This is the last in a series of three articles on risk and PE firms, this installment will deal with the definition of risk.
Mitigating PE risk is not one-time thing but an on-going process. For PE firms, it begins with the due diligence of a new deal and continues through with their portfolio companies until the exit. With financial risk defined, identify and measured, focus can now be spent on mitigating.
Gap analysis provides the road map to mitigating the risk as it measures the amount of risk between a company and its industry standard. However, reducing these risks can take time and require a combination to different approaches and actions.
Using what-if analysis various scenarios can be tested and evaluated, both individually and collectively, to see the impact on mitigating risk and measuring the financial impact on the company.
Based on this data analysis each risk area can be prioritized, risk reduction goals defined along with a timetable for action. A strategy can be developed, both short-term and long-term, and course of action that offers the highest degree of success and financial impact on the company.
Once a risk plan is implemented, benchmarking provides a tool for on-going financial monitoring of a risk mitigating strategy, keeping management focused and allowing action plan adjustments to be made as needed.
What-if scenarios are easily used to prioritize risk actions, the degree of action and what is the subsequent financial impact. Below, is an example of a company with inventory age of 132 days with a liquidity or net cash balance position of $138,122. By reducing the inventory by 30 days the company’s liquidity net balance position increases from $138,122 to $1,168,215 or a $1 million delta.