Risk Management Tips for SMEs

Small and medium size enterprises (SMEs) are the backbone of all economies. Increasingly, they are facing mounting challenges from inflation, increases in interest rates, supply chain disruptions and business interruptions as a result of macroeconomic factors beyond their control – war, pandemic, climate change among others.

Risk management involves the assessment of risks and treating them accordingly. Given their limited resources, SMEs have to make critical decisions about whether to retain and deal with the identified risks themselves or transfer them out at a cost.

SMEs, however, are nimble. They can quickly adapt and respond to unexpected events. How can an SME leverage this in the overall framework of risk management?

Here are three key considerations when managing risk as an SME:-

A. SMEs have limited resources and will only focus on activities that directly generate value

When resources are limited, they are only deployed when absolutely necessary. These are moments when decisions are made based on the direct value or revenue generated versus the costs incurred.

Going through a risk management framework may not always work for an SME if it does not involve the finance team to compute the costs as well as the sales operation team to tally the corresponding revenue forecast.

Managers may attempt to measure the financial benefits and risks in monetary terms instead of relying more on qualitative measures that would make the approach more pragmatic than academic.

B. SMEs conduct risk management to maximise value for their highest acceptable risk appetite

SMEs perform simple risk analysis in order to gain a better understanding of their risk exposures to measure against their risk appetite. Unlike large corporations that do risk management on a regular basis, SMEs do not often conduct a risk management exercise unless it is part of a documentation requirement by their clients or authorities.

Due to their shorter lead time in decision-making and execution, delaying decisions can sometimes give the SME owner or management team more clarity and a better view of the overall situation. In this case, a delay in conducting a fast and simple risk assessment could become advantageous.

C. There is no dedicated risk manager

SMEs usually do not have a dedicated risk manager to manage their risks. Each team, whether operational or support, generates and owns their risks. Operational teams may own the P&L while support teams have to contain their costs. They have their core jobs to fulfil and risk management is an inconvenience.

However, the impact of an unmitigated risk would impact a company’s balance sheet and financial performance. Key staff and officers who are directly responsible for their operation’s overall profitability – GMs, CEOs, COOs and the like – should take on the additional role of risk manager if there are no dedicated resources. The finance team and CFO can assist in quantifying the impact following risk assessment which is done by the operational team. Jointly they can evaluate the company’s risk appetite before seeking risk treatment from professionals.

According to a Lockton report (opens a new window), 66% of CFOs have changed their approach to risk management due to the increasing velocity of risk and its impact on their business.

Increased interconnectivity and interdependence of systems brought on by digitalisation and globalisation has created an environment where one disaster can contribute to another. This results in higher risk velocity, i.e. the speed at which a risk materialises and impacts a business.

Lockton’s focus on SMEs means that we provide a complete suite of services from risk consulting and broking to claims consulting that are both flexible and competitive to meet the unique requirements of individual SMEs.

As a private and independent company, Lockton fully understands an SME’s modus operandi and ensures that client service excellence comes first.

Learn more about Risk Velocity (opens a new window) from the Lockton report or talk to our Lockton specialist about how we can support your company in managing risk.

Risk Velocity series – SMEs