NZ Credit & Finance Institute
Governance New Zealand
Associate Member
New Zealand General Member

Risk Mitigation versus Risk Elimination

Risk is all around us. Each day we have to cope with the challenges of confronting everyday risks when going about our lives. Some people are keen to take on more risk than others, but it is impossible to avoid coming face to face with risk entirely. Without necessarily realising it we are also quite adept at mitigating risk – be it slowing down in the car on wet roads, putting on sunblock on a warm summers day, to even asking someone to hold the ladder when cleaning out those pesky gutters. However, it is important to note that none of these mitigations eliminate the risk entirely – slowing down on a wet road does not guarantee we won’t be in a crash – but the actions taken do reduce the chance of that particular risk eventuating.

Despite this there has been a distinct recent trend toward risk elimination. Schools have dismantled climbing frames, for example, to eliminate the possibility of a child falling rather than mitigating the risk by making the landing softer for the child. Road safety experts are openly talking about a “zero’ road toll although they are a little light on the detail of how the risk of road death can be completely removed. Of course, zero playground injuries and zero road deaths are outcomes that no-one would argue against, it’s just that we have to question how these can be achieved without having a serious detrimental impact on the enjoyment of life.

Similar concepts can also be considered in a business sense. A big risk to a business is taking on credit customers. Selling on credit always runs the risk that payment will not eventuate leaving the business owner out of pocket. If this was to occur on any significant scale then the viability of the business could come into question. Risk elimination here would be to run a business on a cash-only basis, but just how realistic is this? For most business owners that would seriously reduce the potential pool of customers, especially when competitors offer credit terms. So which is worse – a business failing because of customer non-payments impacting cashflow, or lack of customers reducing revenue to a level below financial viability?

Of course, either could lead to the same disastrous outcome, but risk elimination by turning from credit to a cash only environment wouldn’t give the business much of a chance – it would be almost doomed from the start if competitors were offering credit terms. Instead the option of accepting the risk of offering credit terms but taking steps to reduce that risk seems the sensible option. And happily there are a number of steps you can take to reduce credit risk. You can:
• Check out potential credit customers first to assess likelihood that future payments will be made;
• Take additional security;
• Register any securities appropriately;
• Ensure you get a contract signed by the customer which contains relevant terms that cover your credit risk;
• Take prompt action against slow payers and don’t allow credit exposures to get too high to riskier customers.

In most business scenarios it is mitigation of risk rather than elimination that presents the best outcome. In this cashflow situation it allows business to grow by acquiring new customers whilst reducing the risk of suffering cash losses that impact the business viability.

But a word of warning. Accepting the risk means that you must get your risk mitigation plans right. It often pays to speak to experts to ensure your plans are robust and that all risks have been identified and appropriately reduced.