Finance SME Focus

Risk Management for Successful SMEs

Financial risks exist everywhere; it cannot be avoided and has a certain influence on a company’s production and management. In this article, Simon Hodges talks about the steps an SME needs to survive and puts forward effective prevention and control measures to lower the possibility of risks and ensure development.


As businesses grow, they change.  Higher revenues require additional resources, more support and a greater sales effort.  Additional business units are opened and communication lines extended.  More people are taken on, and customers demand quicker service at lower costs to them.  Suddenly it seems there are not enough hours in the day; every call is another crisis that requires attention and more worryingly, the financial results seem to struggle to meet expectations.

Although the development of the business remains a dream, somehow it becomes impossible to find the time and, in effect, the business stalls.

Once a business reaches this stage in its development, there is a need for the organization to transition from a start-up structure to one where a management expertise is required to be created right at the heart of the decision-making process.

Effective management starts with the top team accepting that they are responsible for all the decisions that are made, not just the ones they understand.

For many businesses, it means that the leader takes every meaningful decision but the simple fact is that there is only so much one individual can do and because others stand back to wait for the leader, many vital decisions are in fact never made.

Many would argue that the answer lies in the immediate establishment of traditional corporate governance structures and processes.  While there is no doubt that such structures when set up and used correctly, significantly enhance the performance of an organization, sadly, in smaller ones, they can often slow the business down because they add unnecessary levels of bureaucracy and cost.

There is, in my view, an intermediate step that would allow the organization to broadly maintain its entrepreneurial set up while the management begins to tackle the problem of establishing management systems that can support the growth.

There are two skill sets essential to the top of any organization; the risk taker and the risk manager.  In the start-up phase, the risk taker skill is the only one that matters but as the business matures and the ability of the leader to remain in the front-line fades, the forward-thinking leader will recognise that change is necessary.

If there’s no change, businesses either stagnate due to lack of risk-taking capabilities, or they fail because there is little or no understanding of how the organization needed to be set up and managed to deliver the objectives established by the risk taker.  The start of this process is often demonstrated through a constant shortage of cash and a multitude of seemingly foolish little mistakes at the operational level.

The delegation of responsibilities for the management of the organization to a business partner that the leader respects frees up vital time of the leader to allow the process of forward-planning to begin, but in fact so much more is achieved.

The risk taker can now concentrate on the areas of business development and operations while the risk manager is responsible for finance and risk.  Other sectors such as sales and marketing (the risk taker), IT, HR, Insurance and health & safety (the risk manager) are allocated where the head of that department does not have a seat at the top table.

Contrary to popular opinion, the management of risk is the process by which the actions set by the risk taker are delivered in a sustainable way.  It is not the process where the risk is highlighted but leaves others to take responsibility for the subsequent decisions.

Many organizations only go so far by appointing a head of finance whose role is limited to providing a bookkeeping function through the provision of accounting activities such as the Profit & Loss account, the balance sheet, and the cash flow statements.

Contrary to popular opinion, the management of risk is the process by which the actions set by the risk taker are delivered in a sustainable way.  It is not the process where the risk is highlighted but leaves others to take responsibility for the subsequent decisions.

The issue here is that accountants use such processes to look back while the organization is beginning to also need the forward-looking skills of management accounting such as forecasting and budgeting.

More than that is the requirement for a senior executive to have the time and interest to understand what makes the business work so that they can plan with the providers of these activities to ensure the allocation of appropriate resources so that they can achieve the required objectives.  This aspect together with the control over the finances is the management of risk for a mid-sized SME.

An SME needs access to support skills for a limited time only. Therefore, it makes sense for one executive to take responsibility for finance and risk management thereby ensuring that the organization continues to have access to the necessary skills, when and where they are needed, along with the required funding to support the growth.

The executive with the responsibility for these areas could be a business partner or co-shareholder who might have a team of experts reporting to them, such as the head of IT and even the accountant.  The key point is that there is an executive at the top table who accepts responsibility for every area not covered by the leader or another senior team member

By taking on the wider role of risk management, the head of finance and risk becomes the senior executive responsible for the health of the organization and its ability to deliver sustainable profits and growth in support of the risk taker’s objectives.

Both, the risk taker and the risk manager (together with other shareholder or founder), therefore become the forerunners of a board of directors. And as the business grows, additional full-time skills can be added to this team as required, thereby allowing the risk taker and risk manager to concentrate more and more on the future needs of the business.

These activities enable the organization to grow in line with the business thereby creating an efficient corporate governance system for mid-sized SMEs.simon-hodges-intelligent-sme


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SPI Group

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