Risk proofing your business in a few easy, logical steps!

2012-07-23 12:45

Last week Thursday on the Money Show on 702 Talk Radio and 567 Cape Talk, Bruce Whitfield and I spoke about Sanyati, the black-owned construction company that was going into liquidation on that Friday. What happened and more importantly how can you as an entrepreneur or business owner prevent the same fate.

A few basics can make the world of difference and more than that, a discipline in questioning and observation of how you are building your own business will make all the difference. I will share with you a very simple and basic framework for risk proofing your business. A framework because you need to look at the big things quickly that can be done to achieve this, simple because we are all busy running our businesses and simplicity works!

All of us buy stuff (skills, products, raw materials), add value to it and then sell it to our customers. So there are three elements to our framework where risk can come into the equation; the buying side, the making or production side and the selling side. In addition, we exist in a business environment. This is the 4th element of the framework which I will deal with another time.

The buy side:

Do we only have 1 or 2 main suppliers, are there others? Do we have an exclusive line of supply and is it based on a contract? How solid are our suppliers and what’s happening in their economies? Do we have contracts in place for our suppliers and are we meeting their SLA’s (service level agreements)? Are our suppliers transferable should we one day sell? Are we working with leading suppliers in terms of access to their skills, products, support etc.? Are they big or small and will they be entrepreneurial enough to understand us as well as constantly introducing new products that make our processes easier? If they are people (typical in an IT business), where are they, are there enough of them to build our business?

What you are looking for is a diversified base of suppliers to make your supply chain robust. If your main supplier that provides you with 50% of your inputs collapses or simply decides to supply a new competitor, where does it leave you? You are also looking (always in my view) for transferability of supply should you wish to sell your business one day. Imagine building a business for 15 years to only find your suppliers don’t like your buyers preventing you from cashing out and retiring!

The Operate side:

Are you building a system of delivery or are you always responsible for the running of the business? Have you put systems in place and by this I means business systems not IT systems. These are systems that organise the operation of your business and that allow you to employ people to operate your business! Are your recruiting right in terms of the job spec and culture (one of the most difficult issues that I see constantly)? Do you have a performance management system in place and a dashboard to manage performance – it will be at your peril if not with our labour laws.

What matters here is that you are again looking to build robustness in your operations. However, in operations the MOST important thing you should be doing is building the system of delivery. Without this you are vulnerable in so many ways. An eventual sale will not get you your price, your business will simply fail if you are absent for any period of time, you will lose profit through theft and customers through negligence!

The Sell Side:

Is all your revenue coming from 1 customer, 1 industry, 1 size of businesses? Are you seasonal? Are you subject to exchange risk and interest rate volatility? Are you adding sufficient value to your customers bottom line, do you understand your customers’ needs better than your competitors? Do you have a credit policy, can you build enough value to stop supply when you don’t get paid.

Sanyati, a listed company with over R1bn turnover evidently failed at all these areas. Most revenue coming out of a single client that is notorious in payments – government! Bad move and poormanagement cost the business and the shareholders.

This list is by no means exhaustive. It can and will go on through time over further blogs. Start thinking about how risk proofed your business is. Why should you do this? It’s your business and it’s your life. If you don’t, no one else will. If you need help, please drop me a line or email. Sometimes it easier if someone asks you the questions and provides a sounding board to test your businesses robustness.

Good luck, thanks for reading and keep on truckin’.

Web:           www.aurik.co.za

LinkedIn:   http://www.linkedin.com/in/pavlophitidis

Twitter:      www.twitter.com/AurikSA

Twitter:      www.twitter.com/pavlophitidis

Facebook: www.facebook.com/AurikBusinessIncubator

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