8 Risk Management Tips for Retailers

But for retailers, risk management can be a beast to manage. You have to plan for the continuous supply of products and transportation logistics. Let’s not forget, you also have to manage a large number of third parties – and the financial, operational, legal, security and compliance risks that come with working with them.  

But one thing is for sure – a strong risk management strategy is key to making sure everything runs smoothly. So, let’s explore eight tips that can help you avoid common mistakes that could damage your brand and negatively impact your cash flow.

Data is the backbone of every business decision. But if you don’t have the full financial picture about your customers and suppliers, including their revenue growth, debt, payment history, average DBT, total past due payments (and monetary value), then you won’t be able to know with certainty if they have strong enough financials to pay their invoices (if they’re a customer) or complete orders (if they’re a supplier).

That’s not the only scenario where not having the full data picture can hurt your business. Cash flow forecasting and inventory planning are critical for retail success. So, if you’re missing crucial data, your forecasting and orders could be completely off and lead to excess inventory (or not enough inventory). If you have too much inventory, you could end up spending a pretty penny on warehousing and maintenance costs. You could also end up having to offer steep discounts on items just to be able to offload them.

But if you don’t have enough inventory to meet customer demand, then your loyal customers could get frustrated and go to your competitors to get the items they need. That’s not just lost customer trust, but it’s going to result in a decline in sales and revenue.

Most departments in a company use different tech and tools that have different functionalities. So, if the finance team is analyzing previous sales figures and doing cash flow forecasting for the next year, they’ll need a 360-degree view of risks, threats and opportunities across the entire business. But if they’re missing out on certain data that could expose serious legal risks, government fines and reputational damage, then all that forecasting and analysis will be inaccurate and skewed. And that certainly won’t help you make the right decisions for your business. Remember, your analysis is only good as the data behind it.

The best way to avoid making any mistakes is to make sure you have the best quality data by integrating your existing stack with credit risk data. Doing this will mean you can have the full data picture all in one place and you can reduce your overall risks, while making your business more resilient. 

It’s so easy for different departments (i.e. finance, supply chain, compliance, legal) to all be doing their own thing – with no one speaking to each other. These collaboration and communication silos can be dangerous – as important things can be missed. 

For instance, if the supply chain team signs a contract with a supplier without first having the finance team vet them for financial risk, the entire business could be hit hard if that supplier runs out of cash and can’t afford to complete its orders. Everyone needs to be reviewing the important elements (i.e. credit checks, KYC/ID verification, AML checks and compliance checks) and then regrouping together to see where all the financial, legal and compliance risks lie. Only then can the right decision be made.

What one department does can have a direct impact on another department. And when you look at all the threats to your business, they can have a domino effect on the entire company – leading to sales losses, declines in customer loyalty, lawsuits, government fines and long-term damage to your brand. 

Remember, onboarding doesn’t start after a customer or supplier contract is signed. It starts well before and includes multiple elements, including credit checks, KYC/ID verification, AML checks, sanctions screenings and compliance checks. 

Trying to do all of it manually is going to be tedious, to say the least. Not to mention, it could result in mistakes, delays, skewed analysis and, worst of all, the wrong decisions being made. So, what’s the solution? Automation. This will speed up onboarding, identify risks quickly and help you build up a full picture of customers’ and suppliers’ financial health and stability.

Want an example of what I’m talking about? Ok, let’s look at the credit decisioning process. Our research found that:

• 97% of finance managers process up to 100 credit applications a day.

• Several people are involved in the credit decision process. For 63% of businesses, it takes up to 5 people to make credit decisions on new customers. Meanwhile, 22% of companies involve 6-10 people in the process and 14% of companies involve over 10 people.

• 75% of finance managers take up to a full day (8 hours) to reach a credit decision on a single customer. Plus, 16% take one to two days to reach a decision and 10% take over three days.

On top of saving countless hours, you can also save thousands of dollars by automating the credit decision process using customized workflows based on your company’s credit policy. So, you can set certain parameters based on your credit policy (i.e. if DBT reaches a certain threshold) and then automate credit decisions based on that.

Of course, I’m not saying that the credit decision process for every customer and supplier should be fully automated. While automation can be useful for the applications that fall into the ‘easy approval’ category, your team will still need to be involved in the applications that aren’t as cut-and-dry and require further analysis. This means your team can focus their attention on onboarding customers quickly and effectively, while also saving hundreds (even thousands) of hours and be more productive. But more importantly, you can detect financial risks quicker and more effectively – reducing your company’s overall risk and maximizing your growth.

The bigger the company, the more customers and suppliers are typically used. That could end up being a lot of information to sort through and analyze. But if the information is held in multiple places (or even in physical paperwork), then it’s not very likely that you could quickly identify which customers and suppliers are high risks and which are low risks. 

