MANAGING RISK

Business
risk analysis
“In simple terms, the Directors are often too
blind to the risks they face”
 Managing risk

Executive summary
Business risk analysis is an essential part of the planning process.
It reveals all the hidden hazards, which occupy the business owner’s
mind on a subconscious level but which have not been carefully
considered and documented on a conscious level.

Conducting and regularly reviewing business risk analysis brings huge benefits to a company.

Highlights
What are the risks facing your company?
How to conduct a business risk analysis
How a part-time FD will conduct a risk analysis on your business

Business risk analysis 3

 Managing risk

Introduction
Not understanding the risks your company faces can bring your
company to its knees, as a 2011 report, ‘The Road to Ruin’ from
Cass Business School revealed.

Alan Punter, a visiting Professor of Risk Finance at Cass “About 20 Chief Executives and Chairmen
Business School, said the detailed survey of 18 business subsequently lost their jobs, and many Non-Executive
crises during which enterprises came badly unstuck Directors (NEDs) were removed or resigned in
revealed that in simple terms, directors were often the aftermath of the crises. In almost all cases, the
unaware of the risks they faced.1 companies and/or board members personally were

“
fined, and executives were given prison sentences in
four cases.

“One of our main goals was to identify whether these

failures were random or had elements in common. We
This report makes clear studied a wide range of corporate crises, including
those suffered by AIG, Arthur Andersen, BP, Cadbury
that there is a pattern to the Schweppes, Coca-Cola, EADS Airbus, Enron,
apparently disconnected Firestone, Independent Insurance, Northern Rock,
Railtrack, Shell, and Société Générale.
circumstances that cause
companies in completely “And our conclusion? To quote Paul Hopkin of Airmic,
the Risk Management Association that commissioned
different areas to fail. In simple the research: ‘This report makes clear that there is a
terms, directors are too often pattern to the apparently disconnected circumstances
blind to the risks they face. that cause companies in completely different areas to
fail. In simple terms, directors are too often blind
to the risks they face.’”

1.
‘ The Road to Ruin’, Punter, Alan, Financial Director,
www.financialdirector.co.uk, Aug 18, 2011

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 Managing risk

A lot of business owners spend an unhealthy amount of

“
One of our main goals was to
identify whether these failures
were random or had elements
in common.

their time worrying about what might go wrong but don’t

have a formal risk management framework in place.

It is dangerous not knowing what might go wrong.

That includes not knowing: It is dangerous
not knowing what
When the money might run out might go wrong.
Whether a new product launch is viable
Whether a competitor has the resource and
motivation to drive you out of business
What risks are involved in penetrating a
new market
How the market is changing (and how it will
react to your future plans/products/services)
Whether a recession will change the
playing field.

It is also dangerous not knowing your

internal risks:

What products are delivering the

greatest profit?
What happens if key members of your
team decide to leave?
Are you likely to reach market saturation?

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 Managing risk

What are the risks facing

your business?
Business risks can be broken Where to start…
up into the following:
Strategic risks – risks that are associated with You need to identify potential
operating in a particular industry risks to your business. Once
Compliance risks – risks that are associated with
the need to comply with laws and regulations. you understand the extent of
Financial risks – risks that are associated with the possible risks, you will be able
financial structure of your business, the transactions
your business makes and the financial systems you
to develop cost-effective and
already have in place realistic strategies for dealing
Operational risks – risks that are associated with your
business’ operational and administrative procedures.
with them.
Market/Environmental risks – external risks that a
company has little control over such as major storms
or natural disasters, global financial crisis, changes in
government legislation or policies.2

The ‘shoot, fire, aim’ approach favoured by many

entrepreneurs is great for making things happen
quickly but often jeopardises the long-term stability
of the business.

What is needed is a balance.

Once the business understands the risks, it means
that it can move forward decisively and confidently.
It’s hard to do this when there is a cloud of
confusion hanging over the business.

