaps another for reconciling statements. For all three steps, amounts should be verifiable.
Cash payments and arriving mail should be logged or verified by two people. Each person should count the cash in the presence of the other. This procedure sets up accountability and provides a record of the activity.
Job duties should have differing levels of authority. Soon duties may require recorded supervisor approval. For example, the server at the restaurant may need approval of the shift manager to void the charge for the poorly served meal. Issuing credit for returned merchandise may require supervisor approval above a certain dollar amount.
Conduct periodic audits of cash to insure that it balances with all income records and bank statements. Surprise audits should be done at least quarterly and at different dates in the month. An established pattern may give an employee who has taken money the time to return it. If the surprise audit has not been conducted before the last week of the quarter, the audit will be predictable and a theft may go unnoticed before the stolen funds can be put back in the drawer. Consider that most employees expect to pay back stolen funds before the theft is detected.
Monthly budget projections should include a reserve amount for each month. This should provide a cushion to cover the bills when you can earn less money during the month than you
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had forecast or you have higher expenses than expected. An accountant may assist in determining the amount to hold for additional cash flow, based on your financial statements.
3.5.2 Employee Management
Employees are important to the success of business. The following tips can be reviewed for managing employee:
Use pre-employment screening. Many business credit reporting agencies and human resources service providers will help with pre-employment screening and background checks. Pre-employment screening is important for legal and insurance purposes. For example, we need to know if an employee is driving our car but their license is revoked or they are required to have a device to check for blood alcohol level.
Provide job descriptions and lists of duties. Communicate job expectations and any job expectation changes to our employees. While it is important to separate duties, cross training of staff helps to ease costs in the event someone leaves or the business is short staffed.
Provide performance evaluations. Employees should expect evaluations to enhance their performance. Provide feedback and allow them to comment about their jobs.
Be involved. A business cannot run on its own. Owner who are not present often find their business runs into problems. Let people know you are present. Get to know everyone by walking around your business. Talk with customers.
Audit payroll. Audits should be conducted on payroll systems. Check project timecards against job sheets for appropriate time submission. Compare timecards to payroll ledgers to the payroll account.
Reward safe performance. Injuries and damages can happen. Monthly departmental rewards for avoiding accidents may be less costly than premiums and damages resulting from carelessness. Safety procedure incentives may raise employee involvement in the process.
3.5.3 More on Risk Control Management and Implementation
Here are additional ways to manage risk:
Discuss risks. Schedule regular meetings with managers to discuss risks. For example, add discussions of risk to sales meetings agendas.
Provide a safe workplace. Employers have the responsibility to provide a safe workplace. Employers MUST provide their employees with workplace that does not have serious hazards and follow all relevant federal, state, and local safety and health standards. See http://www.osha.gov/workers.html#6 . You must post OSHA citations,
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injury and illness data, and the OSHA poster in your workplace where workers will see them.
Monitor the premises. Also, create a checklist of the physical building that includes areas of upkeep, needs, and repairs. Complete a monthly walk-around to note areas that require attention. Have managers complete a weekly review of the facility for less significant items.
Be alert to community changes. Be involved in the community or have someone who can update you on changes in the community that affect your business. Stay informed of federal, state, country, and local laws that could impact your business
Use lines of credit wisely. Lines of credit are important. Refrain from using the entire line to give yourself a margin of safety to deal with an emergency.
Speak with an insurance agent. Speak with an insurance agent about business risks. Check to see if your business is in a flood zone requiring flood insurance. Whether you own or rent it is important to protect your business from fire, water and other damage risks.
Consider a generator and secondary phone. Consider the feasibility cost of a generator, what size generator would be needed, and how to implement the use of a generator safely. A backup phone may be as listing a cell phone as a secondary business number and keeping the phone in your business location.
Lead by Example
Be honest and ethical in all business dealings. Make your expectations clear and consistent to those you do business with. Convey to your employees your expectation that they be honesty and ethical.
3.6 Exit Strategy
No one starting a business expects to fail, but planning for the worst is part of managing the risks involved with any business. Sometimes it becomes necessary to implement a business exit strategy. Under the worst of circumstances having an exit strategy will be important for your future and that of your family.
