Business and Compliance Risks

It is not possible to eliminate risk entirely when running a business. However, where the risks faced by a business can be identified, the owner and managers can take steps to manage or reduce the risks to an acceptable level whilst been aware of the impact on return.

Outlined below are some of the risks that a business can face from time to time.

Owners aims and requirements

1. Returns from the business

The owners’ lifestyle and financial obligations could lead to excessive amounts been taken from the business which could threaten the ongoing existence of the business.

2. Exit risk

The exit route needs to be planned to avoid the risk that the owner is unable to obtain suitable return and is ‘trapped’ in the business.

3. Control risks

The owner, where involved in management, may have too much, not enough, inaccurate or late information. This risks inappropriate decisions being made which impacts on the continued running of the business.

Objectives of the directors/senior managers

1. Conflict over direction of business

Conflict between owners and managers will generally be a drain on the resources of the business and will lead to disenchantment on both sides with neither party reaching their objectives.

2. Loss of directors/senior managers

It is difficult to find strong directors and retention is a key issue. Loss of strong directors will have a detrimental impact on business performance and as such the level of returns to the owners.

Labour supply

1. Loss of key staff

Loss or failure to recruit staff with specific skills can result in the business being unable to meet commitments or having to pass up work. This will obviously impact on results but could have longer term effects if the business is seen as being unable to provide the required level of service.

2. Regulatory breaches

There are a wide variety of regulations dealing with employee protection issues. Breaches of regulations may have financial implications.

Unusual or unique labour practices

1. Additional tax liabilities

The taxation system is not operated correctly or is applied incorrectly to certain staff resulting in additional liabilities for the business as well as additional management time commitments.

Key suppliers

1. Poor quality goods

Goods of poor quality received leading to lost sales or reduced margin and increases in the level of stock held.

2. Uncompetitive pricing

Prices charged for goods are not competitive resulting in reduced margins.

3. Loss of supplier or stock

A key supplier goes out of business or is unable to supply the required item of stock. This may lead to the business being unable to satisfy its orders and result in ongoing loss of business.

Customers

1. Loss of key customer

A key customer is lost resulting in turnover falling with no reduction of fixed costs leading to reduced profits.

2. Insufficient profit from customers

The size of the customer may result in additional resources being applied which exceed the profit being generated or small customers in overall terms may not generate a profit after taking into account administrative and other costs.

Building utilisation

1. Long leases

The business is committed to long lease of premises that are not suitable for its future requirements.

2. Under insurance

The business is underinsured in respect of the destruction of buildings and fails as a result.

External regulation

1. Non compliance

The business fails to comply with the rules of its regulator either in terms of systems or the filing of reports and incurs significant penalties.

Product technology

1. Old products

The business is selling out of date products and is generating a lower margin and is unable to finance or source new products.

Production technology

1. Low quality products

The business’s products are of low quality or are unable to compete in terms of price.

Structure of the entity

1. Inappropriate structure

The structure is inappropriate exposing owners to excessive liabilities or creating difficulties for the owners in extracting value from the business.

2. Disagreement between owners

There is disagreement between owners either on the running of the business or in other areas and this creates difficulties in managing the business.

Financing structure

1. Directors’ personal liability

A poor financing structure can make it difficult to finance expansion and can expose directors to liability via personal guarantees.

Organisational structure

1. Delegation

Too much responsibility rests with one person and poor decisions are made and frustration sets in. The performance of the business suffers as a result.

Composition and operation of the board

1. Legal obligations

Directors are unaware of their responsibilities to the company and their obligations under law and act inappropriately or unlawfully.

Operational management

1. Staff retention

A key manager leaves the organisation resulting in loss of knowledge and potentially the loss of other staff and customers.

Government policy

1. New legislation

New legislation increases business costs.

2. Regulations

The business is unable to deal with regulations leading to either regulatory action or action by dissatisfied employees.

3. Government policy affects the market

Government policy affects the market for the product possibly leading to lower margins and sales.

Foreign exchange

1. Financial exposure

The business suffers a significant exchange loss on assets or liabilities denominated in foreign currencies.

General economic activity

1. Economic climate

The business is affected by the general economic climate and is for example under or over stocked.

Competitor review

1. Competitor advantage

Action taken by competitors gives them an advantage over the business in the market place.

Seasonal and cyclical activity

1. Lack of information

Business decisions are taken without awareness of the impact of seasonal or cyclical factors resulting in lack of profitability and potential cash flow problems.

The market place

1. Market changes

The business fails to respond to changes in market conditions and market share is lost or margins impaired.

Information technology

1. The use of unauthorised software

This exposes the business to risks that the unauthorised software will corrupt key parts of the system and to potential charges for copyright theft where unlicensed software is used. Not only can this result in significant costs but the damage to the company’s reputation can be severe.

2. Loss of data

Computers, as any other equipment, can fail. This can lead to loss of data. Data can also be lost in other circumstances such as fire or theft.

3. Virus attack

An undetected virus can create havoc with a system and destroy vital data.

4. Application errors

In some cases key business decisions will be based on information obtained in an application such as a spreadsheet. This spreadsheet may have been created some time ago and undergone a number of subsequent changes.

This can result in errors that lead to inappropriate decisions being made.

Accounting systems and internal controls

1. Statutory records

The business must maintain minimal records to comply with the Companies Acts and avoid legal penalties.

2. Accurate information

The accounting system must provide timely, relevant and reliable information for the decision makers.

3. Inadequate controls

Cost effective controls must be in place to highlight errors and prevent fraud.

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Related Article:           Top 10 Reasons Small Businesses Fail

Please call Noel Murphy today on 021-4310266 if you need further information on business and compliance risks or a free consultation.