Thomas M. Bragg on Business Risk Management

To be honest, I’ve debated about whether I should write about financial modeling. If you’re anything like my girlfriend Amy, the mere thought of financial modeling causes great anxiety and a profound desire to change the topic. And I’m pretty sure that a post on creating spreadsheet representations of your business may not go viral.

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But the simple truth is that financial models are incredibly powerful tools and they’re not that hard to create. Models are also required to do certain types of risk evaluation (as I talk about here, here and here..) In fact, models of the financial kind can be kind of sexy – at least to the engineering types like me.

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Well, now that I think about it the models really aren’t that sexy…did I mention that financial models are incredibly powerful? Read the rest of this entry »

In our last conversation about risk management how-to’s, we finished up the discussion on evaluating risks. If you are able to utilize some sort of financial model to estimate risk impacts during your evaluation, you now have a rather lengthy list of risks with their probable impacts. That list can now be sorted.

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How you sort the data depends on your desired approach. You can sort the data in order of probable impact. (This sort order will put the risks with the greatest potential impact to your business at the top of the list.) Or you can sort the data in order of probability of occurrence. (This sort order will put the risks that are most likely to occur at the top of the list.) Each sort order has its benefits. Personally, I look at the data in both ways. I obviously want to deal with the biggest impact risks. But I also want to deal with the most probable risks. Call it selfish, but I like the idea of reducing my future stress levels by eliminating the most probable risks.

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So we’ve got a sorted list of risks. It’s probably somewhat overwhelming. There is no way you can deal with all of them. Where do you start? Which risks do you work on and which do you leave alone? That’s where the 80-20 rule comes in… Read the rest of this entry »

First off, let me apologize for the inconsistent posting lately. The holiday and vacation really hosed up my editorial calendar…
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So let’s get back to evaluating risks. In the last post, I introduced you to the first two steps in risk evaluation: estimating probability and estimating potential impact. The last two steps are calculating probable impact and testing sensitivity. Read the rest of this entry »

As you recall, the 3 steps of business risk management are:

1. Identify your risks
2. Evaluate your risks
3. Plan for your risks

I’ve written a couple of posts (here and here) about the first step – identifying risks and creating your risk inventory (list of risks and opportunities). I’ve also written about the related topic of identifying your opportunities. It hasn’t been an exhaustive tutorial, but hopefully there has been enough information presented to help you gain a basic understanding of how to get started.

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Now let’s start talking about evaluating the risks. (Note: Whenever I write “risks” in this post, I am also referring to opportunities. They are evaluated in exactly the same way.) In this post I’m going to describe what results from the risk evaluation exercise. The next post will get into the specific actions involved in the evaluation. Read the rest of this entry »

I was thrilled to read Tim Berry’s November 12 post in his Planning Startups Stories blog. He was talking about 5 basic entrepreneurship skills that business schools don’t teach. One of the skills Tim listed was risk management. He wrote:

I don’t mean the technical side of risk management. Business schools are generally excellent at teaching the numbers and analysis of risk, mathematical tools to evaluate the time value of money, for example, and formulas to compare technical investment risk like the internal rate of return (IRR).

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I do mean living with risk. Not betting things you can’t afford to lose. How to sleep at night when your customers owe you enough to destroy you simply by failing to pay what they owe. How to figure out which spend is a reasonable risk for generating a future payback, and which isn’t. How it feels to take a second mortgage, or how it feels to tell a graduating high-school senior with a great record that there isn’t enough money for the college he or she has earned.

The risks Tim described are what I’ve termed “Business Risk” (creative, eh?).  Business risk management includes more than insurance and hedges. It is the continuous, active consideration and planning for all of the potential good and bad things that could happen to your business. The process doesn’t have to be formal or sophisticated. Expensive software and consultants aren’t required. Managing business risk is a simple process. But, it’s a simple process that consumes entrepreneurs (whether they realize it or not) and should consume owners/managers of established businesses. In fact, maybe the day-to-day effort invested in risk management is what defines the “entrepreneurial spirit”.

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How do you feel about that last statement? Agree? Disagree? Tell me why.

Most people think that risk management only deals with the potential bad things that could happen to your business. What a huge misconception. A key outcome of risk management is the identification of your opportunities, too. Very few businesses actively manage their opportunities, but those that do stand out above the rest in terms of growth and profitability. If you put just a little bit of effort into it, you can join the ranks of the best managed businesses.

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As I wrote a while back, businesses make a lot of assumptions. Almost all assumptions are wrong, which means that the actual result may potentially be worse than the assumption (a risk) or may be potentially better than the assumption (an opportunity). Opportunities can be identified and managed in exactly the same way as risks…

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About a week ago we talked about how to identify your risks. I asserted that “almost every risk comes from assumptions” and we, as business owners/managers, make A LOT of assumptions. Where do we start?

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It may be helpful to think about all of those assumptions and associated risks by breaking them down into 3 broad categories.

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1. Budget (financial) Risk
2. Schedule (calendar) Risk
3. Quality Risk

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Let’s take a brief look at each of them…

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“How does somebody develop a passion for business risk management?”, one might ask. Well, let’s just say that I  learned its importance the hard (read “expensive”) way.

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My partner, Phil, and I started a retail liquor store in our hometown – a small town in eastern Iowa. We did our research. There was a  limited local supply – only the town’s grocery store offered a very sparse selection of liqour, beer and wine with zero customer service. Our interviews with competitors, potential customers and suppliers all indicated that there was a solid market for the business as long as the prices were reasonable. We wrote a kick-ass business plan (”Best I’ve ever read”, said the banker), got our financing, set up our space and opened the business.

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Read the rest of this entry »

Risk management is arguably one of the most under-utilized business tools available to owners and managers today. It involves planning for potentially bad events before they happen. Risk management is a technique for predicting what unplanned events might occur and what the impact of those events might be. It’s also a technique for pre-planning how those events can be avoided or how their impact can be minimized. Almost every business does a limited amount of risk management – usually in the form of insurance – but very few businesses actively manage their risks.

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So what kind of risks am I talking about? They run the gamut. The insurance I mentioned usually deals with financial risks associated with natural disasters, fire, injury or death, accidents, etc., but there are many, many more risks facing your company.

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