It’s no surprise that COVID-19 has severely affected the business community among many others. While there have been major recessions (e.g. the financial crisis of 2007-2008), this pandemic has been the most crippling to date. The impact has been wide-ranging; some companies were more prepared for drastic changes like indefinite remote work, while others have worked hard to adapt. Many have also experienced decreased revenue, or even been forced to close their doors permanently.
While it’s difficult to completely prepare for an event of this magnitude, it’s essential to assess and plan for potential risk factors. For publicly traded companies, these are listed in their annual
10-K report, as required by the U.S. Securities and Exchange Commission (SEC). This form gives a clearer picture of everything a company does, as well as any risks it faces. While your business may not require as detailed of a report, it’s encouraged to establish a list of the most relevant risk factors. Let’s explore five risks to prepare your company against:
Concentration Risk
This “concentration” may be in revenue, customer, vendor, material, or supply-chain; all pose a significant risk if something adverse happened within that concentration. While revenue and customer concentrations are the most commonly discussed, that of a vendor or supply-chain could pose just as large of a problem. A recent example of this would be the tariffs imposed on Chinese goods, which disrupted a number of supply chains and impeded companies from offering competitive prices while still earning a reasonable margin.
Financial Condition
In many cases, a company’s financial status would be the most urgent risk factor to address. Liquidity and
debt service are critical factors to consider, as issues in these areas could derail future business plans and put the entire company in jeopardy. Some business owners tend to focus solely on cash flow, but this metric alone doesn’t guarantee that a company has sufficient liquidity or a long-term path to profitability.
Competition
Competition typically falls into two buckets – that within an industry, or 1:1 competition with another company. For the former, this may mean you experience many competitors when acquiring a new customer or contract, which can affect price or a number of other factors. A well-known example of the latter is the expansion of Walmart and Amazon; countless businesses thrived in their local markets, but took a huge hit when a Walmart or Amazon entered their industry or geographical market.
When evaluating this risk factor, consider potential future competition as well as present, since changes to the industry or economy often alter a competitive landscape. Take
Zagg Inc., for example. It’s a publicly-traded company that primarily sells phone accessories (e.g. screen protectors, charging stations, and wireless headphones). While they have a significant market share in the screen protector industry, some of their other product lines have decreased significantly over the past few years due to Apple’s expanding market share. Zagg must now decide whether to diversify their offerings to reduce dependency on screen protectors sales, or to focus on retaining their existing market share.
Products & Services
The above example with Zagg Inc. highlights another significant risk factor: the breadth of products and/or services a company offers. It’s essential to consider if your product or services could be overshadowed by a bigger player, or become obsolete altogether (e.g. if a technological advancement disrupts your industry or offering). Obviously no one has a crystal ball to know what the next radical change to an industry will be, but with a potential Uber, Amazon, or Tesla always looming it important to be future-focused.
Key Personnel
The final risk factor we’ll touch on is when a company is heavily reliant on key personnel. This could be anyone from the CEO to an engineer, but for most small businesses it’s typically one of the company’s owners. This is even more common when a business is owned by one individual who also serves as the CEO or President, performs multiple key functions (e.g. generates most of the sales or has the most industry expertise), and may also handle many administrative tasks.
