By Randy Cleary
Special to Ontario Construction Report
There are a lot of similarities between owning an investment firm and owning a construction company. Of all the required attributes perhaps the most important skill is being able to effectively manage risk. Common definitions of risk are always associated with some temporary setback. In my world this is day-to-day market volatility and in the construction world it is often missing out on the next bid. However the real risk focus for both of us should be preventing a permanent loss of hard-earned capital. With that in mind I have come up with eight core risk factors to watch for.
1. Cash flow risk
Governments and large corporations don’t understand this because money just magically shows up when requested. But to small business owners this is our life line. As financial managers we regularly monitor the dividends that companies pay us. As construction owners you must ensure a steady pipeline of diversified income and that clients pay their bills.
2. Control risk
There is a big difference between ‘selling’ a process and ‘buying’ a process. Sellers have control and already have the required information to make decisions. Buyers are on the outside looking in. When we have our buyers hats on we need to know all about the person who has control. My due diligence on money managers includes personal visits, ensuring that they have skin in the game, and that they do what they said they would do.
3. Lost opportunity risk
For you this can be getting tied up in a money-losing project or real estate deal. For me it usually means owning an overvalued and/or declining investment. The loss from postponing a proper decision is just part of the total loss. What about the missed profits from having to pass up a great opportunity elsewhere. We find that having calculated pre-set exit points solves this dilemma. If you make a mistake, accept it and move on.
4. Cost erosion risk
You’ve heard the old saying ‘death by a thousand cuts’. No matter what business you are in this is an area that must be constantly monitored. If you are upfront with customers and assure them nothing is hidden, it is much easier to earn their respect. Similar to yours, our fee-based structure is clear and straight forward.
5. Liquidity risk
A good example of this in the financial world is the case against large mutual funds. The liquidity issue might be the number one reason why they get in trouble. Correctly concluding it is time to exit an investment is not the same as being able to so. The majority of our accounts could be in cash within one day. Since a lot of capital for the owner of a construction company is tied up in equipment and real estate, flexibility through bank relationships and lines of credit must be maintained.
6. Transparency risk
Beware of documents and agreements where a lot of questions seem to go unanswered. Sometimes corruption is not far behind. When bidding on a contract you should know that some hidden detail will not prevent payment upon completion. In our office we don’t use complex products that can’t be easily understood. Investments are held in trust by a 3rd party. A separate compliance department must approve of our work. We use external auditors.
7. Currency risk
This doesn’t apply to every reader out there, but it still deserves a mention. A 10 per cent swing in the U.S. and Canadian dollar exchange rate would soon reduce or eliminate the return on investment on U.S.-related transactions and listed investments. We handle this possibility by employing maximum exposure limits, hedging, and with pre-set buys or sells. Similar strategies are available for your U.S.equipment and material purchases.
8. Systems risk
Operational shortcomings are easy to overlook. Two examples are dated communication technology which can lead to lack of response capability, and organizational inefficiency that can’t provide the required manpower to physically do the work. Neither of us can afford to miss a new trend or be out of touch with changing regulations. Major improvements on our end were managed accounts, multi-tasked staff, enhanced trading technology, and our own fund.
The information contained herein was obtained from sources believed to be reliable, however, the accuracy is not guaranteed. Worldsource Securities Inc., member of the Canadian Investor Protection Fund and sponsoring investment dealer of Randy Cleary.
Randy Cleary is the owner of MatRx Financial, a Kingston, Ontario-based investment advisory service specializing in small business owners and entrepreneurs. Contact: email@example.com or 613-547-9300.