Tue | Aug 21, 2018

Yaneek Page | Risk assessment as important as business plans

Published:Sunday | November 26, 2017 | 12:00 AM

QUESTION: Can you tell me more about risk plans? I am thinking of starting a clothing business but when I talked to my credit union about it the officer said that I must write a business plan and a risk plan. Is the first time I hear anyone ask for this. I already have some knowledge of a business plan so I understand that, but do you think this risk plan is important and how do I do one?

- Talia

BUSINESSWISE: A risk plan, which is more formally referred to as a risk assessment, is as important, and in our local context perhaps even more important than the business plan itself.

Entrepreneurs by their very nature tend to be highly optimistic, confident and very passionate about their business ideas.

The downside to their positivity is that they are often dismissive of, or blind to objective data that cast doubt on the viability of the business.

To make matters worse, although Jamaica has an enviable rate of business start-up in the world, we also have one of the highest rates of start-up failure - which makes risk assessments and effective enterprise risk management in general, a critical success factor for any new venture.

Another important point is that most people who start business have no prior training in business administration, business strategy and operations, human resources management, financial management, marketing, customer service, sales or any of the other key disciplines that are essential to operating business.

I am, therefore, not surprised that your financier has asked you to produce a plan to manage risks your new business is likely to face. He or she should be commended as this serves your interest far more than their company's.

Most lending institutions have entire departments dedicated to conducting risk assessments of business plans submitted for financing as well as the prospective borrower or principals of the business - in both their personal and professional capacity.

The decision to lend is based mainly on the outcomes of the financial institution's assessment so it would likely give you a significant advantage if you were to complete a risk assessment of your own and include it as a supplement to your business plan.

The great news is that doing a risk assessment may increase your odds of accessing financing for your business, and more important reduce the likelihood of business failure. You will not only make the credit risk department's job easier but also demonstrate your foresight and capacity as a prospective business owner to proactively and objectively manage threats to the viability of the business.

The bad news is that enterprise risk management is a very technical area and typically requires the guidance of an experienced subject matter expert.

There are several software options that can support risk management and the conduct of risk assessments, however the user would still need to be knowledgeable of how to manage risk and the licenses are costly.

The basic process of risk assessments begins with the establishment of a risk tolerance for the business which is the amount of risk or loss the company is willing to accept in execution of its mission or long-term goals.

Any risks that are above the risk tolerance would therefore need to be managed or mitigated proactively.

The next step is to identify risks that are general to the industry and specific to your business, internally and externally. As an example, for your business this would include risks such as currency fluctuation, changes in customs importation policy, increased competition, pilferage, poor location, poorly trained staff, among many others.

These risks would be recorded and rated according to their impact and likelihood if they were to occur. You would then rank the risks by threat level using the established risk tolerance as the guide.

For each risk that exceeds the company's risk tolerance, you would need to outline specific mitigating actions that would both minimise the likelihood of the risk occurring and the impact on the business.

These risk mitigating actions would then form part of your daily operations - so that as you plan and execute the growth of your business you are also managing risks that could threaten your goals as a normal part of doing business.

I hope by now you understand the value of a risk assessment/plan far exceeds merely an item you check off to access a loan, but that it can actually enhance the management of your business, achievement of business goals and reduce the likelihood of failure.

One love!

- Yaneek Page is an entrepreneur and trainer, and creator/executive producer of The Innovators TV series.

Email: info@yaneekpage.com

Twitter: @yaneekpage

Website: www.yaneekpage.com