Bank’s Interest in your Risk Management
Obviously banks are keenly interested in businesses risk management strategies because the better these strategies, the less risk to their loans.
We remark on the obvious because it’s an all-important fact that’s escaped the attention of too many business owners seeking loans – or worse, being aware of the obvious, they've done nothing about it.
The rule of thumb these days is no risk management strategy, no loan.
Whether the need is for start up finance or loans to expand a business, bankers want to see that potential borrowers not only appreciate risks that can adversely affect their businesses, but have strategies to manage them.
Bankers are likely therefore to put loan applicants’ businesses to financial stress tests with quizzes on what-if scenarios, citing risks specific to the business.
But first things first
If you’re a business owner seeking a bank loan, be prepared as a first step, before contacting a banker, to have on hand final data that determines the state of the business no later than a month previous to your application.
This should include such information as sales levels for each of the preceding 12 months, gross profit margins, operating expenses, key performance indicators for the previous financial year and current financial year to date. You also need to have readily to hand current budget figures and forecasts for the next 12 months, an analysis of debtors’ payment history, a list of debtors’ days outstanding, as well as information on any of the business’s outstanding debts.
Next: can you demonstrate to a banker that you are fully aware of risks that could possibly impinge on your business?
Awareness is vital
There are of course risks over which you have no control. You can however, by being aware of them, judge their likely general effect on your business – wars, global financial problems, economic upheavals in various parts of the world and in specific countries.
You may need to factor environmental considerations into your planning – the possible effects of unusual temperature fluctuations, storms, floods, drought and pollution. There needs to be a management strategy for risks associated with these which may involve insurance, disaster recovery plans, policies and procedures.
And of course there are always commercial risks peculiar to the market in which your business functions, that can affect its sustainability. Make sure you have a current appreciation of all of these so you can take appropriate action before a risk develops into a serious danger.
Regulations, laws, and compliance matters affecting a business will change. Stay alert for possible and actual changes so as to lessen the risk of what failing to do so could do to your financial future.
Monitor the opportunities technology offers. Don’t risk your business being disadvantaged because you haven’t kept yourself updated on technology that will maximise efficiency.
Make sure directors and senior executives understand their responsibilities which continue to evolve under the Corporations Act. Corporate governance risks should never be taken lightly.
Be assured, any potential financier for a business wants to be convinced that owners not only know their own businesses well, but are also familiar with the industry in which their businesses function.
Catalogue of risks
Don’t risk committing a catalogue of business risks to memory. Compile one as a written checklist for ready reference.
To risks referred to above, add the following within the premises where your business operates:
- Keep a sharp eye on anything to do with safety – possible damage to property or injury to anyone (visitors to your premises included) resulting from deterioration or obsoleteness of plant, equipment or buildings.
- Are risks both from within and without to premises and contents adequately covered by security systems?
- Consider risks to the business associated with staff: structural issues, personality clashes, unprofessional conduct, false product claims, petty theft, pilferage, workforce unrest, bullying, sexual harassment or discrimination claims.
- There are potential risks to a business because of communication or power failures, foreseen or unforeseen downtime of equipment, loss of an important supplier or departure of key management (to perceived greener pastures, by death or through disablement). Has everything been done that should be done by way of backup or a plan B to minimise such risks or deal with them as eventualities?
For more information, contact Macks Advisory on 08 8231 3323 or visit our office at Level 11, 99 Gawler Place, Adelaide SA 5000.
