Good SME management needs to constantly be on the prowl for risks that could threaten the growth and sustainability of their business. While it’s impossible for every single risk contingent to be accounted for within this article, here are 3 lesser known risk factors to be on the look out for:
- Customer risk. If you’re receiving the bulk of your revenues from one or perhaps a handful of customers – it can present a real threat if one or more of them default on the bill. As a supplier of goods/services, you’re never really sure how comfortable another company’s cashflow or financial health actually is. For startups without any previous client relationships this can be even more tricky. Solutions? The more varied and evenly weighted your customer base, the less any single client default can land a killer blow on your P/L. Additionally, where you do have meaty contracts by one key customer, it’s a good idea to perform your due diligence on that client.
- Exchange rate risk. For SME’s that export a substantial amount, exchange rate risk can really bite into your profit margin – and perhaps even wipe it out altogether in the instances of low margin products/services. For example let’s say a UK business exports bikes to the USA. The company will be paid in US Dollars, so the performance of the Dollar against the Pound will be a substantial business risk. What happens if the dollar weakens substantially over a period of time? Chances are that in order to stay competitive the company will still need to maintain their price levels but would be hit by the weakened Pound when they convert their sales into their domestic currency. One way to mitigate currency risk is to engage in a process known as hedging where the company takes out an opposite position based on the level of business they intend to do abroad. So, the bike company might decide to go long on the Dollar against the Pound (essentially bet that the dollar will go higher). This means that if the Dollar does in fact get stronger against the UK Pound, while the company may lose out on the sales of bikes, the hedge that was applied will effectively neutralize the change in the exchange rates. This business hedging technique is a common tactic used by larger companies who sell a lot of products in foreign markets.
- IT virus risk. While the internet has thrown open a world of hungry new customers to adaptive business models everywhere, it’s also come with its own problems. Some huge names have been brought down – at the mercy of hackers, trojans and other e-nasties. Good SME management will take online security very seriously. All staff who use the company IT systems and hardware should follow a strict and robust internet use protocol, and use an up to date anti virus protection software. Beyond computers and laptops, virus threats can now also come from online mobiles and other portable devices. Know where your risks lie online, and build your digital defenses accordingly.
The next time you revise your own SME business plan, it may well be worth adding a section or two on the above mentioned business risks.