Include an exit strategy in your initial business plan and revisit it from time to time. Question you may want to consider:
Have you provided for insurance in the event of your death? In the event of death, have you provided for the liquidation of assets? Are there sufficient funds to allow the liquidation of assets without additional
insurance? What about disability benefits?
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While some business owners name a trustee to handle the closing of a business, other may have active family members to assume business ownership or perform the closing. Consider allowing employees to purchase the business instead of closing it.
3.7 Treat the Risk (Action Plan)
Risk treatment involves identifying the range of options for treating risks, assessing these options and the preparation and implementation of treatment plans. The development of effective treatment plans requires an understanding of immediate causes of the risk and the underlying factors are sometimes referred to as ‘root causes’
The principle forms of risk treatment are elimination or reduction.
Risk elimination includes strategies such as:
Discontinuance of an activity or removal of an item identified as a risk Avoidance of new or potential risks.
Risk reduction involves taking all reasonable, practicable steps to reduce identified risks and minimize loss, injury or harm.
3.7.1 Risk Treatment Strategies
Risk treatment strategies might include:
The review of policies and processes to reduce risks of loss, injury or harm. The development of a monitoring program Orientation programs, training programs and competency testing in areas of high risk The development of corrective and preventative programs The development post event contingency plans designed to reduce consequences of
events, including emergency response procedures; disaster planning; or outbreak management plans
Sharing risk with another organization, usually by contract, sub – contract, outsourcing or insurance.
3.7.2 Dignity of Risk and Duty of Care
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The principles of dignity of risk and duty of care are important consideration when making risk treatment decisions.
Dignity of risk refer to the service user’s right to make an informed choice to experience life and take advantage of opportunities for learning, developing competencies and independence and, in doing so, takes a calculated risk. However, the welfare of the client outweighs dignity of risk.
Duty of care is the obligation to take reasonable care to avoid harm to another person.
3.8 Monitor and Review
Risk management systems and treatment plans should be monitor and reviewed on an ongoing basis as circumstances change that may affect the risk management plan.
3.9 Documentation
It is important to document each step of the risk management process:
To record the process of risk identification and analysis To demonstrate accountability – including a compliance and due diligence statement To provide information for decisions or processes to be reviewed To provide a record of risk on a register To provide information to relevant stakeholders To support continuing monitoring and review To provide an adult trail To maintain an incident database
CHAPTER FOUR
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Other Forms of Business Investment Risk Management strategies
4.1 Employee and Owner Risks
4.1.1 Attracting and retaining employees
Employees represent the greatest asset of almost every business, and attracting and retaining the right people is a cornerstone of business success for most enterprises. While the ability to hire and keep the right people can be based on many diverse factors, there are a few proactive steps one can take to ensure he is an employer of choice in a competitive labour market.
Here are some strategies that can help turning human resources risks into a business advantage.
Ensure compensation is competitive. The marketplace for talent can change quickly, so it’s important to evaluate the competitiveness of employee compensation package at regular intervals. Evaluation should go beyond base pay to other key benefits that employees value-such as vacation, wellness and lifestyle programs, profit sharing, and retirement savings. Business may be able to tailor individual compensation packages to meet specific employee needs- for example, the option for employees to purchase more vacation time.
Adding a group benefits program. Group insurance is a coveted employee benefit and can provide you with a competitive advantage in attracting and retaining staff. Group insurance can provide reimbursement for an employee’s common health –related expenses and financial protection in the event of illness, disability and death. Often, group insurance programs are enhanced with employee assistance and lifestyle programs that can help maximize employee health and productivity, which in turn can contribute to the success of business.
Group benefits are typically very flexible. Programs can be customized to meet the needs of large companies as well as those with only a handful of employees – with costs covered fully by the employer or shared with employees. And because some benefits are not taxable to an employee, it can be a tax-effective way to deliver compensation. In addition, one may want to offer an employee the opportunity to purchase individual coverage, which can be done through a simplified guaranteed standard issue process. Individual insurance can provide enhanced life and health coverage to defined employee groups and has the advantages of being portable.
Consider value-added perks and programs. There are a number of value-added employee benefits that one can offer to employees at little or no cost to organization. These range from programs that deliver a significant benefit-such as discounted group home and auto insurance- to smaller perks such as preferred cell phone plans, travel clubs, health club discounts, kitchen coffee bars or monthly staff lunches.
