Business owners encouraged to manage risks in tough economic climate

In the midst of a sluggish global and local economy, faced with escalating fuel costs, soaring electricity prices, and a report last month announcing that 440 000 companies closed their doors over the past five years, it is little wonder that many busines

For a company to remain sustainable throughout the economic slowdown, it is imperative that business owners take steps to control expenses. However, it is crucial to plan ahead and consider that in cutting certain expenditures, they could be exposed to even higher costs, and should identify ways of mitigating these potential added risks.

“2012 is shaping up to be a tougher year on industry. As the increase in fuel prices drive up other costs, many companies are forced to cut expenses. However, eliminating some costs may result in a substantial loss down the road,” says Lourens Joubert, head of commercial underwriting at Santam, SA’s largest short-term insurer.

A volatile rand can affect the value of imported equipment and parts so manufacturers must keep track of the fluctuating value of their machinery and equipment. Joubert suggests business owners revise their insurance policies and conduct a needs analysis twice a year with a broker to address changes and to ensure they are neither over nor underinsured.

With so many businesses shutting down in the last few years, a real threat to many companies that rely on the use of a preferred contractor is the fear that their sole service provider will shut their doors with little or no warning. Continuously seeking for alternative suppliers can lessen the risk of being potentially stranded if one supplier closes down.

“Business owners can also protect themselves by diversifying their supply chain and using a number of different contractors. Plan ahead and don’t rely on only one supply chain to meet your needs,” continues Joubert.

The face of the supply chain has also changed with the introduction of the Consumer Protection Act (CPA). Defective products have historically only been the responsibility of the manufacturer. However, since the CPA came into effect on 01 April 2011, the retailer and everyone else in the supply chain can be held liable for failed goods.

“We have yet to see the full impact of this act and as a result many business owners have remained very relaxed on the issue,” cautions Joubert. “However, businesses need to make provisions for returned stock and the increased liabilities which will ultimately lower profits.”

In the past, businesses not directly involved in manufacturing have only required general liability insurance but now anyone in the value chain such as retailers are now also be held liable for faulty goods and there can be grim financial repercussions for those not adequately covered by products liability insurance.

Keeping fewer critical replacement parts in stock for manufacturing equipment may reduce a capital outlay for manufacturers who are hoping to keep costs low. However, in the long run this practice may have a negative impact on the running of the business and production may cease if a critical component breaks unexpectedly and an alternate is not available for delivery immediately.

“Recognising the inevitability of certain events, imagining a number of ‘what if’ scenarios, preparing for them in advance, and incorporating them into the business continuity plan or disaster recovery plan is a necessity for all businesses of all sizes,” says Joubert.

Key management should be responsible for identifying weaknesses and ways of mitigating these risks within the company. Best practices should be adopted and documented and included in the corporate strategy. “Those who do not have a contingency plan in place will be ill-prepared to deal with a crisis. For example, flooding is becoming an increased threat that can compromise supply routes if a bridge or road gets washed away and produce cannot be delivered to customers. By recognising the potential impact on business alternatives can be identified ahead of time, and the risk mitigated.”

“Businesses that want to succeed over the next several years must develop cost-effective risk mitigation plans that assess all potential risk,” concludes Joubert.