Risk is inherent, in some form or another, to every industry sector. Factors like financial crises, accidental mismanagement, strategic pitfalls, natural disaster events, and technological failures can all negatively impact a business’s bottom line.
The failure to mitigate risk can have a wide range of consequences, from small errors stacking up to undermine projects’ financial viability to larger errors that can stymie (or even outright halt) businesses’ plans to scale. The failure to mitigate risk properly can lead to reputational damage, financial losses, and businesses falling way behind the competitive curve. In an economy where the most efficient businesses are likely to rise above their competitors, even small inefficiencies can set you behind if they are not dealt with.
Good risk management practice hinges on you being prepared, shifting the balance from reactive to proactive as much as possible. We’ll walk you through some of the most common forms of risk, showing you how to mitigate them and remain in compliance with federal and state regulations.
Bookkeeping: The Risks and Rewards
Bookkeeping is an essential back-office function no organization should neglect. A single source of truth where financials are mapped out, leaders leverage their organizations’ books to make investments, plan for scaling, and adjust for losses. Making sure your books are accurate and up to date prevents you from acting on false information, keeping your budget stable and preventing cost snowballing.
However, should organizations fail to upkeep their books properly, they may encounter an existential threat in the form of regulatory compliance issues. The IRS requires organizations to follow strict reporting guidelines for their financials, and if your information is misrepresented (whether intentionally or not), the hammer of the government will come down. Failure to upkeep books in compliance with the law can result in these three consequences:
- Tax fraud charges: The IRS takes underreported income very seriously and will issue both penalties and fines to businesses who do not have their finances logged accurately.
- Incorrect form submissions: If payments issued to contractors and vendors haven’t been reported correctly, employees may accidentally submit 1099 and W-2 forms to these contractors with the wrong amount on them. Best case, the company is embarrassed and has to resubmit those forms; worst case, the company causes the contractor to miss the filing deadline and is scrutinized by the IRS.
- Reputational damage: If forms and invoices are misplaced or not recorded, your company may issue the wrong payments to said contractors. Needless to say, this can cause a lot of strain in your working relationship, and possibly impact your organization’s ability to work with others in the future.
Good bookkeeping practice, on the other hand, allows you to protect your organization and its assets, remain in good standing with the federal government, and avoid any unnecessary fines or penalties. Additionally, it provides leaders with a solid foundation from which to base any investment and strategic decisions they may make.
With accurate records, you can see everything going on within your company from a high-level, 360-degree perspective. As a result, you can adjust budgets as needed to maintain project profitability, you can identify and resolve inefficiencies that have become money pits, and you can plan for a safely scalable future. You can also respond more agilely to crisis-level events, and develop an enterprise recovery infrastructure to help you rebound quickly.
The Importance of Streamlining Processes
As mentioned above, efficiency is key in the modern economy. Quite a bit of risk businesses face is caused, either directly or indirectly, by inefficiencies within their processes.
So how can you identify these inefficiencies, and plan to resolve them? By setting a process which allows for continuous improvement, removing inefficiencies and encouraging innovation. Here’s a rough sketch of what that process may look like for you:
- Identify areas of risk: You can’t resolve problems you don’t know are there. Perform an audit of your finances and flag areas where you’re seeing bleeding. Identify the causes of the damage, where processes broke down, and make a short list of easy wins. Additionally, ask yourself if your organization has any level of disaster preparedness: do you have plans in place you can customize to different situations?
- Embed compliance/risk mitigation best practices into processes: When you’ve narrowed down the sources of risk within your organization, it’s time to ideate on how you can quickly and effectively resolve them. Many of these will be direct process changes: scheduling deliveries earlier than needed, requiring frequent reporting, and regular backing up of data are examples of these changes. You can also invest in redundant systems such as backup internet connectivity, create a disaster recovery plan, and implement new cybersecurity systems at this stage.
- Leverage technology to increase efficiency: Process breakdowns can be caused by unnecessary or redundant manual input. Fortunately, several tools on the market can automate these manual tasks, removing bottlenecks and driving efficiency across departments. These tools limit the possibility of manual error and also free your teams up to pursue profitable avenues of growth instead of doing manual labor.
- Encourage communication across teams: Educate your teams on the risks inherent to their business, and encourage them to raise their voices if they see any instances of risk.
While the exact structure of this process will vary from organization to organization, these are the four essential steps you’ll use to mitigate most forms of risk. Some residual risk will likely remain; though, being aware of it, you can take steps to integrate protections into your processes.
We hope this article gave you the tools you needed to identify and mitigate risk. Keep monitoring your attempts at risk mitigation and ensure your compliance with regulations, and you’ll be well above water when the flood comes.
