Business owners face numerous challenges on a regular basis, but it is the daily challenges that can distract owners from a potentially major catastrophe.
“Too often businesses are unprepared for major disasters,” says Brian Sharkey, director of audit and accounting at Kreischer Miller. “Failing to plan for such events can be a crippling mistake.”
In order to be better prepared for such disasters, companies should implement an Enterprise Risk Management (ERM) process within their organizations.
Smart Business spoke with Sharkey about the impact of ERMs on companies’ continuity and value.
What is Enterprise Risk Management?
ERM is the process of identifying, planning, organizing and integrating the activities of a business to prepare for any dangers, hazards and other risks that would interfere with a company’s long-term objectives and continuity. ERM not only addresses risks from accidental losses, but also includes financial, strategic and other risks, which can be summarized as:
- Organizational — lack of leadership, obsolete systems, brand erosion, security breach.
- Physical — unauthorized use, catastrophic loss, natural disaster.
- Financial — poor economic performance, insufficient liquidity.
- Customer — loss of market, loss of significant customer share, ineffective alliances.
- Employee — labor shortages, work stoppages.
- Supplier — poor quality, ineffective partnerships.
Does this impact a family-owned business differently?
Family-owned businesses face similar risks as larger private or publicly traded companies, but they also have some unique risks. For starters, reputation risk is something a family-owned business needs to consider. Were a disaster to occur, it could have an impact on the personal and business connections of the entire family.
Risks to succession and transfer can be more significant in family-owned businesses, which are typically passed down from generation to generation. In this day and age, it is common for the next generation to not be interested in taking over the family business.
Capital risk is also critically important in a family-owned business. Most private business owners have a significant amount of personal capital invested in their company, and consequently have more to lose if a major, adverse event were to occur.
What should companies do?
Implementing a proper ERM strategy should not be handled informally. With the multiple hats many people wear in a small or midsize company, it is easy for an ERM process to fall to the bottom of the to-do list. Like any good process, it is best to have a well-defined plan with time-based goals and objectives. But most important, there needs to be oversight and accountability.
What does it mean from a governance perspective?
One responsibility of an outside board of directors is to help management minimize risks to an organization’s capital and earnings, looking beyond day-to-day responsibilities to keep leadership focused on long-term goals. A board should be included early on to help identify risks since they hold a unique perspective in ensuring that all stakeholders’ risks are addressed. The board is also an ideal body to oversee the process and those who are actively managing it.
Can ERM impact the value of the business?
Implementing a sound ERM strategy can only improve a company’s value. Businesses are valued based on their ability to produce and sustain cash flows. Unaddressed risks create uncertainty about the future earnings and cash flows, and accordingly, a valuation analyst or even a third-party buyer will look at these very same risks when determining the value of a business entity.
A well-planned ERM strategy will not only identify the risks that most significantly impact a company, but create value and security for ownership, employees and customers.
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