| Introduction | | | | the local government, governing bodies in the |
| Risk is a given in any business and it can be damaging | | | | industry, service providers and others. |
| to a business and even threatens its survival. It is | | | | Hedging |
| therefore essential to be aware of the various risks, | | | | The essence of hedging is to circumvent a potential |
| to understand its potential impact on a business and | | | | negative effect in business through an action, |
| to know how to manage it effectively. This article | | | | product, etc. Hedging is typical in the financial domain, |
| gives some practical guidelines on how to minimise | | | | but by working cleverly it can also be achieved (to a |
| risk. The discussion is done under the following | | | | certain extent) on an operational level. Some of the |
| headings: | | | | ways to hedge the operations of a business are |
| - Planning; | | | | given below: |
| - Relationships; | | | | - Suppliers. To have back-up suppliers (especially for |
| - Hedging; | | | | critical products, raw material and services) is a good |
| - Discipline. | | | | practice. This keeps a company from being held |
| Planning | | | | ransom by an un-cooperative or out-of-stock supplier. |
| Detail planning goes a long way in reducing risk. | | | | - Products. Any company should continually add new |
| Planning should include the following: | | | | products to its offering. To rely on only a few good |
| - Feasibility studies. It is important to ascertain the | | | | products can be very risky. |
| viability of a new venture through a proper feasibility | | | | - Manufacturing. It is worthwhile to consider different |
| study. | | | | manufacturing plants (if the size of the business |
| - Business planning. A business plan gives the detail of | | | | justify it). The risk on the business due to factors |
| how, when and by whom the strategic goals will be | | | | such as natural disasters and labour disputes is |
| achieved. | | | | thereby reduced. |
| - Cashflow projections. Too many businesses go | | | | - Distribution. Back-up warehousing facilities and |
| under due to cashflow problems that could have | | | | distribution channels are advisable. |
| been prevented. It is essential to plan for anticipated | | | | - Customers. We have seen successful companies |
| cash in- and outflows and the timings thereof. | | | | that had serious problems when they lost their |
| - Financial planning. Good financial planning covers | | | | biggest customers. Customer risk can substantially be |
| many things including projected management | | | | reduced through having many (and loyal) customers. |
| accounts and the underlying ratios. Pre-emptive | | | | - Geography. Political or economic instability in a |
| observation and correction of any potential | | | | country can be very dangerous for the businesses |
| profitability-, liquidity and solvency problems reduce | | | | that operate there. Wherever possible it is advisable |
| the risk of running into financial troubles. | | | | to spread the risk over many geographical areas. |
| - Project planning. Any substantial ad-hoc project in a | | | | - Seasonality. Product- and service offerings that |
| company is normally handled more efficiently through | | | | cater for various seasons have a very positive |
| proper project management. This includes mergers | | | | effect on cashflows and minimise the potential risks |
| and acquisitions, new product launches and expansion | | | | associated with it. |
| into new territories. | | | | - ICT. Very few companies can survive without |
| Relationships | | | | proper information and communication technology. |
| When companies evaluate risks they often forget | | | | Back-up procedures and of-site facilities reduce the |
| about the human element. This is potentially one of | | | | potential risk. |
| the most fatal risk factors. Relationships should be | | | | - Financial. Financial risk management is very prevalent |
| nurtured. Specific relationships that are important | | | | in large international businesses. If you sell your |
| include the following: | | | | products in the international arena there are many |
| - Suppliers. Good relationships with suppliers are just | | | | products available to hedge the various risks. Risks |
| as important as with any other stakeholder in a | | | | that need to be catered for include currency, interest |
| business. It makes business sense to negotiate good | | | | rate and commodity price risks. |
| credit terms with suppliers and to pay them as late | | | | Discipline |
| as possible, but once an agreement is in place | | | | Discipline can reduce risks in all aspect of business. |
| commitments need to be honoured. | | | | Discipline should apply to all aspects discussed above |
| - Customers. Customers should always receive | | | | as well as to the following: |
| excellent service and be handled fairly and with | | | | - Expenditure. Expenses should be kept under control |
| respect. A large proportion of business normally | | | | -especially in times of affluence. |
| emanates from existing clients. A specific bad | | | | - Debt. Debt assists a business to grow. A business |
| practice is to try and make a quick buck out of a | | | | with too much debt is, however, very vulnerable for |
| client through very high margins. | | | | liquidation in adverse conditions. |
| - Employees. Companies often pay lip service as far | | | | - Cashflow. A lack of sufficient cashflow is a |
| as the importance of their employees are concerned. | | | | potentially fatal business risk. Cashflows should be |
| Confidentiality agreements and restraints of trade | | | | managed diligently. |
| can reduce some risk of unhappy or dishonest | | | | - Growth. Business growth requires additional working |
| personnel, but it can never be as effective as a team | | | | capital. Uncontrolled growth can lead to financial |
| of loyal and motivated employees. | | | | distress and even bankruptcy and should be avoided. |
| - Financiers. Transparency and information is essential | | | | Summary |
| for investors and bankers. Nobody likes to be | | | | Risk in business is a reality. When these risks are |
| blindsided or to get unpleasant surprises. To deliver | | | | successfully managed the rewards can be substantial. |
| more than what is promised is also a good practice. | | | | If not, a business can run into serious problems and |
| In difficult times financing can mean survival. | | | | even collapse. It is unnecessary (and stupid) to ignore |
| - Other Stakeholders. Relationships with all other | | | | risks. By adhering to a few basic principles these risks |
| stakeholders should also be kept in place. This can be | | | | can be reduced drastically. |