A company’s success is always being tested. As the second Law of Thermodynamics points out, all systems tend toward chaos. Practically, this means that what is working today may not work tomorrow, as the variables that affect our businesses are in a constant state of flux. In good times a business is growing, sales are strong and profitability is satisfactory. In bad times a business is contracting, sales are weak, costs are high and profitability is under siege.
Risk analysis is very rarely done proactively. The majority of small and medium size businesses react only when their systems are strained, if not breaking, and profitability is declining. One way to mitigate operational business risk is to have a true knowledge of the variables that affect your business operations and have contingency plans to amend your business plans and business processes as different pressures come to bear.
CTBC’s Operational Risk Analysis methodology will provide your company with a comprehensive quantitative way to measure the performance risk in each department of your company and your company as a whole. Operational performance risk is assessed at a detailed level, scored and critical variables are identified for each operational process. This will allow you to specifically focus, in a prioritized method, on the areas that are affecting and/or will affect the profitability and cash flow of your company.
The degree of operational business risk that a company has, i.e. the number of risk variables that are not being managed properly, directly relates to a business’ ability to manage cash flow and profitability. The more areas that have significant operational risk, and the more variables within each department that are not being managed properly, the more difficult it is to maximize cash flow and profitability. In addition, operational business risk directly affects a company’s valuation.
Here is an example:
Early in 2008, CTBC evaluated a local retail services company that owns and operates 8 retail stores. The company’s 2007 annual revenue was $2.87M. The company’s 2007 expenses were $2.875M. CTBC performed an Operational Risk Assessment and, with the assistance of the management of the company, determined that there were significant operational risks in the Cash Control Process, the Inventory Management Process, the Purchasing Process, the Recruiting, Training and Retention Processes and the Manpower Planning Processes.
CTBC worked very closely with the Owner, the Retail Store Managers and the Bookkeeper to revise the operational processes in each of these areas over a 6 week period. Jointly, we were able to identify and implement $120K in annual cost savings without impacting sales or the customer experience. That $120K in savings not only allowed the company to return to profitability in 2008 but will add $500K to the company’s valuation.
|
