Risk Management Blog - ClearRisk

Battening Down the Hatches: Risk Management in the Economic Storm

Posted by Craig Rowe on Tue, Mar 3, 2009 @ 12:03 PM

This economy is affecting every company no matter what the business or where it is, ClearRisk is no different. We all have to take time out to assess how the economy will affect our business then implement applicable risk mitigation techniques. A few of the possible risks related to the global economic conditions and corresponding risk mitigation techniques are:

  • Commercial credit. With the banks tightening up on credit every business needs to be concerned about their ability to borrow for operating capital and other cash needs. If there was ever a time to have a good relationship with your bank, it’s now. Stay in regular communication with your bank especially in difficult times. Take extra care not to go over credit limits, be late with payments, etc.
  • Supplier and customer cutbacks. This economy is affecting every company , including your customers and suppliers. As they cut back in expenditures and some of them are forced out of business it is likely that your company will lose suppliers and customers, or that supplier prices will increase or customer orders will decrease. In any market companies need to be careful about bottlenecks in their supply chain and market channels. While it is difficult to find new customers in a competitive market like this, dependency on one or a few large customers needs to be identified as a potential problem and solutions found. As for suppliers, analyse your supply chain to identify any key components that are dependent on one or a few suppliers. Regular communication with suppliers and customers to stay apprised of their stability is vital in economic times such as these.
  • Insurance costs increasing. The insurance trade press is abuzz with talk of the coming hardening of the global insurance markets. It is expected by the second half of 2009 and into 2010 that insurance rates will increase and the terms tighten up. There is a Chinese proverb that says, “The best time to plant a tree is twenty years ago. The second best time is today.” There was never a better time to manage risk than now. Make sure you document all of your risk management related activities and communicate them effectively to your insurer. Make sure you have a good broker that knows your business and has access to several good insurance markets that write your type of business.
  • Economic boomerang. Consider what will happen after this current economic situation. It is quite likely that as the economy rebounds that inflation or hyper-inflation will be close behind. Governments use interest rates to keep inflation in check so expect the cost of goods and the cost of borrowing to go up. There’s no better way to manage this risk than planning. Budget for increases in costs in the coming years related to inflation and increased cost of borrowing.

The most important thing to learn about the economic crisis is that it’s never too late to manage risk, but it is a lot more effective if you plan ahead. This particular global recession perhaps due to a particularly bad financial institution crisis along with it, is a longer and deeper one than most, but no one can say it wasn’t expected. Every 8 to 12 years there is a recession…. plan for it! Risk management is an ongoing process that needs to be constantly reviewed, updated and applied. What most companies fail to see is that they are already doing most of the things they need to do to manage risk, they just need some structure and foresight applied to it. Once you put in place a risk management plan and start thinking about risks and how to deal with them more formally, then is starts to become part of the corporate culture. Once that happens it becomes practically effortless.

Topics: economic downturn, strategies for recession, recession