Evaluating Business Risk

William McMahon
William L. McMahon

One of the first things a CFO in a new situation should do is evaluate the risks that a company faces. Sometimes these risks are not obvious, but recent events demonstrate the continuing need to evaluate these issues carefully.


The supply of inventory is vital to most businesses. One of the purchasing department’s primary responsibilities is to get raw materials at the best price. Frequently that has meant the lowest price, but has the company evaluated the risk of the source of that raw material? One good approach is to evaluate the raw materials and develop a matrix. How critical is the material to the production? Is it sole-sourced, and if so, are there other potential sources not currently qualified? What is the lead time and has the company purchased sufficient quantities to meet anticipated demand?

If the raw material is sole-sourced, what happens if the supply is interrupted or the producer chooses to cease production? Does the company have to re-qualify its product with its customers if it changes where it buys its raw materials?

Does the supplier have a single production facility of its own, or does it have multiple facilities?

If the company cannot answer these questions in a satisfactory way, a dedicated response to these issues is necessary and should be led by the CFO. These issues impact the customers who rely on the company to keep its supply line intact. All critical supplies and materials should be identified, multiple sources qualified and if multiple sources cannot be qualified, the company should be evaluating substitute production methods or workarounds, which also should be qualified by its customers.


The business should also review its current customer profiles. How dependent is the company on a few customers and what happens if their supply line is interrupted? How does the company handle those potential issues?

How financially strong is your customer to withstand an adverse economic condition and what is the current exposure of the company in its accounts receivable?


These issues point out the need to reevaluate the total cash flow cycle of the business. From initial purchase through to sale and collection of cash, how long does it take for the company to recover its cash, what happens to that cycle in a downturn or in economic turbulence and how long can the company sustain itself with its current resources – whether through lines of credit, cost controls, inventory and customer management, other capital market options?

The company needs to have a plan to address these issues and the CFO is the person in the best position to lead and direct these efforts.

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