Business Risk

It’s invaluable that the business owner understands what Business Risk really means, especially in this economy.

The critical element that keeps your sanity as a business owner for whom risk hides behind every corner, is your assessment of that risk. Whether a risk is mild, concerning, or severe should be the evaluation that automatically pops into your head when you come across a risk—and that’s basically everything you come across as a business owner. Just opening up for business is a risk. Every single day you are likely to encounter at least one (but probably more than one) of these risks:

Hiring employees
Not hiring employees
Leasing equipment
Not leasing Equipment
Buying Equipment
Not buying Equipment
Purchasing inventory
Not purchasing inventory
Incurring debt
Not incurring debt

And by no means is that a complete list.

Whether you do something or you do nothing, every decision you make as a business owner carries risk. That’s why it’s so challenging to be one. It takes a specific mentality. Together with a CFO, a business owner must assess even what seem like the tiny risks to their business. When it turns out a risk is actually quite severe or otherwise intolerable then with the help of their CFO the business owner must mitigate it.

The CFO clearly plays an important role, no matter the size of your business, because they can be so helpful in the assessment and mitigation of risks to your business.

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The risk of Employees

It would appear, judging by current unemployment rates, that business owners have finally wised up to the risk in employees. If you’re curious about employee risks I don’t cover in this post, this Wall Street Journal Editorial by Michael P. Fleischer, President of Bogen Communications in Ramsey, NJ identifies all you need to know involving the risk of employees. However if you’d just like a brief overview, here is a quick list of risks:

  • If the new hire is only a sub-par performer on the job, you’re left risking all this money when the productivity isn’t even there. You interviewed this employee multiple times and even had your current employees at the time interview them, and they are just not working out like the interviews made it seem like they would. Now you have no choice but to add to your unemployment insurance contributions, because you HAVE to lay off this useless lump.
  • Small business entrepreneurs and business leaders alike share the uncertainty of the latest healthcare plan and rising healthcare costs.
  • Can you really afford to have any subpar performers? Take a look at your existing employees. Are they all optimum performers?
  • Having to layoff or fire an employee is just another burden. You never know what kind of legal action could follow no matter how justified you were in firing them. The best case scenario is if you win a legal case, but even then you lose what you had to spend to defend.With these and other risks in the forefront of business owners’ minds, subcontracting work and responsibilities have become a more valuable option than ever before. The modern business owner needs to consider this option. Subcontractors are real businesses that can work for you and other customers to get things done within your company. They are interchanging, movable parts—when they don’t work out, it’s easy to let them go. There is virtually no risk of legal action when letting go of a subcontractor, especially compared to the risk of letting an employee go. Subcontractors don’t even require health costs or benefits. Remember though, I am talking about subcontractors, not independent contractors (who in the eyes of the taxing authorities are the same as employees). Independent contractors are individuals looking for work, they are not a business, and they come and go as an employee would. Hiring independent contractors could actually get you into a lot of trouble if what you think you’re getting is a subcontractor. For IRS distinction between the two, click here.

    Assessing the risks associated with current employees or people you’re thinking of hiring can be made easier with the help of a reputable Part Time CFO who is a subcontractor (not an employee or independent contractor). A good CFO will not stop there, and help you identify, assess and mitigate other risks in your business as well.

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Never Cut Advertising and Marketing

An expense review is one of the CFO services I make available to my clients. An expense review is an analysis during which I negotiate with vendors for lower pricing, or look for different vendors altogether for lower pricing.   Eventually you will need sales growth, because I’ve never seen a P&L with no expenses, no matter how good their CFO is at cutting them.

Businesses are still looking to cut expenses with the way the economy is continuing to be difficult, which is a good thing. Cutting expenses should really be an ongoing practice no matter what economic conditions are, but during this current economic difficulty I see more and more businesses cutting into their advertising and marketing budgets. Just like other expenses, a review and analysis of advertising and marketing expenses should be a constant no matter what economic conditions are like. During this analysis if certain advertising is determined to be ineffective then that advertising should absolutely be cut, but what I’m seeing is business owners who cut effective advertising, and put off effective looking new promotions. Advertising and Marketing is the last place you should make cuts, the only circumstances under which you should cut advertising and marketing is if what you’re doing there is completely ineffective. I am well aware of the risks involved in advertising and marketing, but being a CFO I also know that business owners cannot retreat forever, unless they’re willing to retreat right into bankruptcy court.

I understand that even your most effective form advertising will not be as effective in this economy as it would be in peak economic conditions, but it’s still the best you’ve got and should not be cut. Making the decision to keep what has proven to be effective advertising and take on promising looking new marketing and advertising opportunities is where the risk of entrepreneurship comes to the forefront. This is the decision that separates the good business people from the not so good business people (and from your competitors who continue to retreat while you stand your ground and quire new ground).

There is a good story, a cautionary tale about the consequences of cutting advertising and passing up new advertising.

A Man lived by the side of the road and sold hotdogs.

He had no radio, because this man was hard of hearing. He had no newspaper, because this man also had trouble with his eyes.

Nonetheless, he sold good hotdogs.

He had a sign on the highway advertising how good they were. He cried out from the side of the road, “Buy a hot dog, mister!”

And people bought his hotdogs.

He bought a bigger stove, and ordered meat and buns in bulk. When his son came home from college, he wanted to enlist his son’s help.

To which his son said, “Dad, haven’t you gotten someone to tell you what’s been on the radio? There’s a big Depression on. The international situation is bad, but the domestic situation is worse!”

Hearing this, the man thought, “Well, my son’s been at college. My son has listened to the radio and read the newspaper. He probably knows better than I do what’s going on.”

On the behest of his son, the man cut down on his bun and meat order once more, took down his sign on the highway, and didn’t bother to stand on the side of the road vocally advertising his hotdogs anymore.

His sales after all his cuts plummeted practically overnight.

“Well son, you are right”, the man said to his son, “We are certainly in a Great Depression.”

As you can see, cutting advertising that works is NEVER going to help you; it will only make a bad situation worse. If a business wants to make cuts during challenging economic times, it should NEVER be from advertising and marketing unless the advertising is actually ineffective.

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The CFO Provides the tools for Success

Three things are needed to succeed in business:

One– The ability to take action.

Two-Taking control of your mind and thoughts.

Three-The proper tools.

Taking action and taking control of yourself depends on you alone, but to acquire the proper tools requires being reliant on outside sources—one of which can be a good CFO.

With these perks from the tools your CFO can offer you, your power trinity of success can be completed:

1. At any point in the future, how much cash will they need or have.
2. The business owner is allowed to choose multiple scenarios if:

* Sales/revenues go up or down.
* Expenses go up or down.
* Inventory goes up or down.
* Increase or decrease in Debt Structure.
* Increase or decrease of Capital Expenditures.
* Increase or decrease of Headcounts.

3. Optimum inventory levels determined.
4. Optimum timing of making trade and expense payables and
how much to pay determined.
5. The company’s ability to make capital expenditures determined.
6. If a company should purchase or lease equipment determined.
7. At what time business owner can retire and still pull out a paycheck from the
business determined.
8. How much debt you will have at any particular time determined.
9. What the business owner has to do to increase cash flow determined.
10. Break even points determined.
11. Optimum inventory receipts or manufacturing output determined.
12. Optimum expense levels determined.
13. Operating budgets helped to develop.
14. Optimum headcount helped to be determined.
15. Business Valuation assisted in being determined.
16. Key operating metrics helped to be determined.
17. The effect of adding or eliminating a product line, business segment or store location determined.

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