This document discusses identifying business risks. It begins by noting the many responsibilities business owners face and the need to continue driving business forward while managing risks. It then focuses on financial risks, identifying various key business ratios to measure profitability, solvency/liquidity, efficiency, performance, and gearing. For each area, it provides examples of relevant ratios and metrics. It stresses the importance of planning, budgeting, and forecasting to reduce risk. Finally, it outlines some additional steps businesses can take to manage risks, such as having proper systems, insurance, and conducting due diligence on their own business.

1. IDENTIFYING YOUR BUSINESS RISKS
Aaron Robertson
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2. Identifying your Business Risks
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3. Way too many hats…
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OH& S Human Resources
IT Family
Succession Business Value
Logistics Growth
Sales Asset Protection
Marketing Legal
Finance Customers
Seasons Banking
Nature Creditors
Debtors Closures
Key motivational speaker
Needs a break…!!

4. …and still need to drive the business forward
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5. Identifying your Business Risks
Narrow it down for today:
• Financial Risk
• Identifying and reducing risk in your business
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6. Financial Risk
This can be identified – it’s in the numbers
Needs to be based on information that is timely and accurate or its value will be:
Old
Of little value
Misleading
and often – too late
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7. Financial Risk
What should be measured?
Key business ratios:
• Profitability
• Solvency/Liquidity
• Efficiency
• Performance
• Gearing
(Measure what the bank measures)
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8. Financial Risk
Profitability
Revenue Trends – aim for growth??!!
Return on Sales (%) – net profit earned per $ of sales revenue (ie. how many sales $’s stick!!)
Gross Profit to Sales (%) - important to look at the trend as it will give an indication of where you
margins are heading (prices as compared to your main variable costs) A decline can indicate pricing
competition, rising direct costs, inefficiency (waste)
Return on Assets (%) – ultimate measure of profitability as it shows the profit yield per $ of asset
used in the business
Risk Highlighted: Performance of the business relative to its sales and value of its
assets/equity used or invested.
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9. Profitability – Return on Sales
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10. Profitability – Gross Profit to Sales
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11. Profitability – Return on Assets
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12. Financial Risk
Solvency/Liquidity
Current Ratio – the extent of funds that are available from Current Assets to cover Current Liabilities.
The higher the ratio the better. Ratio of 2:1 is desirable. (Shellfish industry can be high due to weighting
and value of stock)
Quick Ratio – reflects the amount of liquid assets available to cover current liabilities. Aim for 1:1
More aggressive than the above calculation (ie. excludes stock).
Current Liabilities to Net Assets (%) – identifies the amount due to creditors in the short term (1
year) as a %age of the owners equity. Reflects funds creditors have a risk relative to the owners
investment. A %age > 80% would be of concern.
Total Liabilities to Net Assets (%) – the higher this %age the less protection for creditors.
Identifies the relative size of the long term debt which may burden a business with interest.
Fixed Assets to Net Assets (%) – level of Fixed Assets relative to the owners equity. Being too
high (> 75%) indicates a business may be vulnerable to ‘environmental’ changes as a high proportion of
funds are tied up in long term assets (not easily convertible to cash).
Risk Highlighted: Ability to meet debts in the short term
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13. Current Ratio
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14. Quick Ratio
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15. Financial Risk
Efficiency – Working Capital
Collection Period (days) – days taken to collect cash from your Accounts Receivable. Should align
with your collection terms!
Accounts Payable Days – days taken to pay creditors. Should align with general payment terms.
Inventory Days – days working capital is tied up as inventory. Will be a large number of days in the
shellfish industry.
Sales to Stock Ratio – shows how fast inventory is being turned into sales. A higher ratio is better
as suggests a quick turnover and conversion to cash. Shellfish industry will generally have a low ratio!
Can indicate being understocked.
Assets to Sales Ratio (%)– Shows how productive your assets are in terms of generating sales. If
high can suggest that not aggressive enough in use of its assets, however if low could be putting too much
pressure on its assets (exposes risk if any assets fail at a critical time).
Creditors to Sales (%) – shows how the business is paying its creditors. A lower ratio is a healthy
situation and a high (or increasing ratio) indicates creditors are being used to excessively finance the
business.
Risk Highlighted: Ability to manage short term assets (working capital) which
directly effect cashflow.
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16. Collection Days
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17. Accounts Payable Days
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18. Inventory Days
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19. Financial Risk
Performance Efficiency
Return on Assets – net profit yield generated from the assets.
Return on Equity – the ultimate measure of how well a business is performing from an owners
perspective. One of the main drivers of business value.
Return on Capital – Gives a better indication of a businesses performance because it is not effected
by the debt/equity capital structure (ie. its the return before any recognition of interest or debt structure).
Risk Highlighted: highlights effectiveness of overall business management
(as reflects management of the income and expenses (to get profit), the efficiency of asset use and the
use of debt).
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20. Return on Assets
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21. Return on Equity
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22. Return on Capital
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23. Financial Risk
Gearing
Interest Coverage – number of times interest payments are covered by net profit (before tax and
interest). Shows the ability to meet interest bills and service debt. (Aim for 1.5x or better)
Debt to Equity - the extent to which a business finances its operations. The riskier the business the
less that is lent.
Sales to Debt – bank indications are that preference is for debt not to exceed 2 – 3 times turnover.
Debt to Total Assets (%) – familiar ratio. Depending on industry, range would be 40% to 60% debt
funding. The risker the industry the lower this ratio.
(Note: Bank will involve personal assets in this calculation)
Shellfish industry – will come down to cashflow and the ability to service debt… (making your sales $
stick!!)
Risk Highlighted: key bank indicators. Highlights level of debt and the ability to
pay.
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24. Interest Coverage
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25. Debt to Equity
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26. What's wrong with this detail??
It’s historical – We are looking backwards
A guide to the future only
Not at Market Value
If it’s all you have a present…
…still a good starting point
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27. Audit | Tax | Advisory | Financial Advice 27