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4.1.2 Ownership conflict or change
Partners or co-owners can bring essential strength, expertise and support to a business, but a conflict between them- or the unexpected loss of one of them – can create problems that are often not anticipated.
Where there is an ownership conflict, business progress could hit a stalemate unless a mechanism is in place to resolve the conflict. In the event an owner or partner is no longer able to participate in the business due to death or disability, his or her business interest could pass to a spouse, estate or other beneficiary who is not well suited to running a business. Multi-ownership risks can be managed in a couple of ways:
Ensure that your shareholder or partnership agreement has a buy-sell clause. A buy-sell clause specifies the conditions under which owners or partners have the right to buy the business interest of other owners or partners. Typically, a buy-sell clause includes certain triggers (such as death, non- contribution to the business, disability, divorce or retirement at a specified age) that will activate that right and also specify how to transfer the business interest.
Use insurance to fund a buyout. If business partner dies, or suffers disability or critical illness, a shareholder or partnership agreement will typically require that the absent party’s interest be bought out. But for the agreement to be effective, it needs to be funded in a way that won’t cause financial hardship to either the company or to the partner being bought out.
One of the most effective solutions is buying life, disability and critical illness insurance to insure each owner or partner. When an owner or partner dies or becomes disabled or ill, the company (or surviving parties, depending on how the insurance arrangement is structured) can use the insurance proceeds to buy out the owner or partner’s business interest.
Both sides benefit from the arrangement. The departing party (or the estate) receives the buyout proceeds immediately, and the business can carry on operations without the additional financial burden of securing funds from loans or cash reserves to make the purchase.
4.1.3 Loss of a key person
For business owners, the consequences of the loss of a vital member, known as a “key person”, in the company through death, disability or critical illness could be significant. The business would lose the input of valuable member, creditors could withdraw financing tax liabilities could be created and customers might go elsewhere. In addition, there could be significant out-of-pocket costs in terms of recruiting and training a suitable replacement.
For many businesses, the definition of a key person extends beyond the business owner to key sales people, product developers or senior executives. For a business, one can define a key
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person as anyone connected to the business whose temporary or permanent absence might cause a significant disruption to your normal business operations.
Here are few ways that you can manage the risk of losing a key person in your business.
Insure the most valuable people. Key person life, disability and critical illness insurance can provide the funds necessary to keep your business operating should a key person suffer an unexpected illness, accident or death. The business is the beneficiary of business purposes, such as recruiting or training a replacement, providing supplementary cash flow to replace a decline in business income, or paying suppliers.
Consider creditor insurance. The death or disability key person in business could affect profits and the ability of the company to repay business depts. Creditor insurance helps ensure that financial responsibilities, such as business loans and mortgages, are met in the event of death or disability of a key person or owner. Creditor insurance is offered by financial institutions on eligible business loans and mortgages. It differs from key person insurance in that the proceeds of the insurance are paid directly to the financial institution (not to business) and are used specifically to cover dept obligations.
Cross-train employee skills. Where possible, one should ensure that employees are cross-trained so that one or more people can take over if a key employee dies or has to be off work for an extended period.
4.2 Economic Risks
4.2.1 Currency and interest rate fluctuations
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If a business pays suppliers or receives payments from customers who are outside Nigeria, you’re likely aware of the impact that fluctuations in exchange rates can have on cash flow. While currency movements can work in ones favour-for example, When naira declines in value and one have foreign currency receivables-an unfavourable exchange-rate swing can quickly turn profit into loss. Interest rate changes can also negatively affect cash flow.
Here are some strategies that can help you manage your currency and interest rate risks.
Hedge currency movements. One method of eliminating currency uncertainty relating to major transactions is through a currency forward contract one can arrange with a financial institution.
A currency forward contract is a binding agreement between two parties to buy or sell currency at an agreed-upon future date for an agreed-upon price. It neutralizes the impact of currency exchange movements that may occur between the date your contract or transaction is entered into and the date your currency transaction takes place.