2
Source: http://toolkit.smallbiz.nsw.gov.au

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 Managing risk

Categories of risk
Financial: This category includes cash flow, creditor Service delivery: This relates to the delivery of
and debtor management, budgetary requirements, tax services, including the quality and appropriateness
obligations, remuneration and other general account of service provided, or the manner in which a product
management concerns. is delivered, including customer interaction and
after-sales service.
Organisational: This relates to the internal
requirements of a business and issues associated with Commercial: This category includes the risks
its effective operation. associated with market placement, business growth,
diversification and commercial success. This relates to
Equipment: This covers the equipment used for the
the commercial viability of a product or service
conduct and operations of the business. It includes
and extends through establishment to retention and
equipment maintenance, general operations,
then the growth of a customer base.
depreciation, safety, upgrades, and general operations.
Project: This includes the management of equipment,
Legal & regulatory compliance: This category
finances, resources, technology, timeframes and
includes compliance with legal requirements such as
people associated with the management of projects.
legislation, regulations, standards, codes of practice
It extends to internal operational projects, projects
and contractual requirements. It also extends to
relating to business development, and external
compliance with additional ‘rules’ such as policies,
projects such as those undertaken for clients.
procedures, or expectations, which may be set by
contracts, customers or the social environment. Safety: This category includes the safety of everyone
associated with the business. It extends from
Security: This category includes the security of the
individual safety to workplace safety, public safety
business premises, assets and people, and extends
and to the safety and appropriateness of products or
to the security of technology, information and
services delivered by the business.
intellectual property.
Stakeholder management: This category relates to
Operational: This covers the planning, operational
the management of stakeholders (both internal and
activities, resources (including people) and support
external) and includes identifying, establishing and
required within the operations of a business that
maintaining an appropriate relationship.
result in the successful development and delivery
of a product or service. Strategic: This includes the planning, scoping and
resourcing requirements for the establishment,
Reputation: This entails the threat to the reputation
sustaining and/or growth of the business.
of the business due to the conduct of the entity as
a whole, the viability of product or service, or the Technology: This includes the implementation,
conduct of employees or other individuals associated management, maintenance and upgrades associated
with the business. with technology. This extends to recognising the need
for and the cost benefit associated with technology as
part of a business development strategy.

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Before you begin to identify the types of risks you Identify the risks
face, you need to assess your business. Consider Look at your business plan and determine what you
your critical business activities, including your staff, could not do without and what type of incidents could
key services and resources, and the things that could have an adverse impact on those areas. Ask yourself
affect them (for example, illness, natural disaster, whether the risks are internal or external. When,
power failures, etc.). how, why and where are risks likely to occur in your
business? Who might be affected or involved if an
In particular, consider: accident occurs?
The records and documents you need every day
The resources and equipment you need to operate Ask ‘What if?’ questions. What if your company’s critical
The access you need to your premises documents were destroyed? What if you lost access to the
The skills and knowledge your staff have that you internet? What if you lost your power supply? What if one
need to run your business of your key staff members resigned? What if your premises
External stakeholders you rely on or who rely on you were damaged? What if one of your best suppliers went
The legal obligations you are required to meet out of business? What if services you rely on, such as
The impact of ceasing to perform critical business communications or roads, were closed?
activities
How long your business can survive without Think about what possible future events could affect
performing these activities. your business. Consider what would lead to such events
happening. What would the outcome likely be? This will help
Doing this assessment will help you to work out which you identify risks that could be external to your business.
aspects your business could not operate without.
Assess your processes
Evaluate your work processes (use inspections,
checklists, and flow charts). Identify each step in your
processes and think about the associated risks. What
would stop each step from happening? How would that
affect the rest of the process?

Assess your
processes

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Consider the worst case scenario

By thinking of the worst possible things that could affect
your company can help you to deal with smaller risks.

Once you’ve identified risks relating to your

business, you’ll need to analyse their likelihood and
consequences and then come up with options for
managing them.

You need to separate small risks that may be acceptable

from significant risks that must be managed immediately. You need to consider:
Analysing the level of risk How important each activity is to your business
The amount of control you have over the risk
To analyse risks, you need to work out the likelihood Potential losses to your business
of it happening (frequency or probability) and the The benefits or opportunities presented by the risk
consequences it would have (the impact) of the risks
you have identified. This is the level of risk, and you
When you’ve identified, analysed and then evaluated your
can calculate it using the following formula:
risks, you need to rank them in order of priority. You can
then decide how you will treat unacceptable risks.
Level of risk = consequence x likelihood

Level of risk is often described as low, medium, high To do that, you will need to
or very high. Assign each risk a likelihood rating from 1 consider:
(being very unlikely) up to 4 (being very likely). You can
use a rating level higher than 4. The method of treating the risk
The people responsible for the treatment
You should also assign each risk a consequence rating The costs involved
from 1 (being low) to 4 (being severe). Again, you can The benefits of the treatment
use more than four levels. The likelihood of success
The ways to measure the treatment’s success
Once you’ve assigned each risk a likelihood and a
consequence rating, calculate the level of risk. You
then need to create a rating table for evaluating the risk You could:
(which means making a decision about its severity and
Avoid the risk
ways to manage it).
Reduce the risk
Transfer the risk
Accept the risk

