Risk management beyond BFSI: Importance and strategy to risk-proof your startup
It is well understood that entrepreneurship is based on the foundation of taking risk, but ironically, entrepreneurs often overlook the integration of risk management processes into their ventures. While businesses across the board, whether large conglomerates or small companies, face risks from a multitude of directions, startups are particularly vulnerable to threats.
By virtue of being nascent in the business world, startups face a host of risks that often threaten their very survival; scenarios such as lack of capital, insufficient liquidity, an inability to attract talent and customers, and increasing competition are all too common. However, it is possible for startups to effectively manage and mitigate such situations with the help of effective enterprise risk management processes.
Importance of Enterprise Risk Management (ERM) for startups
Enterprise risk management is often seen as the domain of large corporates that requires huge investments, but every crisis is a reminder that risk management is relevant for all organisations.
Entrepreneurs, today, must remember that investors are no longer looking at simple sales forecasts and projections. They are looking at profitability, overall risk management strategy, and a startup's potential to bounce back successfully from major threats or crises.
Hence, prioritising risk in decision-making and operations can go a long way towards gaining investor confidence.
While traditionally, companies have focused their risk management strategies on finance and compliance, the tenets of enterprise risk management (ERM) can help startups build a risk culture, to anticipate and mitigate threats from all areas including human resources, procurement, supply chain, marketing, sales, and even reputation. ERM can also provide valuable assistance to startups, in creating contingency plans to minimise the impact of uncertainties on business.
To be able to anticipate undesirable trends and developments, startup leaders can take certain steps to risk-proof their companies.
Steps for risk-proofing startups
To begin with, startup leaders must ensure that their leadership and key personnel are risk literate.
Risk literacy is the ability to perceive threats faced by businesses, and take appropriate decisions stemming from knowledge of the various implications of these risks. Being risk-aware allows companies and their leadership to inculcate a strong risk culture and risk-based decision-making as an integral part of the organisation’s DNA.
While qualified risk professionals are adept at creating risk-proof environments in companies, nascent startups often do not have the financial resources to hire top-notch risk professionals.
In such a scenario, a founding or core team member should ideally assume the mantle of risk officer. The key role of this member is to identify internal and external risks on an ongoing basis, using techniques like scenario planning, where simulations or hypothetical situations are analysed to understand the various outcomes possible, the different factors that can cause a decision to have an undesirable outcome, and how to prevent worse-case scenarios, or horizon scanning, where emerging trends are examined to determine their potential impact on the organisation, and mitigation plans put in place to avoid any crises that may potentially arise from these developments.
Startups have fewer defences to safeguard themselves when faced with uncertainty, and are among the first to be impacted. While assessing risk the organisation must study the impact on their customers, or the sectors in which they conduct business, evaluate systemic risks, and implement mitigation measures.
As an example of systemic risk, an importer might be susceptible to variations in exchange rates. To offset this threat, they would need to secure themselves with an FX cover. Startup leaders also need to be wary of concentrating their investment too much, and should ensure they have a diverse investment portfolio.
Supply chain risk is one of the most important systemic risks for entrepreneurs, and has been particularly highlighted by the Covid-19 pandemic. It was always considered sound business practice to work with alternative vendors for the required product/service, such as for parts supply or logistics.
But now entrepreneurs also need to consider associating with vendors who are geographically more separated, so as to avoid the situation faced by innumerable companies who were dependent on manufacturing units in China. Going forward, another pandemic must be considered a much more probable scenario, and startup leaders must ensure their supply chains are protected from risk from the outset.
As more and more businesses transition to the digital sphere, with the pandemic having imposed additional urgency, they are increasingly at risk for cybersecurity vulnerabilities. Entrepreneurs and startup leaders need to be mindful and ensure all processes are reviewed and realigned, if needed, to support remote working, while maintaining a secure ecosystem that protects valuable company and customer data, and is resistant to cyber-attacks.
Although financial risk is inherent to any business, startups are particularly vulnerable to financial turbulence. Therefore, leaders of startups must have in-depth knowledge of finance and financial risk as well. Unfortunately however, entrepreneurs often lack the appetite for number crunching and balance sheets – this is not a good sign because financial understanding is crucial for the survival of any business.
Startup leaders must be adept at understanding cash flow statements and balance sheets, so that funds can be allocated strategically, and contingencies are adequately planned.
We have also seen evidence of how the financial havoc caused by the Covid-19 pandemic has brought a number of startups to an even more precarious position. According to NASSCOM, close to 40 percent of startups have either temporarily shut down operations, or are on the verge of doing so due to the pandemic. The survey also found that over 90 percent of startups in India are facing a revenue decline following the pandemic and resultant lockdown.
Startups always run the risk of running out of funds at some point in time, and raising debt is fundamental to their business model. However, entrepreneurs must be careful to avoid the perils of being over-leveraged. If profitability is already a challenge in the near term, taking on too much debt can complicate matters very quickly when a crisis hits.
Lastly, startup leaders must work towards minimising their people risk.
Most startups face the risk of hiring the wrong kind of team members and losing out on quality talent. Both these risks impact startups heavily because they generally depend on lean teams and limited resources.
Having to let go of employees and rehire fresh talent puts a strain on the organisation, due to the loss of knowledge/experience coupled with the cost of training new recruits frequently. To mitigate these risks, startup founders must invest in robust hiring processes at the outset, and conduct meticulous research to identify and capture good talent.
Potential hires should be adequately tested to determine the value they bring to the table, and subjected to a probation period while their professional skills and learning capabilities are properly assessed. Once recruitment is concluded, leaders must work on cultivating and training employees to overcome any skill gaps. In order to avoid losing good talent, startups must also ensure adequate job security and financial compensation. Practices such as awarding annual bonuses to top-performing employees can go a long way in retaining quality talent.
In conclusion, entrepreneurs must bear in mind that risk is a part and parcel of business. While it is impossible to avoid all risks, putting robust risk management processes in place will ensure that the impact and shock of uncertainty and crises are minimised.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)