Managing Risk in SME Businesses.
Every business has to deal with risks on a daily basis. Simply putting capital into your business involves risk but you do so in the belief that you will get a better return from your enterprise than you might get from putting it on deposit in a bank or into stocks or bonds. So what are the different elements of risk that you meet in your business and how do you effectively mitigate these risks?
There are a variety of risks in every business, although individual firms will have different risk profiles. It is important to be able to identify what the greatest risks are for your business and to devise business strategies that mitigate these risks. Bear in mind that all risks cannot be mitigated because some risks may well be outside of your control. However, if you have taken time to consider the risks facing your business from time to time, and have taken decisions as to how you will deal with these risks should they become a pressing reality, then you will be at least half way to dealing with them rather than being simply overwhelmed.
Business risks are usually categorised as Environmental or Business and Economic. Environmental risk relates to legal and regulatory changes that may possibly put your business at a disadvantage. Keeping appraised of laws and regulations that are being considered by Federal and Local Government can allow you to anticipate what is coming and to prepare counter-measures that protect your business. Employment laws are another environmental risk that you need to keep appraised of. An example of this is minimum wage levels, which can have a significant impact on a business’s cost base should the Government decide to increase the statutory minimum.
Economic risk relates to changes in Global or local economies that can impact your business. Recession is one example which dampens demand for goods and services. Another example might be a large employer in your area moving production to a cheaper country and leaving a lot of unemployed people with little spending power in your neighbourhood. There is also the topical issue of the Euro currency area and the stability and sustainability of the currency. Should the currency collapse, what impact would this have on your business? Would it close off an important market for your business? Would you lose money because you decided to invoice European customers in Euro currency and you are carrying a significant amount of Euro denominated receivables?
Business risks include:
- changes in the cost structure of your business
- cash flow
- seasonality of your business
- dependence on certain customers
- dependence on certain suppliers
- product liability
- availability of adequate funding
- credit risk/ getting paid by customers on time
The list will differ based on your firm’s individual circumstances. No business is risk free and typically the more risk you take the greater the reward will be. Nevertheless, don’t be tempted to be a gambler that risks your business on the roll of a dice. Sustainable growth based on calculated risk and reasonable profit levels is a smarter way to operate. It may take more time to get you to where you ultimately want to be but you will have a far better chance of getting there with your shirt still on your back as well as having a couple of extra ones in your cupboard. The “greed is good” culture has lost some of its appeal since 2008 and realism is now the order of the day.
The approach I recommend to small and medium businesses is to create a list of possible business risks that could face their business. Think outside the box and ensure that you have a list of 10 or more items. Now take the list and order it on the basis of what would be the most catastrophic for your business and the most likely to occur. You could also do it on the basis of a matrix as shown below.
Now that you have established a list of risks in each quadrant, you should look at the risks that are important and likely first. For each risk in this category, you need to decide how you can reduce each individual risk by taking specific actions. In some cases, there may be nothing you can do to mitigate the risk in the short-term.
However, you may decide to take different business decisions that reduce your risk of exposure in the longer term. Now move on and do exactly the same in each of the other quadrants where you have identified that risk exists. Come up with decisions you can take and tactics you can employ to mitigate these risks also. So long as you regularly review business risks and your plans to mitigate them, the less impact they will ultimately have on your business, should they come to pass.