Identifying and Managing your Operational Risks

Identifying and Managing your Operational Risks

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In large corporations operational risks are usually separated quite clearly from other business risks. “But in SMEs a very different picture emerges,” says Colin Hill, solution manager – Risk and Financial Crimes, at SAS Institute.

“In SMEs things are typically managed in a far more integrated way and usually by one person or a small team of people. This means that when SMEs consider operational risks, they often include everything,” Hill adds.

There will be those operational risks that are unique to certain industries

A business operating in the chemical sector might have health and safety risks, while a clothing retailer might need to manage the risks related to suppliers, clothing quality and theft. “But if you’re speaking generally, there are a few key headline operational risks that relate to all industries,” says Hill.

Among these is business continuity risk. Consider the losses your business could incur should it be prevented from running, even for a short period of time. “An incredibly broad range of things can get in the way of business continuity,” Hill comments. They include:

Services interruption

Many people associate interruption to business continuity with interruption to basic services such as electricity and water, and while this is not the only business continuity risk, it is an important one.

This is particularly true in light of the Eskom power supply crisis that made itself felt in 2008, an issue that affected some businesses more than others. In particular, loss of power and interruption to water supply can cause significant losses to businesses in the manufacturing, food production, hospitality and restaurant sectors.

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IT failure

The extent to which most businesses rely on IT infrastructure, means that failure of such systems can severely impact business continuity. For businesses in which information is the key asset, secure and private data storage is of critical importance to business continuity.

HP says that businesses can reduce the probability of downtime by investing in reliable servers that have been certified to run on the latest operating system, simplify storage, and build redundancy into their networks. When it comes to data protection, they advise businesses to look for a storage back-up solution that lets them effectively replace data for quick recovery, and encrypt the data that they back up to tape.

Loss of key employees

Skills can make all the difference to your business, particularly in smaller companies that can’t afford to duplicate skills and where every employee counts. Skills retention is a key risk for many small companies, particularly those operating in skills-short industries such as IT and engineering. In addition, the loss of key employees, even for a short time, can severely impact a business’s ability to operate. This is particularly the case in SMEs where key people tend to hold vital information or knowledge about the company and its processes.

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Supply chain interruption

Supply chain disruptions can reduce revenue, cut into your market share, disrupt distribution, increase your costs and impact your reputation with customers. The risk of supply chain disruption increases with the trend towards globalisation, offshore manufacturing and outsourcing. Businesses need to choose their suppliers carefully, and weigh up the risk of poor or intermittent supply with the benefits of choosing the cheapest supplier available.

There are arguments to be made for developing a strong and trusted relationship with a good, reliable supplier, but it can equally be argued that putting all your eggs in one supplier basket leaves you exposed if that company cannot deliver. The bottom line, however, is that companies need to do a thorough risk analysis of suppliers before committing to supply contracts.

Destruction of property

Depending on the nature of your business, destruction of business premises as a result of fire, flood or other disasters can bring about a partial or total disruption to your business. Because such events are not preventable, the type and comprehensiveness of your business insurance is critical in helping to mitigate this risk.

Financial risks

Cash flow is one of the single biggest challenges facing small businesses and even the smallest disruption to projected cash flow can quickly throw a business into turmoil. Because businesses have limited access to credit, it’s even more important that they manage their debtors proactively.

Debt collection software company, Swordfish, says it’s impossible to avoid bad debt altogether. “Even SARS is battling to collect money. The key is to keep bad debt to a minimum,” says Jacques Lubbe from Swordfish.

The best case scenario is to weed out potential bad debtors before they become clients. “This can be done by implementing a thorough screening process or scoring system, which can be outsourced to specialists who perform the necessary checks and balances before you take on a client,” says Lubbe.

Debt collection software like Swordfish provides a system for cradle-to-grave debt management in one centralised repository.

Juliet Pitman
Juliet Pitman is a features writer at Entrepreneur Magazine.