Move to a fixed interest rate. While variable-rate loans are ideal when rates are falling, sharp increase in interest rates can have a dramatic impact on cash flow. If rates look like they have more upside than downside, one may want to consider a move from a variable-rate to fixed-rate loan structure to provide greater cost certainty.
One may also be able to lower his monthly payments by extending the amortization period of his loan. While this increases the interest costs over the long term, it can be an important strategy for keeping payments affordable over the short term.
Use a cash reserve. One of the simplest ways to manage currency exchange and interest rate risk is build a cash reserve that can cover the higher costs or lower income that can result from currency or interest rate changes. This is an excellent strategy for businesses that have only a modest or infrequent exposure to currency or interest rate risks.
4.2.2 Reduction in consumer and business spending
The economy is cyclical and few businesses are immune to the threat of lower sales when consumers and businesses reduce their spending.
Here are some strategies that can prepare one for a possible reduction in sales when the economy hits a lull.
Trim now, not later. Regardless of current economic conditions, re-evaluating expenses on a regular basis to avoid the “cost creep” that can occur overtime. Streamlining operating costs can put one in an excellent position to offset lower revenues during tough economic times.
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Spend strategically. Reviewing the key drivers of business and focusing on what one should be spending his money on. For example, while advertising costs may be substantial, a reduction in this expense may be a poor strategy if it’s a key source of sales. There may be other expenses-entertainment, payroll, even occupancy costs- that may be more suitable for reduction.
Identify “needs” versus “nice to haves”. While economic slowdowns may be a fine time to plan for growth, it may not be a good time to execute the strategy. Whether you’re expanding locations, launching a new product or adding staff, if it’s not a “need to have” change, it may be prudent to delay any addition or expansion until an economic recovery begins.
4.2.3 Supply chain cost fluctuations and disruptions
If business relies on one or more key supplies, Volatility in the price of these supplies can have a significant impact on costs, pricing and profitability. In addition, an interruption in service from a key supplier can slow down or even stop production.
If any have exposure to one of these supply chain risks, here are some strategies that could help you manage them.
Hedge supply price. If key supply is a common commodity such as grain, fuel or a base metal, for example, one can gain greater cost certainty through forward contracts or other hedging strategies, much the same as for the currency risks discussed earlier. Financial institutions can explain the options and help determine if a hedging strategy is appropriate for your business.
Consider contingent business interruption insurance.
If you have specific suppliers who you know are essential to your business, you can purchase insurance that covers the risk of a supplier failing to deliver due to a catastrophic event such as fire or flood at its work site. This coverage is known as contingent business interruption insurance and can be added as part of your business’s property coverage.
Source other suppliers. If there is potential for supply interruptions that are not insurable (such as those due to labour unrest, volatile political situations or supplier bankruptcy) then sourcing other potential suppliers is the best way to mitigate this risk.
4.3 Credit Risks
4.3.1 Non-payment of accounts receivable
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Most businesses must offer credit to remain competitive, and accounts receivable can represent a substantial portion of a business’s value at any given time.
If a business has one or more large customer accounts, the failure to collect a significant receivable could represent a major financial setback. Even if the company have a wide customer base, it can still be exposed to substantial defaults on receivable during periods of economic downturn.
Here are two ways to protect against a default in company’s accounts receivable.
Consider accounts receivable insurance. If a company sells business to- business, accounts receivable insurance can protect the business from losses due to unpaid account receivables stemming from the customers’ inability to pay, or the late payment of legitimate receivables. And if your clients are outside of Nigeria, it will even help protect the business from defined political risks, such as currency inconvertibility or problems with currency transfers.
Check out the credit history. If the credit plan on extending to a client is for a significant amount in relation to business, a credit bureau check on a potential customer before one deliver the product or service can be an important safeguard. This one extra step can make the difference between a strong, profitable relationship and one of loss and aggravation.
This coverage is available to businesses operating both domestically and internationally and can offer valuable protection if the business has large, concentrated receivables from a small number of consumers or if planning to expand into unfamiliar markets. With accounts receivable insurance, one can focus business development and less on the collection of receivables.
4.4 Operational Risks
4.4.1 Lawsuits and legal liability
The legal liability of a business for an injury, product defeat or monetary loss involving an employee or third party can take many forms. That’s why it’s essential for one to assess the type of liabilities and legal actions to which one may be exposed and tailored a liability insurance package to cover the key risks.
