Every business owner should think about performing a financial risk assessment of their company on a regular basis. The assessments are different for every industry, size, and type of company, but at a minimum once per year.
The results of a financial risk assessment will feed into the strategic planning process and budgeting. A consistently profitable company who is not worried about potential risks may still be missing something that could either blow up or cause them to miss opportunities.
Potential Costs of Not Thoroughly and Frequently Assessing Risks
There are several types of assessments a company can perform on a regular basis. These include operational, information technology, sales effectiveness, human resources/people-based, and financial risk. But, what if you decide to rest on your laurels and forgo these reviews?
In the case of a financial risk assessment, the potential costs could be astronomical. include:
Examples
Liabilities not properly recorded, future loan/lease payments not planned for, poor equity timing, expenses not accounted for properly on the P&L vs. balance sheet. Inventories not performed can lead to adjustments on the balance sheet that could cause a negative equity situation if not reviewed regularly.
Missing internal controls could lead to improper usage of company funds.
Without a strategic plan in place, the company cannot grow to its full potential.
External relationships (banking, audit, legal, insurance, etc.), if not revisited, can become stagnant.
Is the company in line with its competitors? Even if it is profitable, is the company in line with the rest of the industry?
What are the financial best practices for the industry, and is the company tracking these?
On the flip side, these exercises can also help grow your business. Your company will become more proactive and able to take advantage of income-producing opportunities. Here is a list of the benefits to be gained by performing a financial risk assessment for your business.
Gain clarity on what is working and what is not working
Provide a solid groundwork for decision making
Assess financial risk
Build a strategic plan
Prepare for growth
Reach or build profitability
Be ready to take advantage of opportunities
Both new and established companies will benefit from a financial risk assessment performed periodically. It could be quarterly, yearly, or as needed.
What financial risks do you currently face?
Market risk
Are you tracking changing conditions in the industry?
Are you up to date on the competition in the industry and area?
Credit risk
Does the company have sufficient cash flow to pay its bills?
Are customers paying on time or taking advantage of inefficiency?
Liquidity risk
Is the business subject to general or seasonal downturns?
How easily can you convert assets to cash if a need arises?
Operational risk
Are you prepared for risks involving lawsuits, fraud, or personnel issues?
What insurance policies and controls are in place?
Is your company prepared for growth?
Are you tracking with your strategic plan with regards to growth?
If a plan isn’t in place, what steps will you take to grow your business?
Do you need to drive profitability and/or adjust to gain efficiencies?
What is your company’s profitability status?
Can you increase prices or shorten your sales cycle to improve margins?
Will profitability improve by speeding up the design cycle?
Can you identify waste to eliminate or other costs to cut?
Are you ready to spot and take advantage of opportunities?
Are you getting the information you need to spot new business opportunities?
When an opportunity arises, do you have the resources available to pursue it?
Key Business Components to Review in a Financial Risk Assessment
These are the key components of your business that should be reviewed and a few questions that will be asked during the assessment process.
General
Company structure. Is your company structure appropriate for the business and its owners? Does it provide the best level of protection from financial risks? Do you have succession planning in place?
Management team and Board of Directors make up. Are there gaps in your top management team or board that you should address? Do you need assistance filling these positions?
Historical financial statements and management reports. Do you have easy access to these reports and use them to benchmark progress?
Facilities
Have you conducted a lease vs. buy analysis for every location? Is it time to renegotiate any leases? Are there any embedded leases that require monitoring?
Human Resources
Are key contracts in place? Are there any gaps?
Are HR policies distributed and acknowledged? Are they being followed?
Finance team and payroll
Are the systems right-sized for the company today and tomorrow? What immediate upgrades might be required?
Are there documented processes in place to protect the company and its people? Do any gaps need to be filled?
Are the right people in the right jobs? If not, what’s the best way to get them there?
Are requirements being met for taxes?
Sales
Are contracts in place, and are they being followed and recorded correctly?
Is revenue recognition being done correctly?
Financial
Internal controls. What are your internal controls, and are they adequate?
Banking controls. Are banking controls in place and followed?
Are financial reports adequate for management to run the business? Is ‘What-If’ analysis available to help with strategic decisions?
Is a budget in place and reviewed on a set schedule? What are the parameters for adjusting the budget?
Does the company have an annual audit or review? Is this internal, external, or both?
Are your tax returns filed timely and accurately? Have there been any shortfalls?
Board of Directors. Are budgets and strategic plans in place and reviewed by the board? How is feedback handled?
Debt & Equity. Is the company’s Debt/Capital structure adequate? What can be done to improve these positions?
Bottom line. What would it take to get to break even if not profitable? What can the company do to improve margins?
Management information systems
Look for risks in current systems. Are they susceptible to an internal or external breach?
Look for opportunities to strengthen systems and processes.
The information gained by this exercise should go into an updated business plan to help the company reach its goals.
Based on your business type, we can assist in setting up template formats for you or your staff to maintain or we can maintain and produce reports that can be agreed going forward what will be required more frequently or less.