The Benefits of a Risk Assessment

A risk assessment is a benefit to any private company, and especially one moving toward an IPO. It is required of public companies and a private company will be best prepared by documenting their risk before going public. Let’s look at risk from the top level.

Companies historically are overoptimistic in their growth forecasts. Even if they do meet their expected goals, the question remains whether they are able to sustain that growth amidst all the variables in a changing marketplace. A risk assessment is advantageous on several levels, and should address technology risk, staff retention and even whether a business is physically in the best location to reach potential investors and talent. Many businesses have a growth plan; however, they need to consider whether growth can be sustained as planned, and how they will accommodate needed changes in production facilities, technology and staff as needed.

Assessing risk for businesses in the technology sector is especially hard to predict.   In five years will a technology or process still be relevant? Even if your product is not in the technology sector, your company should assess the risk associated with changes in the technology used within your company, and have a growth plan to change as the related technology also changes.

An example of this can be seen with Eastman Kodak Company, better known as Kodak. The company was founded in the late 19th century, and in the late 1970s enjoyed nearly a 90% market share of all photographic film sold in the United Stated. In the 1990s digital cameras came along, and Kodak was not able to change their business model and products quickly enough to meet the challenge. Did Kodak do a risk assessment and have a plan in place to deal with the changes? Unfortunately, the company filed for bankruptcy in 2012.

Looking at risk posed by competitors is also important. Microsoft did not respond quickly enough to meet the rising demand for mobile computing devices, and their competitor, Apple, saw the opportunity and successfully dominated the market with their iPad and iPhone.

One might say hindsight is 20/20, but it’s important to have a risk assessment program in place that looks ahead at potential risks as your company grows. A risk assessment will enable a company to be better informed and capable of making difficult decisions as they arise, or, ideally, before they become a risk.

It’s important not only to evaluate the risks that affect companies in general, but to examine risks that are specific to your business. An Enterprise Risk Management consultant can provide valuable insight to companies by helping them create and sustain a resilient risk management infrastructure.

In next week’s blog, we’ll discuss how to time the market for an IPO.

David Katz is a Senior Audit Manager providing domestic and international accounting, auditing and business consulting services to public and private clients in a variety of industries.

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