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How to manage external risk in your business

How to manage external risk in your business

The coronavirus is the latest reminder that external events can occur and severely impact your business without warning. By their nature, you cannot plan for specific Acts of God, but you can plan in general for external, adverse events.

Economic event

The coronavirus is a good example of an economic event. China has dramatically cut its holiday season movements and expenditures and this has impacted on all sorts of Kiwi businesses from the suppliers of crayfish to log movements at the ports. It’s important to note that you might not be directly affected, but subject to downstream consequences. The Hawkes Bay forestry sector is being impacted which affects all the smaller businesses which support that region and its people.

To manage economic risk, you can:

  1. Maintain (or develop) a diverse customer base. If one of your customers reduces their trade with you, it’s good to have others so you are not reliant on one type of customer.
  2. Have available funds to manage a short term downturn, or access to credit. Short term debt may be required to help you through a short term crisis. Access to debt is helped significantly if your books are in order. Being able to supply up to date and accurate financial statements to a potential lender will speed the process.
  3. Be able to rapidly reduce costs. Responding sooner rather than later can help you survive an external event. Don’t bury your head in the sand.

Natural disasters

To manage natural risk (such as an earthquake, fire or drought), you can insure yourself and your business against natural risks. Discuss this with your broker and see if it makes sense to insure yourself against weather, or other events.

Political risk

To manage political risk (such as the impact of sudden lockdowns, even if they’re not in your state), you can:

  1. Stay informed
  2. Be a member of your professional lobby group (Real Estate Institute of Australia or Restaurant and Catering Industry of Australia, for example). These groups can lobby on your behalf and keep you informed.
  3. Think ahead of time about how to mitigate risks.  You can maintain a log of all the possible risks and how you can mitigate them.  In the example of the sudden introduction of adverse legislation, you may want to think about diversifying investment away from property.

Acknowledge the reality of unforeseen events

It’s hard to face up to this reality and, as normal human beings, we want to hope for the best far more than we want to prepare for the worst.  But take some time to consider your risks, maybe once a year, and make a plan to mitigate your risks and plan for adverse events – then maybe you won’t need to think about it for another year!

Kate, Australian problem solver

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