Don’t let unacceptable risk creep up on you
Your business is always facing risks. Starting and running a business is a risk in itself. And as a business grows, it becomes vulnerable to certain risks that weren’t a problem when it was smaller. Financial risks are those that threaten a business’ ability to manage its cash flow, pay its debts or to manage fluctuations in income or expenditure due to changes in overseas exchange rates. As a business owner you should take steps to learn about these risks and how they can impact your business. Even better, with a little help and education you can learn to manage or reduce these risks to acceptable levels that pose less of a threat to the viability of your business.
Liquidity Risk
Having enough cash to cover day to day outgoings is a risk for businesses of all sizes. To remain liquid, a business needs to plan for expenses, create a schedule of expected cash ins and outs. In some cases, you may need to consider a line of credit, to cover you during leaner times.
Some lucky businesses have too much cash. This is great, but leaving too much money in a low (or no) interest bearing account means it’s wasted. A business with a large cash balance could consider investing it, at the least in a higher interest deposit account, or in other assets such as new equipment, that can improve your business further.
Business cash flow should be monitored daily by your finance team. Tracking your cash flow over a period of a few months will usually reveal patterns you can use to smooth a lumpy cash flow. An enormous proportion of businesses that fail are profitable, but their cash flow lets them down*. Don’t let this happen to yours.
Interest rate risk
Does your business borrow money to fund activities or purchases? Many businesses do. From a bank overdraft, to a loan for equipment purchase to a large debt raising, it all depends on the size of the business and how fast you want it to grow. If your business does borrow money, it’s important that you’re thoroughly aware of the details. Are you paying fixed or variable interest? What is the term of the loan? Will you be penalised for early repayments if you attempt to eliminate your debt early?
If the money you’ve borrowed is under a variable rate loan, you risk interest rates going up which will increase the amount of your repayments. This may not matter on a small loan, but if you’ve purchased large amounts of equipment, plant or property, a few interest rate points could have you paying way more than your original budget.
It’s possible to reduce your exposure to interest rate risk. Fixing the interest rate on your loan is one way. The rate may be higher than the variable rate, but it won’t change, making it easier to budget for. A risk management expert can help you decide the best way to manage your business’ interest rate risk.
Foreign exchange risk
Do you purchase goods, services or assets from overseas using foreign currency? Or do you sell your products or services overseas? Either way, you’ll be subject to foreign exchange risk. As the Australian dollar (AUD) strengthens against various currencies it buys more of their product which is great for importers (but not for exporters). When the Aussie dollar weakens it benefits exporters who can convert their foreign income to more AUD (but less good for importers).
Because currencies are always moving against each other, there is always a financial risk in exposing yourself to them. There are several tools you can use to manage foreign currency risk. Many of them are complex financial tools such as derivatives, which are best put in place and monitored by experts.
To manage financial risk, asking for professional help is a wise choice
For many businesses, some exposure to financial risks is unavoidable. But it’s possible to reduce or remove the risk if you take the time to fully understand the reasons for it and be open to ways countered. Truro Partners count risk management as one of our specialties. We can teach you to understand and manage your financial risk, and help you create a strategy around it so everyone on your team knows what they’re doing and what they’re responsible for.
Over to you
Have you faced a scary risk moment? Do you know how exposed your business is to financial risk? Let us know in the comments.
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*MYOB: The Pulse Blog 2012 – Eight tips on managing your cash flow