IDN3: Managing Risk in Tough Economic Times

Canada has been hit with several plagues. All that seems to be missing is a plague of locusts. But, according to western news sources the annual impact of grasshoppers is being felt by prairie farmers, so maybe we have had our locust plague!

Canada has dealt with terrorism, severe acute respiratory syndrome (SARS) and mad cow disease. What could be next?

When running a business of any size the reality is that most of the decisions you will make will be severely affected by things completely outside of your control. Some small business owners take umbrage with the entrepreneur label because its definition focuses on risk taking.

Calling a business owner a risk taker is appropriate, but not because most of us are motivating by daring-do; simply because we need to handle risk well in order to successfully run a business.

Some risk is self-inflicted. This kind of risk includes expanding too fast, having too much (or too little) debt to properly expand the business. Being too cautious or too daring. We all take risks in business because it comes with the territory. What differs with one’s risk posture is how much risk we take on and what kind of decisions we make to manage risk that is thrust upon us.

Any Canadian firm that has survived for five years or more will have seen considerable economic ups and downs. The normal economic cycle will prevail: recession, recovery, growth, and so on. The day to day management task involves growing the company across these normal economic cycles.

But extraordinary risk management is quite different. Unfortunately, extraordinary risk is what many Canadian firms have had to manage in the face of adversity over which they have no control.

What is also challenging is that these events impact many industries. While the tourism industry was hit badly by SARS and terrorist threats, it was also impacted by mad cow disease.

What entrepreneurs quickly realized is that the spinoff effects of the tourism industry are legion. Many other businesses are affected. Suddenly, a development in one part of the country, such as the SARS crisis or mad cow, is impacting businesses thousands of kilometers away.

In the wake of terrorist threats in the United States small business owners became acutely aware of the impact that an event in another country can have on our own personal fortunes.

So how does one handle such extraordinary risk? Is there a solution that can safeguard you and your business?

Just as financial analysts tell us that we should save one year’s salary to carry us through tough times in our personal life, we also need to save money to carry our business through.

When making this decision you are faced with the same questions. How will you save that much? How much do you need? How should you actually save the money? Should it be invested? How risky should the investment be?

The guideline for your family’s financial security is to save a year’s salary. This presumes that your annual salary is sufficient to meet your needs. In some cases you may need to make changes in your lifestyle to live within your means, or saving a year’s salary is simply not enough.

You also want to invest it in safer investments. Money market funds are popular because they tend to be less volatile than other types of investments. While they may not grow a lot in value that is fine because they are there as a form if self-insurance against job loss or illness. They are not designed to earn a return on investment for your retirement or another purpose.

The same is true of your firm’s needs. While your firm’s revenue may increase or decrease you can also manage its resources to minimize spending. What is the minimum amount of money that is required to cover the fixed expenses of the business, with an emergency fund to meet occasional special needs?

You should set aside that portion of your firm’s income, called retained earnings, to have your firm’s own emergency fund. Invest it in the same conservative fashion as your family’s emergency fund.

When setting aside money remember that you need to set aside enough to take the firm through the tough times. During a national crisis, or a deep recession, the down times may last for more than a year and you need to be prepared.

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Karen Blotnicky is a marketing professor at Mount Saint Vincent University in Halifax, Nova Scotia and President of The Marketing Clinic in Bedford, Nova Scotia. She can be reached at karen@themarketingclinic.ca