Business growth requires a solid foundation and a solid foundation is built on powerful risk-management.
The single most important thing an SME can do to minimise the risk of failure is to establish a risk management plan that identifies risks and nominates processes to deal with them. Failing to do so is like setting out to sea in an unseaworthy vessel – a bit of bad weather and you will be spending more time bailing than sailing, diverting sorely needed resources from the core business.
The list of business risks is extensive and can be broadly grouped under the categories of regulatory risk, market risk, credit risk and environmental risk but there are a few that are particularly prevalent among SMEs. These include:
- Bad debtors
- Financing and capital risk
- Negative cash flow
- Inventory risk
- Strategic risk
- Property and equipment risk (breakdown of machinery and equipment)
- Staffing (high staff turnover, loss of key staff members, security of data and intellectual property)
- Cyber risk
- Compliance failure
- and Natural disasters (which can affect suppliers and reduce demand for goods, such as the 2013 bushfires in the Blue Mountains)
Help is at hand
Fortunately for SMEs, entire industries have been developed to help manage risks such as compliance (the accounting industry), property and equipment risk and workplace safety (the insurance industry) and bad-debtor risk (the factoring industry, rating agencies and debt collection agencies). Similarly, these industries have all developed procedures, processes and software that are accessible to all.
But some risks are particularly difficult to manage, even for large companies, and usually involve a human factor. Three particularly thorny areas are:
- Human capital
- Cyber risk.
Fraud is on the rise within SMEs. The instance of fraud has increased globally since the global financial crisis, according to KPMG’s fraud survey and SMEs are increasingly a target. While deficient internal controls can be responsible, these can still prove a flimsy protection against the committed thief. The time to be most on guard is when household debt servicing ratios rise and during times of declining GDP.
Human capital risk
Companies that manage people well are tipped to outperform those that don’t by between 30-50 per cent, so human capital risk is a key issue for SMEs. Poor hiring choices convert to poor customer service; loss of revenue and market share; competitive disadvantage; higher production costs; brand risk; and legal liability. Great workplaces, superior leadership, good life work balance and cross training are all strategies small to medium-sized companies can use to target the human-capital underbellies of big companies.
Cyber risk is another bogey for SMEs. Banks offer firewall services for customer credit-card details and many SMEs are flocking to these cyber shelters. Otherwise, best practice is to stay up to date with cyber risks; educate staff, ensure software is updated, have a strong policy on BYOD (bring your own device); use strong passwords; have a strict employee transition policy and be wary of strangers in the guise of delivery men or utilities servicers. A growing number of companies offer support in this field and many security specialists conduct seminars for SMEs.