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Financial Risk Management Is Good Management - WHY?

Kim Radok21 August 2014

FINANCIAL RISK MANAGEMENT IS GOOD MANAGEMENT - WHY

Every business owner or manager, sooner or later comes to understand, business is not risk free. Whilst opportunities jump up all around us, dangers also hide around every corner. Such dangers include purchase fraud, employee fraud, non-paying customers, and new or amended legislative requirements. You might as well add the new favourite strategy by disgruntled investors and litigation funders, "Greenmail" for every little mistake, perceived or otherwise, committed by directors.

Furthermore in every business, there is the on-going battle on how to invest in limited funds to grow the business. Do we spend endlessly on aggressive marketing and sales strategies and mechanisms and act like an army which only knows how to attack? Or do we spend a reasonable portion of our resources on defensive business strategies and mechanisms to defend the company when required?

Unfortunately, we see too often business organisations concentrating on an attack strategy with little thought of how to defend the company when events go astray. When crisis or emergencies occur, these organisations usually lack a defensive ability and are without a budget or funds to defend themselves. In this state, any proactive defensive actions such as suing a bad debtor or a fraudster, is almost likely to be expensive.

Then the question is asked "How much is that going to cost us?" To compound the problem of answering this question, the ethos behind the question is inevitably based on "Do we want to spend the money or just write off the problem?" rather than, "... okay let us budget and spend the money to protect our corporate rights!"

The answer to the first question is usually, "Well we are not going to throw more good money chasing the bad money!" The decision is then taken to proceed on the easiest and what is thought to be the cheapest short-term option. More often than not however, the short-sighted resolution to the problem is taken. Unfortunately, future events usually prove it was the wrong decision and "unforeseen costs" continue to impede the company's future performance.

You only have to read the stories in the media at the moment to understand the costs of failing to properly understand risk management issues. It appears almost to be a weekly event where we see another major bank, corporate business, public identity or politician caught out. In every case, we see the same situations apply where the party named failed to understand how their actions or inactions or their disregard of risk, has caused them problems.

At times and in rare situations, the cost has been merely to eat humble pie and offer a mea culpa in the hope that is as bad as it gets. In the majority of situations however, you see a loss of reputation, unforeseen costs which impact on the bottom line, and a distraction from the real purpose of business, to make money.

Risk is all round us in business. To ignore the potential for risk is bad for the long-term welfare of your business. By planning for risk and investing in risk adverse strategies and defensive mechanisms, you are actually adding to the strength of your business model. Equally important, you are working against business disruption and for peace of mind, and how much are these factors worth these days?

May you be paid today rather than tomorrow

Kim Radok

kim@creditmatters.com.au

www.creditmatters.com.au

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