Understanding the business risks affecting a corporate entity

The success of every business entity is measured by its ability to make a decent return on investment and also make a reasonable profit while the hallmark of every professional lies in his or her ability to commercial his skills, knowledge and expertise. A company that fails to break even may find it difficult to make profit. There may also be ongoing concern issues on the long run if due care is not taken. Business risk is one of the factors which inhibit a company’s ability to achieve its aims and objectives. An understanding of these risks is of paramount importance for any business to thrive, especially at these austere times.

Business risk is a risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies.

No business can be said to be totally immune from this risk. It is the risk of an adverse development that could have a major impact on the company’s business, such as an increase in the cost of a key commodity or loss of a major customer.

Business risks could either be internal or external. Internal business risks are risks arising from ineffective or weak management, poor financial management (excessive levels of gearing, poor cash management and poor working capital control). It also includes risks that arise due to system weaknesses or system failures, internal control weaknesses, risk of fraud and misappropriation of assets. It is the responsibility of the directors to prevent and detect fraud. The risk of having ineffective and indolent employees is also a big factor.

External business risks, on the other hand, has to do with threats from competitors to a company’s patents or copyrights, effect of recently discovered new technology, the impact of a new competitor moving into the market, effect of changes in the macro-economy, such as changes in interest rates or exchanges rates, or downturn in the economy (lower economic growth, or possibly an economic recession), the possible loss of a major contract as a result of a dispute with the customer is also a major external business risk, long term decline in demand for the company’s products, and failure to invest in research and development of new products, and the impact of proposed changes in laws and regulations. For instance, where a company needs a licence to operate, there may be a risk that the licence will be withdrawn or will not be renewed. The impact of natural hazards such as storms and flooding may affect the company’s ability to maintain operational capacity. We are extremely lucky, because this is a rare occurrence in Nigeria.

For companies that are into e-commerce, the loss of transaction integrity, non-compliance with taxation and other laws and regulations, failure to ensure that contracts are binding, improper accounting policies, systems and infrastructure failures or crashes and security risks are likely to have an adverse effect on achievement of their objectives.

Business risk cannot be eliminated, but can be effectively managed. This involves the identification of risks affecting the company, the determination of the company policy, and finally,   the   implementation of   the strategy adopted by the company. It is also worthy of note that the identification of a particular business risk will serve as a trigger for the discovery of other areas of risks within the business process. For instance, a risk from the declining sales demand for a product will raise questions about the obsolescence of product inventories and the realistic useful economic life and net realisable value of the non-current assets that make the product. The going concern assumption may be challenged, if the product has been a major source of income and profit in the past. Where there is significant business risk, failure by management to deal with the risk could affect items in the financial statement.

The understanding of business risks is imperative for the success and survival for every business.

May we all thrive, and not just survive.

 

Adeniyi Bamgboye