Why You Need Risk management

Business growth requires a solid foundation that includes prudent risk-management. The principle is simple - Normally, when you cut your risk, you cut your losses and increase profits.

One of most important things SMEs (small to medium-sized companies) can do to avoid risk of failure is to create a risk management plan that recognizes risks and adopt procedures to handle them. Not doing so is like heading out to sea in an unseaworthy ship – meet bad weather and you will be spending more time trying to stay afloat than sailing, diverting essential resources from the main business.

The list of business risks is large and risks are generally categorised under regulatory risk, market risk, credit risk and environmental risk but there are a few that are mainly predominant among SMEs. These include:

Bad debtors; Negative cash flow; Inventory risk; Strategic risk; Property and equipment risk (machinery and equipment failures); Personnel (high staff turnover, loss of key staff members, security of data and intellectual property); Theft; Cyber risk; Fraud; Natural and man-made disasters.

Luckily for SMEs, entire industries have been established to help manage risks such as human, property and equipment risk and workplace safety (the insurance industry) and bad-debtor risk (the factoring industry, rating agencies and debt collection agencies).

But some risks are particularly difficult to manage, especially for small companies, and usually involve a human factor. Three especially problematic areas are:

• Fraud

• Human capital

• Cyber risk

Fraud

Fraud is increasing within SMEs. The incidence of fraud has increased worldwide since the global financial crisis, and SMEs are being increasingly targeted. While poor internal controls can be blamable, these can still be a slight defense against the dedicated thief. The time to be most cautious is when household debt servicing ratios rise and during times of decreasing GDP.

Human capital risk

Companies that manage people well are poised to beat those that don't by 30% to 50%, so human capital risk is a big issue for SMEs. Bad hiring selections translate to poor customer service; revenue and marketshare losses; competitive disadvantage; higher production costs; brand risk; and legal liability. Great workplaces, superior leadership, good life work balance and cross training are all strategies SMEs can use to target the human-capital weaknesses of big companies.

Then there’s an issue that’s incredibly important, such as insurance--specifically, "key man" insurance.

Key man insurance is simply life insurance on the key person(s) in a business. In a small business, this is usually the owner, the founders or perhaps a key employee or two. These are the people who are crucial to a business--the ones whose absence would sink the company. You need key man insurance on those people! The reason this coverage is important is because the death of a key person in an SME often causes the immediate death of that company. In a tragic situation, key man insurance gives the company some options other than immediate bankruptcy.

Cyber risk

Cyber risk is another beast. Some banks offer firewall services for customer credit-card details and many SMEs are using these cyber shelters. Alternately, best practice is to stay current with cyber risks; train staff, ensure software is updated, establish a strong policy on BYOD (bring your own device); use strong passwords; have a strict employee transition policy and be careful of strangers appearing as delivery men or utilities servicers. Increasing numbers of companies offer support in this field and many security specialists hold seminars for SMEs.