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 Managing risk

How a part-time FD will

conduct risk analysis
on your business
The FD Centre will provide you with Although our review process will reveal areas of
a highly experienced senior FD weakness you specifically require help with, we take a very
proactive approach to finding out where we can best help
with ‘big business experience’ for a you. In other words, we don’t expect you to tell us what
fraction of the cost of a full-time FD. you need because that way, you are left to do the thinking.
We work through a detailed methodology to ensure that
This means you will have: no stone is left unturned.
One of the UK’s leading FDs, working with
you on a part-time basis Your part-time FD will work with you to understand the
A local support team of the highest calibre FDs risk profile of the business and of the shareholders. Too
A national and international collaborative team of the many initiatives launching or running concurrently can
top FDs sharing best practice (the power of hundreds) be problematic.
Access to our national and international network of
clients and partners By managing the company’s risk profile and the risk profiles
of the shareholders the whole business can be brought
With all that support and expertise at your fingertips, into alignment and can operate as a unit rather than as a set
you will achieve better results, faster. It means you’ll have of individual parts.
more confidence and clarity when it comes to decision-
making. After all, you’ll have access to expert help and This is actually one of the most critical roles in any business
advice whenever you need it. and your part time FD will support and guide you through
the process.
In particular, your part-time FD will work closely with you
to take on the burden of designing the roadmap for the We have an intimate understanding of every conceivable
business. risk growing businesses face. This means that we can help
you build a much stronger business by knowing how to
navigate through the growth stages of the business cycle
confident that you are equipped to meet the challenges as
they present themselves.

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 Running head here xxx

When our part-time FDs look at Safeguard all intellectual property including patents.
‘risk’ in your business, they also Implement hedging strategies where there are
financial risks such as currency or interest rate
work with you to:
exposure.
Improve resourcing to strengthen performance.
Identify future risk areas across the business and
To re-engineer the business as and when the
share that information with key employees.
competitive landscape changes.
Include significant risk areas in the business plan.
Improve customer relations where they pose a
Test assumptions to find weaknesses in the
threat to the business.
business plan.
Use our own experience and the experience of the
Evaluate alternative scenarios and approaches
wider FD Centre team and expanded contact network
which may lead to improved outcomes.
to help surround you with the best possible team.
Consider contingency plans in case things go wrong.
Help you achieve your work/life balance
Provide forecasts based on risk analysis. objectives (careful planning is key to freeing up
Provide your organisation with an elevated sense of your time and energy).
credibility (with a high calibre FD as part of the team) Guide you through the business growth stages so you
your organisation will be perceived by funders and know what to expect and how to deal with changes.
other third parties as a much ‘lower risk’.
Help create a clear roadmap for delegating
Act as a sounding board to discuss and critique responsibilities and tasks out to your team to create
your plans. more time and space for developing the business.
Liaise with funders when circumstances change. Help communicate the business objectives to your
Test the effectiveness of your marketing. family where appropriate (it can often help to have a
Test the effectiveness of your operating procedures. third party involved who understands the needs and
concerns of your family).
Identify problem areas before they become
unmanageable. Devise a reporting structure which acts as an early
warning system for problems.
Correct mistakes quickly before they cost too much.
Liaise with lawyers to understand possible legislative
Develop incentive schemes for staff to lower the risk
changes and ensure compliance.
of losing key members of the team. After all, replacing
employees is a costly enterprise. The average fee for Investigate existing insurances and make sure that
replacing a departing staff member is £30,614, says you are adequately covered if things do not go
Oxford Economics and income protection providers according to plan.
Unum. Look into hedging strategies for borrowing abroad
Coach you and your department heads through for example to fund overseas subsidiaries
the implementation process. Reduce your personal risk by looking into other
types of security/funding.

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Conclusion
It is never possible in business to eliminate
risk or worry, but it is possible to create a
framework and implement systems which
lower your exposure to risk. That in turn
allows you to focus primarily on growing
your business.

Knowing that you have a framework in place

to mitigate risk means that you can free up
time and mental energy.

Discover the way to

manage risk now
Let one of the FD Centre’s part-time FDs help you with
business risk analysis. To book your free one-to-one call
with one of our part-time FDs get in touch on:

tel: 0800 169 1499

email: info@thefdcentre.co.uk
www.thefdcentre.co.uk

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tel: 0800 169 1499
email: info@thefdcentre.co.uk
www.thefdcentre.co.uk