For example, if a customer or other third party suffers an injury at your work site, one could face potential liability for the injury. And don’t overlook the fact that legal fees are payable even if you are successful in defending the lawsuit.
Insist on essential coverage. Liability insurance is essential coverage that most businesses need to protect themselves from the cost of legal actions and any damages that may be awarded.
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Every business is unique in its potential exposure, and a part of the risk management process is determining an appropriate level of coverage for your operations. One may also want proof that another business he/she deals with such as a business that rents space from you- has liability insurance coverage so that your business remains protected in the event something happens on that property.
Consider your need for specialized coverage.
For example, errors and omissions insurance can protect your business from claims relating to errors in professional judgment that others will use in making their business decisions. This type of coverage is mandatory for some profession- such as engineer, lawyers and accountants- and is often delivered through their professional associations. However, additional coverage is often purchased to provide coverage above the minimum limits required, as some awards and settlements are exorbitant.
Other specialized types of coverage include industry-related coverage that can protect against specialized risks that are often excluded from general liability coverage.
4.4.2 Catastrophic Risk
Catastrophic events, such as fire, flood and major thefts, are rare, but it only takes one event to close down a business permanently if the proper coverage is not in place.
Fortunately, property insurance, which provides protection in the event of such catastrophes, can go beyond providing coverage for the four walls of business premises to protect the sustainability of business operations as well.
Here are some strategies to consider when assessing catastrophic risk protection for businesses.
Review property insurance terms. Not all property insurance is created equal. One should be sure to obtain coverage that’s tailored to the potential risks his/her business faces, whether it’s the breakdown of heavy equipment or machinery or a higher risk of crime and vandalism. Some events may be excluded from coverage, or have low coverage limits, unless specialized protection is put in place.
Protect your business operations. A major loss may force a business to close for an extended period of time due to the loss of supplies, equipment or actual business premises. Business interruption insurance may replace the lost earnings of a business and offers a number of different coverage options. For example, depending on the type protection chosen, a business interruption insurance coverage may cover payroll expenses to retain the skilled workers needed when normal business operations resume.
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Have a contingency plan. Aside from any insurance coverage put in place, one may ask the “what if” questions and make certain that a business has a contingency plan should an unexpected event occur. Are there alternate premises where your business can operate? Are back-up files easily accessible? How will you and staff communicate? While it’s difficult to predict how or when a catastrophic event may occur, business owners can and should be prepared.
CHAPTER FIVECONCLUSION
5.1 CONCLUSIONRisk management policies and plans are important. They document the steps an organization plans to take to minimize and deal with actual and potential risks. Risks will vary from organization to organization depending upon circumstances and the way an
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organization operates. Directors are responsible for ensuring the organization implement the risk management plan.
References
Australian institute of risk managementTelephone: (02) 9437 3040Fax: (02) 9437 3066www.airm.org.au
Australian Standard AS/NZS 4360:2004 Risk Management & Companion to AS/NZS 4360:2004 Risk Management
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Standards AustraliaPhone: (02) 9237 6000Fax: (02) 9237 6010Email: [email protected]. Standards.org.au
Aged and Community Services Association of NSW and ACT (ACS)Phone: (02) 8754 0400Fax: (02) 9743 4556Email: [email protected]
HACC National Service StandardsDepartment of Health and AgeingPhone: 1800 048 998Fax: (02) 9263 3509www.health.gov.au
NCOSS Management Support Unit (MSU)Phone: (02) 9211 2599 ext 127Fax: (02) 9281 1969Email: [email protected]/ms
NSW Commission for Children and Young PeopleTelephone: (02) 9286 7276Fax: (02) 9286 7286Email: [email protected]
NSW Disability Service StandardsDepartment of families, Community Service and Indigenous AffairsPhone: 1300 653 227Fax: (02) 8255 7799Email: [email protected]
Workcover NSWPhone: (02) 4321 5000Fax: (02) 4325 4145www.workcover.nsw.gov.au
Managing risk for businessRBC Royal Bank- Canada
Federal Deposit Insurance Corporation (FDIC) http://www.fdic.gov U.S. Small Business Administration (SBA)
http://www.sba.gov
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