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Using Risk Management Practices to Improve Small Business Liquidity
Question: How can bankers use risk management practices to improve small business liquidity?
Answer: Liquidity concerns grow close to the bone of small mid-size businesses (SMBs). Liquidity management is their bread of life and successful SMBs practice it like a fine art form. With the dramatic changes occurring in the credit markets SMBs need to become more aware of how to preserve liquidity.
Bankers can help SMBs accomplish this by recommending a few simple risk management practices. It’s also an opportunity for bankers to add value to their products, build closer relationships with clients and mitigate potential credit risk in loan portfolios.
Optimizing business processes with accounting software and internet banking are great liquidity management tools. They extend and manage payment cycles, match assets to liabilities and calculate liquidity metrics like quick and current ratios. Bankers need to take the lead in helping SMBs to develop specific strategies and techniques to improve cash management practices.
Every banker knows that a strong balance sheet reduces cost of capital and increases asset valuation and ability to leverage assets. Risk management seeks to protect and maximize returns on assets and minimize the “leakage of enterprise capital”. Leakage of enterprise capital is a capital investment that did not provide an acceptable rate of return (ROI). A concerted approach to assessing and managing numerous risk factors and choosing the appropriate risk/opportunity factor to fund is a principal driver in preserving liquidity by maximizing return on capital.
Some villains that contribute to capital leakage are inappropriate, non-prioritized or misdirected capital allocation initiatives. Here we refer to an initiative, acquisition or project requiring investment of time, money, personal energy and corporate resources that did not produce an optimal rate of return. This is critical for SMBs because of their limitation to initiate and fund corporate or product development projects. Misdirected projects drain corporate assets and heighten liquidity risk factors.
SMBs capital allocation decisions must factor opportunity cost and an understanding of value at risk (VAR). VAR is usually associated with measuring risk in investment portfolios; but it is a useful metric to determine which projects small business should fund to mitigate the greatest risk and produce the greatest return on capital expenditures.
Bankers must continue to be the go to guy for SMBs to address liquidity management within an enterprise risk management framework. Bankers must be strong advocates of prudent risk management practices that guide SMBs through an opportunity discovery exercise. Bankers who accomplish this will counterbalance and become a fine tune complement to the entrepreneurial instincts of the small business owner.
Sum2 Boilerplate
Sum2 is dedicated to offering banks creative sound practice tools. Our Profit|Optimizer product suite helps banks address the SMB market. The Profit|Optimizer identifies low risk lending opportunities; initiates dialog with prospects and clients; differentiates e-commerce sales initiatives; adds credit decisioning transparency; mitigates credit defaults
and improves loan workout programs. See our full product portfolio at www.sum2.com or call us at 201.440.1173.
First published on BankersOnline.com 4/07/08
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