If the pandemic – and now the Ukraine war – have taught small and medium-sized business owners anything, it is the value of staying agile in changing circumstances. Regular assessment of financial risks, and your strategies to meet them, will help to mitigate their short and long term impact.
One immediate challenge for many businesses will be managing the rising cost of energy, along with increasing inflation.
Financial risk might best be described as any potential future situation that could cause your business to lose money. A business will have more control over some risks than others, but that doesn’t mean risks outside a firm’s control, such as energy and fuel prices, can simply be ignored.
For example, if part of your business involves visiting customers, fuel costs might be contained by reorganising service areas to reduce travel time for each journey.
Highly-geared businesses carry more financial risk. With interest rates potentially going up again this year you may need to consider refinancing or switching to a fixed interest rate.
If your focus is largely on sales and profitability, your business’s overall financial position could get overlooked. However, cash flow is critical; poor cash flow has led to many business failures.
- Prepare regular cash flow forecasts so that future liquidity issues can be identified early. It is better to be negotiating a loan or overdraft from a position of strength, rather than when finance is needed desperately.
- Where there is a lot of uncertainty, this can be built into cash flow projections. These could include what will happen if fuel and energy prices increase by x, or a major customer pays y days later than normal.
- If customers regularly pay late, you could consider applying a late payment fee, or look at funding the gap with invoice financing.
Weekly – or even daily – cash flow monitoring could be appropriate given the current, somewhat volatile, economic conditions.
Since it’s impossible to see the future, the only option is to be as prepared as possible for the unexpected; and the key to this is agility.
Think about your business as a series of moving parts, not static fixtures and ask probing questions such as: What else can this asset be used for? Does this expense scale down if revenue falls? Can we quickly scale up if an opportunity presents itself?
Risks are inevitable but having a financial risk strategy in place will mean you are better prepared to deal with the unexpected.