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01 Sep 2009

Risk Management Guide – Part 2


5 min

This month we continue with our Article Series titled Risk Management, written by and reproduced with permission by CPA Australia.

Risks posed by staff

Do employees see the business as a short-term employment option? For example, they would describe it as 'a good place to learn for a while' or 'a nursery for the industry'?

If the business is seen as a short-term employer, high staff turnover could result in disruption to the business and the expense of finding and training new staff who won’t deliver a return to the business if they also leave after a short time.

Are there employees in the business who are critical to its success?

If an employee is critical to the business’s success, then sales and profits may suffer if the employee sets up a business in competition or goes to work for a competitor. With sales and profits suffering, there is a risk that the business will have to quickly restructure, for instance, by moving to smaller premises or retrenching staff.

Do some employees largely govern or control dealings with key suppliers or customers? For example, some employees may control the supply of goods or services, or pricing.

If some employees are largely autonomous when dealing with key suppliers or customers, there is a risk of fraud or collusion, or there could be significant disruption to the business if they leave.

Do staff face occupational health and safety (OH&S) risks? For example, are they working in a dirty or hazardous environment, or do they have to travel extensively by car?

If staff work in an unsafe environment, the business is at risk of fines and penalties and, more importantly, the absenteeism, injury or death of an employee.

Risk mitigation strategies include:

  • implementing a selection procedure that increases the probability of finding the right staff for the business
  • putting in place confidentiality agreements and / or reasonable restraint of trade agreements signed by key staff or where appropriate all staff
  • implementing a robust performance development system for communication of performance expectations and goals, monitoring performance and setting remuneration
  • providing ongoing training for staff consistent with the needs of the business
  • allocating several people to fulfill key tasks and provide backup in the event of illness or sudden departure
  • rotating employees through various functions or departments to familiarise them with other areas of the business
  • implementing suitable OH&S policies to minimise risks. For example, safe driver training and regular maintenance of vehicles or other equipment
  • using equity interests, profit-sharing or other incentives to help retain key personnel and let them share the success they create for the business. But be careful how such incentives schemes are designed, as it could encourage unintended behaviour
  • reviewing the period of notice required of staff who resign. Once again, be careful with this as it could have unintended legal consequences

Risks posed by the business premises and its location

How dependent is the business on its current location?

If the business depends on its location, a move to premises outside the immediate vicinity of the current location may disrupt the business by affecting customer, staff and supplier access. Another risk of being highly dependent on the premises is that in the event of a fire, flood or other disaster, the business may not be able to restart trading if the premises (including stock, equipment, materials and records) are destroyed. Another risk is the possibility that customers may move away from the location.

Is the business growing strongly at present, or is it relatively stable? If it is growing strongly, how long can this be expected to continue for and how big will the premises need to be in two, five or 10 years’ time?

Unless plans have been made to expand the current premises, the business may not be able to grow to its full potential and it could be overtaken by competitors.

Risk mitigation strategies include:

  • identifying a number of suitable alternative premises which would suit customers, suppliers and staff
  • where the premises suit the business’s long-term needs, consider securing a long-term lease or right of first option when the lease expires
  • managing the business to predict future space requirements early, which will allow an easier response to business requirements for premises. Only businesses that are established, have good prospects and are growing should consider purchasing a property and then only if the property has sufficient capacity to allow for future expansion, otherwise it is preferable to rent. Renting also helps to preserve working capital for business operations

Threats to goodwill and reputation

How exposed is the business to a threat to its reputation or goodwill? For example, what would happen if there were a product recall, or if the business delivered bad customer service or advice or there was a major fraud?

If there is a large-scale product recall, a fraud, or other similar event, there would be a lot of bad publicity. This would cause immediate distress to the business by impairing its cash flow and putting it to the trouble and expense of reworking. It could also cause longer-term damage to the business’s reputation.

Risk mitigation strategies include:

  • incorporating robust review processes and quality assurance systems to avoid a situation that may damage the firm’s reputation or goodwill
  • investing in research and development and keeping up-to-date with technological advances
  • compulsory training and development programs for staff

In next month’s series, Risks Posed by Information Technology; Risks Posed by Financial Transactions such as Liquidity Risk: Credit Risk: Foreign Exchange Risk.

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