What are the simple basis of risk management?
In business - and life in general - prevention is better than cure. Here Roberto Simone, risk development executive at Xenia, sets out why monitoring and reviewing other companies’ performance is the basis of a sound risk management strategy.
The collapse of the long-established and reputable wholesaler Palmer & Harvey in 2017 was certainly a shock to the UK business environment. But for those who had been monitoring the company over time, it was not unexpected.
The credit markets had been carefully monitoring its position for some years given its significant debt burden, in turn crushing and stifling the balance sheet strength, market value of the business and its historic sound financial base.
This, coupled with economic conditions of the time and a momentous change in the market when Tesco, its key customer, bought its main rival Booker, put Palmer & Harvey in an extremely challenging position.
When the administrators were eventually hauled in, the credit markets decided against offering support based on the financial position… and a 92-year-old company was suddenly defunct.
There were some people and companies who didn’t think for one second Palmer & Harvey could fold as dramatically as it did. But therein lies the lesson: to continually monitor and review.
Monitoring and reviewing: the simple basis of risk management
Monitoring for supply chain implications
This was a company, after all, which supplied 90,000 grocery and convenience stores across the country. Any business monitoring the precarious state of Palmer & Harvey before its collapse would have identified key players in the supply chain which would support managing the risk accordingly.
It shows that whether you’re providing cover or trading with an organisation which may be exposed to supply chain implications, it’s important to frequently review how this business is trading in the marketplace.
But the good news is, it’s not that complicated.
Being on the ball with current affairs and news reports is a start. Keeping constantly up-to-date with a selection of companies, going into that more forensic detail, can help you identify the ones to watch.
Over time, you gain an understanding of what is happening in the markets, and more importantly the key indicators of a company’s performance that are not necessarily the orthodox metrics.
For instance, given the unprecedented rise in gas prices this year, the companies that are highly energy intensive should be monitored and reviewed more frequently than normal. Energy prices are an external factor beyond internal control, but you still need to monitor.
Always keeping an eye on the ball
Understanding the particulars and fundamentals behind a business - and those key indicators in the environment that are likely to affect their operation - forms the basis of a sound risk management strategy.
It’s also worth noting that monitoring and reviewing isn’t always about waiting for D-day. It can also be utilised for observing growth, understanding how a company is performing and tracking their trajectory.
Either way, the key thing is you’re keeping an eye on the ball. As I have previously discussed in this series, complacency can be fatal in business. Good risk management is about preventing a disaster rather than having to find a cure. It’s a good mantra for life in general: why cause hassle and extra cost when you can stop something happening in the first place?
Not acting on a preventative measure causes chain reactions: people lose jobs, cash flow deteriorates, the business suffers. This is why monitoring and reviewing is a key attribute of credit risk analysis.
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