Risk Management is something about which every owner manager should be concerned, more so perhaps than a senior executive of a large corporation, who may not lose his job if it all goes wrong (even if he does the chances are that he will receive a generous compensation package).
Compare this to the owner manager, where every major decision he/she takes has potentially life changing consequences. For example, it is not uncommon for owner managers to personally guarantee business debt. So a balanced approach to risk taking is not only desirable, but essential for the owner manager.
With this in mind the following are some tips for managing risk in owner managed businesses :
1. Guard against low probability/high consequence events. Think outside the box in terms of what might go wrong. Just because it hasn’t happened before doesn’t mean it won’t. It is not possible to predict the future, so if you can’t manage certain risks take out insurance to cover downsides.
2. Carry out meaningful sensitivity analysis, based on a range of different scenarios. Small businesses tend not to ‘what if ‘ analysis in a structured way. Even small changes in demand/pricing can have a dramatic affect on profitability for businesses with a high fixed cost base.
3. Put contingency plans in place to cover potential downside scenarios. The businesses that do this are more nimble at implementing necessary changes when economic conditions are challenging.
4. Integrate risk management into the assessment process for new opportunities. It may be better to have a slower rate of growth than borrow from the bank to double capacity, just because you are convinced that the new venture is a ‘sure thing’.
5. Make a virtue out of being cautious. Who are your advisers ? It is easy to recommend bold moves if you don’t share in the downside. Most of your advisers will not carry downside risk.
6. Always have a plan B. Know what you will do if things do not go as expected with a new initiative.
7. Be independent minded. The herd instinct can be very strong. Just because everyone is doing it doesn’t mean that they are right. Remember that ‘winners are different’.
8. Challenge numbers. Look at the quality of the analysis that underpins cash flow and profit forecasts etc.
9. Don’t put good money after bad. Owner managers have a tendency to stay committed to their pet projects, long after there is ample evidence to suggest that it has failed.
10. Put early warning systems in place. What changes in the environment would cause you to change your strategic direction?