13 Dec What’s the Risk?
It doesn’t matter what you do, every day when you get out of bed, you will face risk. Much of this risk we will manage on the go seemingly without thought; things like crossing the road. What we weigh up is consequences…can we safely cross the street now, as the consequence of being hit by traffic is likely greater than the value of getting to our destination quicker.
Some risks we have trouble recognising because they are unfamiliar (business risks are often like this) or if we did recognise them, they would cause us to change the way we live (lifestyle risks are often like this). Or maybe we feel powerless to do anything meaningful – what can an individual do to stop global warming?.
Recognising and managing risk makes sense.
Some risks you can pass on to others, through insurance. Most people insure their car or their house. If you have a young family and debt, it is sensible to consider life insurance. Medical insurance seems a good idea to many people.
Some risks can be managed by your own actions. Here is a few of topical risks to consider: interest rate increases (a financial risk), natural disasters (a business risk), and health issues.
Interest rates: maybe it’s because the lines of cheap credit have been exhausted, perhaps it’s because the president elect of the USA has vowed to go on a public spending spree, or it could be that interest rates will rise globally as the record low rates are no longer necessary to stimulate the economy. Whatever the reason, interest rates seem to be on the move, northward. So what does this mean?
Well, if you had purchased an ‘average’ house in Auckland during August of 2016, you would have paid $842,500. If you had a 30% deposit, your mortgage is near enough to $590,000. Spread over 30 years at a rate of 4.5%, you will pay total interest of $486,200. If the rate moves up to 5.5%, your total interest goes up to $615,984. That is an increase of $129,784, or an average of $4,326.13 per year. The risk is of course cash management…where would the money come from to pay the extra $83 a week interest? One thing you can do to manage the risk is look to moving some of your debt to a fixed rate. Talk to your lender about options.
Natural disaster: the recent earthquakes are a stark reminder of just how quickly prospects of a booming summer can turn to dust. Businesses from Kaikoura and Wellington are counting the cost of damage and the losses from closures. Others must rethink their business entirely – it is likely the Kaikoura tourist industry will take a significant hit. How would your business cope if it had been affected?
For those using cloud based software such as Xero, one thing that will continue to be available is your records and information. The Christchurch earthquake was a major reason why we choose to switch to Xero.
The business risk to those who are not directly impacted is a challenge. How can a business in Central Otago deal with the increased freight costs of product that have to move through the upper South Island. Will the Auckland market pay more for the cherries this year compared to last, or will that business have to suck up those increased costs? More working capital may be required for those businesses as their costs increase. Managing the risk would involve seeing the Bank to get a larger overdraft perhaps.
Health issues: in 2013, there were 22,166 new cases of cancer registered in New Zealand. There are various factors that make you more likely to end up with cancer – smoking, being overweight, getting older, being Maori and being male all increase your likelihood of getting the big ‘C’. So, if you are an older, overweight Maori male who smokes, you need to recognise the risk and take advise how to manage it.
If you ended up with a serious illness or chronic condition that meant you were unable to work the way you have in the past, how would you support yourself and your family? Is your business saleable? What if things got a little more terminal – do you have a will? An enduring power of attorney? Are those closest to you aware of your wishes should you be struck down without warning (think: heart attack or serious accident)?
We’re surrounded by various risks all of the time, much of it we don’t ever contemplate. But those who have evaluated these risks and prepared for them tend to fare much better than those who don’t.
What are the risks that face your business or family? Have you evaluated them? Do you have plans in place should one of these risks ever materialise? We see risk management as vital to your economic and personal success. As to your business, a great way to get started on recognizing and managing risk is to prepare a forecast for the next year, the next five years. We will follow this up with you in the new year.
