Managing risk: lessons for small business owners

As the owner or manager of a small or medium-sized enterprise (SME) in Australia, it’s easy to dismiss the collapse of a major finance firm like Greensill Capital as irrelevant to your business. However, this high-profile corporate failure offers valuable insights that can help you bolster your financial health and manage small business debt effectively.

The Greensill story: what we can learn

The 2021 downfall of supply chain finance company Greensill Capital was attributed, in part, to allegations of financial misconduct, including mismanagement of funds and misrepresentation of insurance contracts. While your business might operate on a much smaller scale, the core issues remain universally applicable.

You may wonder, “How does this relate to my business if I’m not running a multimillion-dollar financial firm?” Here’s why it matters:

  • • Trust: Whether engaging with a major financial institution or a local supplier, trust is the cornerstone of business relationships. Greensill’s alleged misrepresentations eroded trust, leading to its demise.

  • • Risk Management: All businesses, regardless of size, face risks. The Greensill collapse underscores the critical importance of identifying, assessing, and mitigating risks to ensure long-term survival.

  • • Transparency: Maintaining open lines of communication with key stakeholders—including employees, investors, and customers—can prevent misunderstandings and foster enduring relationships.

6 risks business owners should plan for

In today’s disruptive economic environment, small businesses face a broad spectrum of threats and, if not addressed, can result in serious financial difficulties. By understanding the risks of running a small business, you can establish an effective risk management strategy that is vital for long-term success and preventing insolvency.

Here, we discuss six key risks that business owners should plan and prepare for:

Cash flow constraints

The most common risk for small businesses is unstable cash flow. Many companies – especially those that sell seasonally or work with a large number of customers – can experience unpredictable cash flow or cash flow that is subject to extreme variations. Late customer payments, high overhead costs or unexpected expenses can quickly drain cash reserves, leaving your business unable to meet its obligations.

Economic downturns

Small businesses often feel the impact of an economic slowdown more sharply than larger companies, especially those that depend heavily on consumer spending for survival. For instance, an interest-rate change could affect your sales, whilst a slowing economy could decrease your product demand, making it harder to earn revenue to pay off equity and debt.

Over-reliance on key clients or suppliers

Suppose your business relies on just a few critical clients for revenue or a small number of suppliers for materials. In this scenario, you might be leaving yourself vulnerable if one went out of business, scales back its operations or simply can’t meet its commitments to you.

Uncontrolled expansion

Rapid growth without the necessary financial controls will lead to cash flow problems, a higher cost base and an inability to meet requirements when demand suddenly increases. Growth without control will leave you in a financially risky position.

Regulatory compliance considerations

Keeping up with tax laws, changing industry regulations and employee rights can be time consuming and complicated but non-compliance can result in fines, penalties and costly fees that a business may need to absorb.

Cybersecurity threats

Cybersecurity is an unavoidable concern that small businesses must plan for. A data breach risks exposing sensitive customer information, damaging your reputation, incurring costly recovery efforts and leading to legal liabilities – threats no business can afford to ignore.

Why effective risk management is important

Small businesses, especially startups, often have fewer financial buffers than larger companies and one unchecked risk can quickly spiral into a disaster that jeopardises your entire business. Effective risk management, however, highlights areas of vulnerability and exposure, enabling you to plan, prepare and make informed decisions to minimise their impact.

  1. Risk management isn’t just about preventing things from going wrong: it helps you keep your operations running even if they do. Ensure your business has a plan for economic downturns, backup suppliers for vital resources, as well as a financial buffer to maintain resilience during tough times.
  2. Risk awareness informs your decisions on expansion, investment and daily operations. By understanding the risks associated with your business activities, you can avoid excessive exposure and prepare for potential setbacks.
  3. Good risk management shows your customers, suppliers, investors and staff that your business is stable and reliable. This builds confidence in your brand and business, leading to stronger relationships with stakeholders.

Through risk awareness and management, business owners can more effectively control their financial position. For example, by reducing wasteful expenditures, avoiding bad debt and better managing cash flows, placing your business in a better position to grow and thrive.

Practical tips for managing risks

As a business owner, here’s how you can implement these lessons to effectively manage and mitigate risks in your small or medium-sized business:

  1. Implement basic risk management strategies:

   – Identify and assess key risks to your business

   – Create contingencies to reduce these risks

   – Review and update your risk management plan often

  1. Maintain clear financial records:

   – Keep up-to-date, accurate financial statements

   – Use accounting software designed for small businesses

   – Review your financials regularly to catch potential issues early

  1. Communicate openly with stakeholders:

   – Be clear about your business’s financial health with relevant parties

   – Provide regular updates to investors or lenders

   – Create an environment where employees can raise concerns freely

  1. Build strong relationships with partners:

– Develop a good relationship with your lender

– Be proactive in discussing financial challenges

– Seek advice on debt management as soon as you feel the pressure – the earlier you engage, the more options you have.

  1. Stay informed about financial regulations: 

   – Keep up with financial regulations relevant to your industry

   – Join industry associations for updates and support

   – Seek professional advice on complex matters

Building a financially stable business is ongoing work. By learning from cases like Greensill’s and using sound financial practices, you’re taking the necessary steps to secure your business’s future.

How AVA Advisory can help

At AVA Advisory, we understand the unique challenges small and medium business owners face. In these uncertain times, our experienced team of debt solutions experts and corporate advisors can provide practical, actionable advice to help you boost business preparedness, as well as build resilience to financial and operational risks.

Contact us now at 1300 181 220 for a private, obligation-free discussion, or schedule a meeting via our online booking system.

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