With the credit crunch continuing to tighten, West Midlands directors have been urged to put risk management at the heart of their business strategies.
The call, by Peter Manford, a partner in the risk management and contracts team at Birmingham law firm Martineau Johnson, was made during a seminar for company directors at the firm’s Birmingham offices.
“With the focus shifting to cost cutting, some directors are tempted to cut corners but, unsurprisingly, many risks of doing business increase in an economic downturn so that is a bad time to start paying less attention to them,” he said.
Peter Manford wants to see an integrated approach: “Companies respond to risk by making commercial and operational decisions, setting financial criteria and placing insurance.
“Contracts are a crucial and integral part of risk management and they must fit properly with those responses,” he said.
However, for those who think that the contract is the universal solution, Mr Manford has a simple message. “Eliminating risk is a pointless holy grail. Even if we could do so, all opportunity would have disappeared with it. Risk and profit are opposite sides of the same coin.”
Business risk is often associated with regulation but Mr Manford says that this is not the correct emphasis: “Of course, businesses must protect themselves against health & safety and other regulatory requirements but this narrow view of risk management is not nearly enough,” he said.
“Managing risk is not just defensive and negative. Skilful risk assessment and managing and profiting from well managed risk should be at the heart of a good business.
“Good practice is to do so in a way that is systematic and has become part of the culture of the organisation. Businesses which achieve this tend to be more profitable, experience fewer problems and increase their value more quickly and more surely.”
Mr Manford cites the example of increased credit risk in a downturn.
“To guard against being caught out by such loss, a company should first check and monitor its customer’s credit status, only then granting an appropriately limited credit amount and period.
“Then, if a problem arises, the company will place the customer on stop or on proforma cash in advance terms. It may take out non-payment insurance.
“The contract must give the company power to do all these things and have the right to interest for non-payment at an appropriate rate. Other contract terms including ensuring that ownership of goods sold only passes on payment are worthwhile protections too.”
In addition, Mr Manford says that there should be a range of provisions to deal with the customer who wants to break out of the contract.
Martineau Johnson is holding one further ‘breakfast cereal,’ seminar, this time covering Routes to Market on July 11.