You need to create a comprehensive risk profile on customers and suppliers and make sure the profile includes various information, such as credit scores, credit limits, annual financials, average DBT, if there have been any changes to DBT in the last 12 months, if their credit score and credit limit have dropped drastically or suddenly over a short period of time and so much more. 

Then you should use this information to rank them all. That will be useful in prioritizing invoices, payment reminders and debt collections. It could also help you determine if you should continue working with them – or if you need to adjust their payment terms. 

Having enough supply of goods is one of the biggest challenges retailers face, especially if you sell in high volume. But bottlenecks are common and can occur for many reasons. For example, labor shortages can make it tough to find enough workers to complete work, meaning goods won’t be delivered on time to customers. A supply chain bottleneck can also occur because of infrastructure problems. This happened in 2021 when a giant container ship got stuck in the Suez Canal.

Other causes of supply chain bottlenecks include:

• Poor communication: If you aren’t communicating clearly and regularly with your suppliers, then things can go amiss very easily. So, it’s important to make sure you have regular check-in meetings and are open, honest and transparent about your expectations, needs and plans.

• Lack of inventory visibility: Managing your inventory can be complicated when you have lots of SKUs and multiple warehouses. The larger the company, the more complicated things can get. You need a good grasp of your inventory management if you want to know where items are, have enough inventory to meet customer demand and avoid getting stuck with surplus stock that doesn’t sell.

• Limited production capacity: It’ll be incredibly hard to fulfil orders if you don’t have enough workers available. And you won’t be in a good place if you don’t have enough warehouse space to store your inventory. If your production capacity can’t meet demand,, then you could miss out on potential orders or fall behind with existing orders.

• Inadequate transportation infrastructure: Your business is heavily reliant on transportation to deliver your goods from suppliers to your warehouses as well as to customers. So, transportation bottlenecks can cause serious problems. So, if there’s a massive demand surge during certain seasons, like the holiday shopping season, transportation delays can be quite common. More recently, UPS workers were on the verge of going on strike. Although the crisis was averted at the last minute, the potential strike is a perfect example of a transportation bottleneck. If the strike had occurred, you can bet it would have drastically slowed down the movement of goods, which means consumers would have seen severe package delivery delays, higher shipping costs and possibly even higher prices for goods.

When these bottlenecks occur, the implications for your business can be wide-reaching. They can include:

• Increased costs: Bottlenecks aren’t just frustrating; they can also raise prices of materials, shipping and products. This often then requires that you hike up your own prices so you can accommodate the higher overhead, which can frustrate customers and cost you their long-term business (and revenue).

• Delivery delays: Most retailers have experienced this (more than once). When deliveries are delayed, this means your customers will be left waiting longer to get their items. And if the delays are too long, you could lose those customers to competitors.

• Customer dissatisfaction: Customers don’t usually know or care about the nitty gritty of supply chain logistics. All they care about is if they get their order quickly and it’s in good quality. So, if it takes too long to deliver an item – or if the item arrives damaged or in poor quality – you can bet that customer won’t think twice about shopping elsewhere next time. Not only will you lose that revenue, but you could end up getting negative customer reviews and complaints as a result.

• Lost revenue: As I already mentioned above, increased costs, delivery delays and customer dissatisfaction can all lead to lost revenue. And lost revenue means lower profit margins, slower revenue growth and more problems down the road. 

There are various regulations that retailers need to be aware of. These are across multiple areas, including:

• Data privacy: Regulations like the Consumer Data Protection Act came into effect in January 2023 and must be followed by retailers across the U.S. At the same time, some states, like California, have their own specific guidelines and you should be aware of individual policies. 

• Payment fraud: For the most up-to-date payment fraud practices, the Federal Bureau of Consumer Protection has everything you need to know. 

• Retail theft: The Inform Consumers Act is meant to prevent the selling of fraudulent items and reduce retail theft. Companies that break these guidelines are subject to a $50,000 fine. More recently, the Combating Organized Retail Crime Act (CORCA) was introduced in the U.S. Senate, with the goal of providing investigators with more tools to take down organized theft groups and give the current laws ‘more teeth.’

• Ethical sourcing & sustainability in supply chains:  The Uyghur Forced Labor Prevention Act was passed unanimously by the U.S. Senate in December 2021. The act bans imports from China’s Xinjiang region unless companies can prove their goods were not produced using forced labor or child labor. Meanwhile, U.S. senators introduced the Slave-Free Business Certification bill in 2022. The bill requires certain large companies to carry out audits on their supply chains to ensure they are free of slave labor. If the bill passes, eligible companies could be fined up to $1 million if forced labor is identified in their supply chains. Earlier this year, Canada passed its Fighting Against Forced Labor and Child Labor in Supply Chains Act.