Dealing with risk in an uncertain environment

The pandemic has hit cash flow, but it has also created a much more complex landscape in terms of business risk.

One example of increasing uncertainty is the risk of staff falling sick or being forced to isolate. It has helped create an employee’s market for jobs meaning teams must do more to compete for talent. Supply chain issues have delays in receiving materials and delivering products. Climate change is a growing feature in risk assessments. So how can finance teams keep track of these risks and ensure they can mitigate them?

Our panel of members in business share their various approaches to risk management.

The risk environment is still turbulent – we must expect the unexpected

Farha Jamadar FMAAT, finance manager, Todd Doors

There has always been uncertainty, but now it’s a case of more risks and a higher probability. For example, staff absence has always been a risk, but with Covid, there is more of a chance of it happening.

We approach risk assessments by measuring the impact of risks. If the impact and probability of the risk is high, we would review this and develop plans to mitigate or reduce the risks. For example, with staff falling sick, we’d make sure we could get cover from other branches or temporary staff.

This is utilised in forecasts and budgets, ensuring the costing is incorporated, identifying contingencies and what specific areas of the business can run on minimum staff, etcetera, and the cost of reallocating resources.

The environment does not feel less risky than it did a year ago. [In the pandemic], things were difficult, and we almost knew what to expect. Now it feels like we take steps towards normality, then something we saw as a small risk has a significant impact. The primary effects of Covid-19 have been sorted, but the secondary effects have come about, like supply chain issues.

Although they won’t be foolproof, Forward-planning work and identifying contingencies work. Ensuring the management chain of command is short also allows rapid changes and enables the company to be flexible.

Risk management is a constant focus

Clare Elliott FMAAT, CFO, ILUX

I spend much of my time focusing on risk management. As CFO, the company relies on me, as well as other officers, to ensure the company is as risk-free as possible. I don’t really think that has changed.

There is always risk in business, and if you drop your guard at any point, it increases. But of course I can appreciate that external factors are impacting that risk, and the decisions we have to make.

As an IT company, we have continued to thrive throughout the pandemic. We don’t feel our risk has increased. We have created many more opportunities to support new clients where their previous IT providers were letting them down. Our business is strong, and we have a strong emphasis on client support and service, which has served us well.

Our biggest impact has been in hardware. It has been very challenging to source equipment. Lead times have increased significantly, which has created problems when needing to purchase equipment in a hurry. Prices have increased due to both the pandemic and Brexit. We constantly have to explain that our price increases are actually have nothing to do with our margins, they are also imposed on us.

Employment has changed too. Low unemployment has created an employee’s market. That means we need to put more focus on existing employees in terms of their engagement and retention.

Most of our clients seem to be thriving, too. Our client retention rate hasn’t dropped at all. The actions of businesses indicate that it really is “business as usual”. Of course, this is only in my experience with our client base, I’m sure there are many other points of view.

One thing that has changed is how far forward we are able to forecast. Many years ago, businesses might have a five-year plan, and a few years ago, they might have a three-year plan.  [Now], if you’re managing to forecast the next 12-18 months you’re doing well. Risk management can never be foolproof, but ensuring it isn’t underestimated will increase your chances of success.

The pandemic has reshaped our approach to risk assessment

Andy Murray MAAT AATQB, finance lead, Manna Pro

Performing in a volatile business environment post-pandemic has accelerated the operating risks within the industry and reshaped our approach to risk assessments. The pace of change has created an organic environment for assessing the ongoing impact of market conditions. Therefore, forecasts are being revised more frequently, provisions are more optimistic and third-party relationship management has significantly increased. These tools are being used as a barometer to plan mitigations.

Our organisation is juggling competing uncertainties following the United Kingdom leaving the European Union and the associated reorganisation of our business model. Recent examples of high-risk areas of exposure is the ongoing impact of global freight costs. Our business relies on harmony across world trading and current conditions allow little or no time for strategic planning. Being forced to continually operate in response to the market is an ongoing cause for concern.

Risk has overtaken growth as the driver in strategic planning. This has been evident in budget-setting for 2022 with additional forecasting and a far more cautious approach to the constraints of remaining operationally viable during 2022. Analysis continues to be challenging.

As we continue to learn more about the world’s recovery, we find ourselves operating in a new market, seemingly on a daily basis. Therefore, meaningful data sets are not readily available, making trends harder to identify. This significantly increases the operating risk compared to the same period a year ago where we were in a Covid-19 response scenario.

At this time, failing to react to market conditions would create a greater risk of exposure. [But the] fluctuation in operating conditions doesn’t allow for risk assessment methods to be developed to a foolproof standard. Therefore, a favoured approach is building in a greater level of redundancy to risk planning and business decision-making. This ensures expertise is drawn from all facets of the organisation. While this is a responsive methodology, it appears to be the [best] approach at least until global market conditions stabilise.

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.