Sound Risk Management: Think twice about every trading partner
Roberto Simone, Xenia’s risk development executive, has previously discussed in our Xtra Series how no business is too big to fail. Here, Roberto sets out the dangers of presuming all is well with a trading partner and checks you can put in place.
Presumptions in the business world are often fraught with danger.
The passage of time, along with our own beliefs and experiences, can allow us to think all is well with a trading partner.
For many large firms in particular, success is often deeply embedded in the system - normally as a result of years of hard work, research, diversification and providing a unique product or service.
However, even if your partner business appears to have reliable backing, support and success, things will not always be as they seem and there could be liquidity risk. That means it cannot hurt to think twice.
Risk management means raising doubts
It’s certainly easier to follow the herd and listen to a generalised view that’s being bellowed across a marketplace, or within a certain circle. But the easier option can be the incorrect one.
Actively raising doubts should be encouraged as part of any risk management framework.
If your gut instinct is prompting doubts about a trading partner and you think there could be financial risk, trusting your intuition should not be underestimated. After all, this is a feeling built up over time through experiences, failures, successes and personal and professional development.
There should also be an acknowledgement that while many organisations are true with their intentions, there are some whose prime focus is delivery to shareholders.
And shareholder pressure can drive different intentions to a business, with decisions potentially deviating from the strategy, and wider purpose, of the company.
Having the awareness to think, and then think again, about the liquidity risk of a trading partner can potentially mean the difference between preventing a bad debt, which in turn avoids major issues down the line, and saves copious resources and time.
Carillion is a prime example, in view of its apparently intangible value before its collapse. It shows there’s nothing to lose in digging a little deeper into the numbers and avoiding the noise about how a company is too big to fail (an issue I addressed in my previous Xenia Xtra Series blog).
Essentially, firms that see risk management as an intrinsic part of their operation will ensure a better chance of mitigating any issues that should arise, as well as providing a sound platform to springboard off should any difficult occasion present itself.
This has become a critical pillar in business in recent years, and even more so since the coronavirus pandemic. Businesses that were once solid, creditworthy and undoubted may fall to the overconfidence and success of yesterday.
It costs relatively little to question whether that success will also apply tomorrow.
Risk Development Executive