Risk Management

The importance of minimising trading risks and the adoption of Risk Management solutions.

The importance of minimising trading risks and the adoption of Risk Management solutions will depend upon determining how inherently risky the business is and how important the business is in the financial life of the business owner.

For example:

  1. Mr. Smith may be an independently wealthy person with a relatively small investment in the business, possibly of a low risk nature – e.g. renting land and buildings or selling stationery to a public utility.
  2. Mr. Jones may be a person who not only needs the income from the business to live but is also hoping to sell it and retire on the proceeds. He may even be supporting the business with collateral security or personal guarantees. We can therefore say that Mr. Jones needs to look at risk management strategies more than Mr. Smith.

Potential Problems

  • Bad Debts – Even your best customer can fail.
  • Poor Trading – profitable companies can become loss making.
  • Uninsured losses – until you claim you don’t know how good your insurance is
  • The Unforeseen – e.g. natural disasters can threaten at any time

Strategy

Put in place the following mechanisms in two parts:

  1. Ring fence the existing company assets to protect from future claims.
  2. Ring fence the existing company

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