To many, supply chain finance still leans primarily on approved invoices and credit. And yet, over the past 15 years, there’s been a complete transformation in the way financial processes are handled within the supply chain. Fifteen years ago, letters of credit predominated the payment interactions between buyers, suppliers and financial institutions. Financing was arduous and expensive. Today, online, cloud-based platforms are revolutionizing both payment and financing.
Data is the driver. Today, we have unprecedented visibility into all the transactions and interactions that take place in the supply chain. The cloud, as a central information hub, not only can host these interactions and provide a real-time picture of them, but it can also keep long-term records.
This gives financial institutions what they always wanted—a better way to assess risk.
Big Data Financing
Credit rating was historically the key factor for financial providers to assess risk. In many cases, it’s the buyer’s credit rating that counts most, even when the supplier is the one receiving the financing. The problem with credit rating, though, is that it depends on a lot of factors, not just on how reliable a supplier is in delivering goods or how reliable a buyer is in paying on time.
But as far as risk assessment goes, proven transaction history is what lenders prefer to set their decisions and rates upon. But for the longest time, financial providers didn’t have a good way to assess risk independently of credit rating. Now, thanks to big data, they do.
Only 44% of small businesses stick around four years or more. One big reason so many go away: Poor risk management.
Fortunately, help is on the way from the guys at VC Experts (subscribe to their email here).
They’ve published a helpful how-to on the art of risk management from Akira Hirai, the founder and managing director of Cayenne Consulting. With permission, we’ve excerpted the best bits below.
The Risk Management Framework
“Risk Management” is the art and science of thinking about what could go wrong, and what should be done to mitigate those risks in a cost-effective manner.
In order to identify risks and figure out how best to mitigate them, we first need a framework for classifying risks.
Once we know the severity and likelihood of a given risk, we can answer the question: Does the benefit of mitigating a risk outweigh the cost of doing so?
Quadrant A: Ignorable Risks
Quadrant B: Nuisance Risks
Quadrant C: Insurable Risks
Quadrant D: The Company Killers
Identifying & Mitigating the Company Killers
Companies flatline when the cash runs out and total current liabilities (i.e., bills due now) exceed total liquid assets. Risk management is all about identifying and mitigating the uncertainties — especially the company killers — that surround cash flows.
Uncertainty plagues businesses in countless ways, but we can group most company killers into the following categories:
Technology & Operational Risks
Legal & Regulatory Risks
The knowledge of risk management is also essential establishing a startup business. If you have any opinion, leave it in the comment box below or send us a message.
What is one risk management tactic you implemented during the early stages of your business to protect you and the company?
The following answers are provided by the Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched StartupCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
Voice the Red Flags
Hire a Tax Advisor
Mind the Cash Flow
Have Good Contracts
Create an LLC
Insist on Down Payments
These strategies could be simple yet important. Do you have any thoughts? Post it in the comment box below or send us a message.
Almost every developed nation in the world was walloped by the financial crisis, their economies paralyzed, their prospects for the future muddied.
And then there’s Sweden, the rock star of the recovery.
This Scandinavian nation of 9 million people has accomplished what the United States, Britain and Japan can only dream of: Growing rapidly, creating jobs and gaining a competitive edge. The banks are lending, the housing market booming. The budget is balanced.
Sweden was far from immune to the global downturn of 2008-09. But unlike other countries, it is bouncing back. Its 5.5 percent growth rate last year trounces the 2.8 percent expansion in the United States and was stronger than any other developed nation in Europe. And compared with the United States, unemployment peaked lower (around 9 percent, compared with 10 percent) and has come down faster (it now stands near 7 percent, compared with 9 percent in the U.S.).
Sweden has proven to the world that they survived from the crisis in a short time. If you are interested in learning more about financial management, feel free to contactus.
For any business, supply and demand chain disruption represent at least, an immediate financial risk, that no business can afford to let it to happen. At worst, any disruption will have long term ramification on the future revenue. The fact of the matter is that disruption doesn’t happen out of a sudden. It is preceded by its precursor signals. These signals either are not detected or are ignored. So a proper proactive risk management program should be designed such that it encompasses and incorporates all active networks of a supply and demand chain. This way, any variance is detected at early stage on the upstream or downstream networks.
In our approach we investigate financial risk, environmental risk, and risk to customers. In a quantitative approach, the bottom line is profit against loss. In methodology we practice, the focus is on identification, evaluation, analysis and optimal management. We believe that any business action or decision generates risk. Consequently we have to learn to live with it. The way that civilizations have rid out the natural disasters exemplifies our recommended approach; risk tolerance. An organization can best survive any interruption or even disaster if risk tolerance is embedded in its infrastructure. This is the basic philosophy of supply chain Institute in dealing with risk.
In near future, we will introduce curriculum of risk management in the form of workshop tailored for industrial applications.