28. Financial Risk cont
Planning/Budgeting/Forecasting
From any position the only way to identify risk going forward is to plan:
• Use historical as a guide and a comparison
• Use key drivers to model your situation – estimated seasonality, timings, stock
coming on, prices etc
• Use variables that you know exist at present – interest rates, softened demand
etc
• 3 way budgets – banks are beginning to require…
• P&L; Cashflow and Balance Sheet
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29. Financial Risk cont
Planning/Budgeting/Forecasting
• It is a tool to reduce risk – less surprises
• Shows financiers good fiscal practise especially when
• Comparing and explaining actual to budget
• Reforecasting
• Look beyond one year
• Action plan for any gaps (in cashflow)
• Budgets should be ‘rolling’ plans – always looking 12 months out (or more)
• If not, as a financial year ticks by, your budget shortens to a point where it is only a 1 month
budget.
• The above is the ideal – however keep it as simple or as complicated as you
like – Just have that ‘plan’!
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30. Planning/Budgeting/Forecasting…don’t stop there
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31. Sounds hard to get all this information? Spreadsheets, double handling of
information – here’s a glimpse of the future…
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Diagnostics &
Reporting Tools
Cloud
Accounting
Package
Add ons
(sales/inventory)
Budget System
3 Ways
Data Entry
Risk reduction:
‘live’ accurate information at your fingertips

32. Business Risk
Basics in place:
• Best practice
• Systems & Procedures
• Adequate Insurance(s) – business/key person/family
• Right business structure (will change and grow with the business)
• Limit family directors
• Limit personal guarantees
• Know your bank account…
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Family
Family
Trust
Company
1
Company
2
SMSF
Property
Trust

33. Business Risk cont
The ‘business plan’ will cover key elements of risk
• A liquid / live document that is reviewed and updated by the management team
(at least annually)
• Considers all aspects of the business – marketing/sales/OH&S/HR
• SWOT analysis
• Risk analysis
• Includes the budget (as above)
Involve the key team members.
Allocate tasks and keep everyone timely and accountable.
Attend to in prioritised and achievable sizes.
Benefit > Cost
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34. Business Risk cont
Have your business ‘ready to sell’…even if your not going to
Why?
• Usually when you sell it needs to be in the best possible shape
• Sharpens the books
• Do ‘Due Diligence’ on your own business:
• Use checklists across various aspects of the business
• Looks vigourously at the important areas – people, systems, OH&S, profitability
• Build an action plan around this (similar to the business plan above)
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35. Business Risk cont
Hire in specialist help
• Set the scope, get them in, keep accountable, action results, get them out…
• Fresh independent view
Use your team involved
• Hold a wealth of knowledge
• Internal eyes and ears
Have a business manager
• Gets issues and admin off the owners desk to look the big picture
• Accountable around the business plan
Benchmark business to industry
• Industry margins
• Cost of production
• Industry returns
Get away from the business – Stand back and view
• Can’t see the wood for the trees…
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36. Business Risk
IN SUMMARY
• Review current position
• Plan and Identify …plan budget due diligence
• Prioritise, and action
• Get help
Now, not later….could be too late?!
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37. Three things serial Client Choice Award winners do
extraordinarily well…
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1. Everyone in the firm knows that
customers/clients come first
2. Regard people as being as
important as their clients
3. Consistency. Consistency.
Consistency.
© 2014 Beaton Capital 37

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