Risk & Leverage Checklist

Check your business for the exposures that amplify a bad quarter: customers, suppliers, platforms or people you depend on, fixed costs and debt, and cash timing. Then stress test them together and set limits while things are calm.

Operating leverage, financial leverage and concentration risk are standard corporate finance concepts without a single canonical study. The cash conversion cycle is an established finance measure (Richards & Laughlin, 1980), used here as a practitioner tool. Stress testing comes from the scenario planning tradition (Wack, 1985), which has mixed research support. All guardrails, bands and shock sizes on this page are rules of thumb.

Use it when:

• You are about to sign a large deal, take on debt, raise money or make a major commitment.
• One customer, platform, supplier or person has quietly become very large in your business.
• You do a quarterly or yearly review and want risk limits you set in advance, not under pressure.

Skip it when:

• You need the cash mechanics first (what comes in and goes out, and when): use 5.4 3-Statement Snapshot.
• Your question is about project risks, not business exposure: use a risk register (see the RAID log research card).

Most of this page is standard finance vocabulary, not a tested framework. Operating leverage, financial leverage and concentration risk are textbook ideas whose logic is mechanical. Fixed costs and debt magnify whatever revenue does, so the structure that makes a good year great makes a bad year dangerous. A dominant customer, supplier or platform turns an ordinary dispute into a threat to the whole business. The cash conversion cycle was proposed to catch liquidity trouble that profit ratios hide (Richards & Laughlin, 1980). Stress testing grew out of corporate scenario planning (Wack, 1985), a practice with a long history but few formal tests.

So the arithmetic is solid and the limits are judgment. This page follows the amplification logic: Step 1 measures how much of your fate sits with others, Step 2 what fixed costs and debt do to a bad month, Step 3 how long the cash lasts. Step 4 runs the shocks together, because trouble rarely comes one at a time, and Step 5 sets limits while you are calm.

For each dependency, write how large it is now, the limit you would accept, and what you would do if it went away tomorrow. Name people by role only.

Strong answer: (illustrative numbers) "Largest customer: 38 of every 100 kronor of revenue; my limit 25; backup: two quoted prospects in marine supply, no contract yet." Not: "Good relationship, low risk."

Illustrative example: the business and all numbers are made up.

The owner of a contract machine shop in western Norway, making aluminium parts for the fish-farming industry, runs the checklist before signing a larger frame agreement with her biggest customer.

Section 1: the largest customer already gives 38 percent of revenue; top three give 71 percent. The most critical person is the CNC programmer, the only one who can set up the five-axis machine.

Section 2: fixed costs 1.1 MNOK a month, breakeven 2.4 MNOK, current revenue 2.9 MNOK. A 20 percent drop puts her below breakeven. The bank loan has an equity-ratio covenant with a small buffer.

Section 3: cash 3.2 MNOK. Customers pay in 60 days, suppliers want 30.

Section 4: losing the largest customer alone gives about five months of runway; all three shocks together, under three months, and the covenant breaks.

Section 5: she signs the frame agreement only with a 90-day notice period and a price index on aluminium, sets a 30 percent limit on any one customer, and books two weeks for the programmer to train a colleague.