It is also sensible to be aware of and take into account the human dimension. People behave differently and inconsistently when making decisions involving risk. They may be exuberant or diffident, overconfident or overly concerned. Or they may simply overlook the issue of risk.

One important priority is to identify significant risks within and outside the organisation and allow these to inform decisions. This makes it easier to avoid unnecessary surprises. Examples of significant risks might be the loss of a major customer, the failure of a principal supplier or the appearance of a significant competitor.

Risk surrounds us all the time. As Harold Macmillan, a former British prime minister, once said: “To be alive at all involves some risk.” Some of the most common areas of risk affecting business are summarised in Table 11.1. It is valuable when attempting to identify risks to define the categories into which they fall. This allows for a more structured analysis and reduces the chances of risks being overlooked.

To this list should be added another, intangible category: the opportunity cost associated with risk. In other words, avoiding a risk may mean avoiding a potentially huge opportunity. There is a tendency for people to be too cautious and risk averse, even though they are often at their best when facing the pressure of risk or deciding to take a more audacious approach. It is also worth considering that sometimes the greatest risk of all is to do nothing.

Do not ignore or underestimate the wider impact of a financial decision on other parts of the business. Avoid weak budgetary control Budgets are often used merely to assess performance, whereas their real value is as an active tool to inform financial decisions. Budgets should not be cut without giving sufficient thought to how this will affect other
decisions.

Understand the impact of cash flow

Issues of cash flow and the time value of money are often ignored by non-financial managers, to the detriment of the organisation. In the worst case, this may result in the business becoming insolvent.