Forward thinking, thoughtful planning – The Delta Group has got you covered.
The Delta Group ensures that your cash position calibrates directly with your strategic business plan. The Delta Group’s tools enable deep financial visibility yet simplify the process to mitigate risk and engage financing sources needed for sustained growth.
Risk is Not a 4 Letter Word
How often are you frustrated with your banker for not understanding the viability of your business when you are looking for financing? They seem to be singularly focused on risk instead of opportunity! The good news is that the problem may not be your business but instead a simple communication issue.
Risk is often misunderstood or avoided all together. TDG helps demystify risk by breaking down barriers and simplifying it into two basic concepts – seriousness of event & probability of that event happening- so all parties can fully understand obstacles and move forward.
The Risk in Every Decision
Leo J. Correia
Risk is inherent in every decision we make, some more than others. In many situations, particularly lending situations, everyone talks about risk as subjective topic. I would often become frustrated in a meeting when someone would bring up the topic of risk, discuss some potential undesirable outcomes, then make a decision, without defining risk. Being a numbers person, I need to define and quantify things and risk is no different.
I was in a meeting with a lender, discussing restructuring and expanding the debt structure for a my client’s growth strategy when the banker started discussing risk. I felt like this was the ultimate roadblock, then it came to me. Risk is very simple, risk only has two components, probability and seriousness.
- Probability – The likelihood that an undesirable event will take place.
- Seriousness – the cost or dollar value if the event does take place.
Now I can quantify the risk. Putting numbers to the probability and seriousness defines the risk with precision and communicates the risk with accuracy. Communication
n of the risk is key. Using verbal descriptions of risk that are not quantified, often creates a misunderstanding to the risk environment. For example, in a meeting between a business owner and a lender, the business owner was describing an unfavorable event as “not likely” to happen and “not significant” even if it did happen. I stopped the conversation and ask the lender to quantify the probability and seriousness of the event, given this verbal description. The lender understood the risk of the event as a probability of 40% and a seriousness of $100,000.
What’s interesting is, when I asked the business owner to quantify the probability and seriousness of this event, he described the risk of the event as a probability of 10% and a seriousness of $50,000. Given the size of the company, a probability of 40% and a seriousness of $100,000 was not an event that would concern the lender in evaluating the company, but when you combine this risk quantification with other risk factors, the lender would become very concerned about the creditworthyness of the company. This un-quantified misunderstanding can now become a barrier for the company’s access to capital for growth.
Mitigating the Risk
Mitigating risk is easy now that we have defined risk as only two components, probability and seriousness.