Mitigating risks for SMEs

In uncertain times, all companies, no matter their size, face the same risks. However, the challenges SMEs tend to face turn out to be more significant because of limited resources and access to finance. They also tend to find themselves having to proceed with their business with little time to think about risk mitigation and proper future planning, says Mark Aquilina, founding partner at NOUV.

The 21st century has already yielded its fair share of financial crises, impacting nations and the entire global economy. We have already experienced economic and financial turmoil in Greece, Argentina, and Russia in recent years.

The global financial crisis of 2008 was rated as the worst one since the Great Depression in the US in the 1930s. This was mainly caused by major investment banks being highly overleveraged on mortgage-backed securities that eventually crashed because people were not keeping their mortgage repayments obligations as they were finding themselves financially over-stretched.

Today, the global economy is again facing issues that, unless tackled, are bound to translate into financial problems. We are just coming out of a two-year global pandemic, and now, we must deal with the effects of a raging war close to home. These issues continue to pound their distinctive marks on the financial markets.

Whether big or small, all companies face the same fundamental risks during these uncertain times, albeit on different scales and levels. However, Small and Medium Enterprises (SMEs) face even more significant challenges because they tend to be very constrained in resources and access to finance. They also tend to have a short-term focus and proceed with their business with little time to think about risk mitigation and proper future planning.

SMEs have always played a vital role in every economy and will continue to do so for many years to come. According to the World Bank, SMEs represent about 90 per cent of businesses and more than 50 per cent of employment worldwide. It is estimated that by 2030, 600 million jobs will be needed to support the economic growth in many countries, and SMEs are at the very centre of this progression.

But for SMEs, managing risks has never been more challenging than now. What can they do to ease the daily pressures they face in managing cashflows, accessing finance, and dealing with global megatrends and challenges, including technology, sustainability, and globalised supply chains?

Accountants and consultants can play a role in risk management and mitigation for SMEs. This is because most small businesses count on these professionals to provide regular advice that adds value to their business. Depending on the nature of the SME’s risks, the accountant or consultant can inform and assist with implementing and monitoring business controls.

So, where to start? It always starts from the top, depending on how clear the owners/founders and top management roles are. The boardroom is the brain of a company, where strategies and corporate rules are set, and critical business decisions are taken. Hence, it is imperative that SMEs set basic rules and policies in place of “dos” and “don’ts”, which will eventually be transformed into the company’s charter. Secondly, the owners’ roles and responsibilities must be identified and segregated according to their skillset and character traits, with possibly someone taking the leading role.

The next step is getting to know your business’s costs & KPIs inside out, and in this regard, proper financial management is vital. This means getting to know industry standards, daily running costs, product costing methods, pricing strategy, efficiency drivers and most importantly, the break-even analysis.

But the crucial aspect in any business will always be liquidity, hence cash. A long sales order list and a healthy bottom line on a company’s income statement may be attractive. Still, if debt collection, capital expenditure or sales returns are straining the cash flow, then it’s bad news for the company, and it’s unlikely for the company to stay in business for too long.

Too often, we see business owners and top executives busily firefighting their daily operational and human resources issues or closing sales deals. However, they fail to give enough attention and focus on generating cash. Companies need to have sufficient capital and reserves to meet all the working capital obligations or cover that occasional rough patch. I believe that a company should become obsessed with generating the necessary cash from operations to finance its investment activities, which is most of the time needed to support further growth and more sustainable operations.

In times of crisis, companies need to have enough reserves to make it through with the least damage possible. On the other hand, managing cash has become particularly challenging for SMEs, especially in the light of our current scenario, which presents us with a challenging lending climate due to banks becoming more stringent and less flexible.

SMEs face an added set of challenges, such as supply chain, sustainability, and IP protection.

In recent years and months, the China/US trade tensions, the pandemic, and the Ukrainian war created a massive supply chain problem. Companies need to identify and analyse these risks that can be external (such as those mentioned above) or internal (such as logistics and a skilled and knowledgeable workforce).

Hence, companies need to keep their options open and converse with different suppliers and subcontractors (attend fairs and exhibitions), network with peers and competition, keep their ears to the ground and make sure that their supply chain is mapped out with multiple options in different areas.

Protecting the IP developed (if any) is another crucial area of mitigating one’s risks and investing in this area will add intrinsic value to any business. This can be a lifesaver in pitching one’s product to investors or financers. Furthermore, by doing so, this asset can remain in the family for generations.

The above skims the surface of what should make up a detailed risk management plan, making it more so important for companies not to shy away from asking for help where needed. An essential step is acknowledging that it is not “if” but “when” a business will face risks. Hence top management should always stay alert in identifying potential risks and allow enough time for strategies on mitigating them.

Assuming that running a company will always be smooth is naive and short-sighted. Therefore, risk mitigation should be at the forefront of a business’s strategy or a part of an entrepreneur’s top concerns.