Enterprise Risk Management
- December 9, 2016
Is your retail operation prepared to manage and mitigate business risk? “All we really know is the past, but what really matters is the future.” – John F. Levy
Following a process to manage your business risk is simple but takes time to establish and discipline to follow. Here is a framework to consider when establishing how you will address Enterprise Risk Management.
Step 1 – Establish your Risk Appetite – this is the amount of risk that an organization is willing to accept in pursuit of increasing profit and business value.
Step 2 – Identify potential events that may affect the business.
Step 3 – Manage the Identified risks from step 2 within the Risk Appetite identified in step 1.
Spend some time with all the entity stakeholders to brainstorm the risks involved with your business and how you will address them. Successful businesses are not risk averse, they are better at mitigating the negative impact of the risks that they take on the overall operations.
A simple example in retail could be a decision to open an additional location. In following the framework above you would (Step 1) consider the capital reserves (or access to additional capital) that your company has to invest in the build out, promotion, and providing inventory (working capital) for the new location. (Step 2) Consider the impact of what negative cash flow in that new location will do to the rest of your organization. Determine how long you can sustain negative cash flow from the new location and the timeline you are prepared to tolerate before exiting the expansion, and what costs would be associated with breaking the lease and retracting from the expansion. (Step 3) Make the decisions to sign a shorter term lease that coincides with your timeline for determination of success for the new location.
Remember, past performance is not always an indication of future results. A fun example to consider this time of year is the that of the turkey. For the past 330 days of the turkey’s life things have been great and only getting better. The turkey is well fed, lives in a clean pen, and gets fresh water. If you were to ask the turkey (and the turkey could understand and respond), “how do you feel about the next two weeks of your life?”, we are certain the turkey would project that things can only keep getting better, why not, they have all the way up until this point. We all know what risks the turkey faces over the next 30 days of its life. Don’t be a turkey.
As Yogi Berra once said, “prediction is very hard, especially about the future.”
By Mark Brown, CFO, RICS Software