| RISK MANAGEMENT
By Joseph P. Fullop
The two biggest killers of business today are improper initial capitalization, and unpredictable cyclical events. The two are linked to a certain degree because if you are capitalized properly you maybe able to survive an unpredictable swing in sales.
Banks loan money on an antiquate basis that compounds these common problems. I have inquired from a multitude of professional bankers as to why they persist in this practice. The answer is always the same, "That is the way it has always been done". You would think that a banker would not be adverse to positive changes that would reduce defaults and increase profits. The real problem here is not the problem itself but the adversity to change, or fear of it, by all involved.
Risk can be managed if some planning occurs before the crisis presents itself. The first step is to define as many risk factors as you can that your business is exposed. List them in writing and then attempt to define offsetting circumstances that you can control. It isn't as complicated as it sounds. This approach can best be summed up by the old proverb " An ounce of prevention is worth a pound of cure".
The old "what if" game should be played to the point of exhaustion when calculating possible problems with your business. Some of the problems you might think of may, at the time, seem absurd. The absurd in business has a strange habit of becoming reality so don't discount the possibilities too much. Murphy's Law dictates that "What could go wrong will". My Law as a professional consultant dictates that Murphy was a pure optimist.
It is much easier to solve potential problems if you deal with them before the business is actually functioning. CEO's get caught up with the day to day problems and never ever get around to potential damage control. A new business that is in the planning stages can be a little more objective about the environment that they are entering. Things such as " Is the market for my product being controlled by one major competitor?" or "Are any of my key components controlled by my competition?" etc.
After you define most of the problems you will ponder the possible solutions. You will find that almost every one of the solutions will make a full circle and end up with you needing more capital to solve the issue. You might need to buy out a supplier, or be able to purchase all your raw materials in larger volumes, or maybe you need additional warehouse space for both raw materials and finished goods, or simply the need to expand market area. The odds are you are already borrowed up to the limit so where are you going to get the capital you need?
Its no secret that I am a staunch advocate of tapping the private investor markets. This kind of money is the cheapest by far and a multitude of fringe benefits can be rolled into the equation. There is only so much you can do to increase efficiency within your organization without money. If indeed you decide to capitalize some improvements you should look at your entire financial portfolio at the same time. Many think that because they have low interest loans from the city or state that they could not hope for better terms or lower interest rates. Think again! Proper syndication from private investors can bring to the table things you never contemplated. For instance, what is it worth to become judgement proof? What is it worth not to be personally liable for the corporate loans? What is it worth to shelter yourself from double taxation? What is it worth to be able to expand now and dominate market share and put yourself out of reach of the competition? All of these and much more can be accomplished if you are structured properly and capitalized adequately.
Putting together a plan to accomplish the above is not as difficult as it sounds if you have good professional help in putting it together. Focus on a couple key issues as you organize your plan. First, and foremost, remember, the better you make the deal for the investors the better the chances of raising the capital you need. This would seem to take from you when you give to them. Don't be greedy! You should focus on what you want both short and long term. If you can get what you want without all the risks normally associated with your industry it is most definitely worth considering. Secondly, the art of the deal requires you to incorporate as many different types of benefits as possible. You must put into the air many balls and be able to control them. For example, you need to minimize the tax implications to the investors and yourself as much as possible with your plan. You need to reduce the amount of legal exposure your investors are subject to. Provisions need to be made in case of your death as a key man.
Most business risks can be managed. The CEO must take responsibility for the risk he exposes himself to personally to as well as his corporation. Most businesses fail because these issues are ignored to the point of disaster. Face them head on and solve the dangers before they wipe you and all your work out. I personally have never seen a corporation that couldn't use a large dose of risk management. Every kind of risk needs to be addressed. Make a game of it with your employees and ask them to contribute their thoughts on the subject. You might be surprised what they come up with and you just might discover someone among the rank and file of your company that has the insight for a potential management position. One plan should be able to solve 95% of your company's risk if you really work on it. Good Luck.
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