Bianca Dexter-Burnell: Dealing with risk

- Last updated on GMT

Related tags: Risk management, Risk

Sound risk management is clearly important during a recession. But experience shows that many companies actually run into financial difficulties...

Sound risk management is clearly important during a recession. But experience shows that many companies actually run into financial difficulties during the upturn, as they stretch themselves in search of renewed growth. So it is vital for the management of licensed trade companies to keep a firm grip on risks as economic conditions improve.

Two types of risk are currently particularly front-of-mind for our clients. One is market volatility - and it's not hard to see why. Since late 2007, the pound-dollar exchange rate has swung between US$2.11 and US$1.35, the UK's base interest rate has fallen from 5.75 per cent to 0.5 per cent, and oil has traded in a per barrel range of US$39 to US$144.

The other risk area is that of refinancing. Our analysis of the loan market for UK corporates projects a peak requirement for refinancing in 2012.

With auditors increasingly wanting evidence of access to finance going forward, many companies will want to start examining their refinancing options this year.

Both of these risks can have major impacts. Market volatility on the scale described above - if left unmanaged - can turn a profit into a loss in a matter of days. And failing to refinance on suitable terms may put a business's very future in doubt.

So, how can licensed trade companies mitigate these risks? With market risk the answer lies first in structuring your business to reduce the impact of market movements. At a basic level, this might include natural hedges such as sourcing supplies from the business's main export markets, or building in operational flexibility to ramp capacity up and down.

Many companies reduce their risks further by buying hedging products, which provide protection against markets moving the wrong way.

Examples include swaps or forwards, which fix the rate payable and involve a commitment for the maturity of the trade, and options which give buyers a known worst case rate without any commitment other than the initial premium cost.

All these products are underpinned by 'derivatives' - which have attracted negative comment in the press, but which remain a valuable tool when used properly. Hedging can also create additional business opportunities beyond risk management of existing activities.

For example, those pub companies which are heavily reliant on importing stock may use an option to lock in an attractive foreign exchange rate and price your products accordingly, with the confidence that if the business doesn't materialise, there is no further commitment and could even sell back the option.

Irrespective of your business's size or industry sector, it faces significant risks at every stage of the economic cycle. The key to managing these risks is to understand what they are, and then to take considered, prudent steps to protect against them.

Bianca Dexter-Burnell is head of licensed trade at Barclays Commercial Bank

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