Top 5 SMEs Risk

Financial Risk
Increasing labour costs, fuel costs and intensifying competition in a global economy all contribute to thinning margins for companies. The impact of rising business costs is even more pronounced in SMEs which typically run a tight ship where cash flow is concerned.

Cash is the life blood of any business. Many SMEs do not do enough cash flow planning and the need for funds and cash generation is not properly managed. Forecasting projections and budgets are essential in identifying the cash needs of a business, and to handle a cash crisis if one arises. It can also be useful tool in identifying non-essential expenditure in order to reduce costs. Without diligent cash-flow management and a capital raising exercise, the business is often constrained by its capital as it grows.

SMEs which have expanded globally or transact with overseas customers or suppliers are exposed to foreign-exchange fluctuations. They will need to assess the materiality of the foreign-exchange impact on their financials and manage the risks accordingly, usually via hedging and taking advantage of natural hedging where possible.

The difficulty faced by many SMEs is to obtain financing from financial institutions.


Credit Risk
Many SMEs are typically dependent on a few major customers due to limited resources. A default or slowdown in payments by one or two such customers could add immense pressure to their already tight cash-flow situation.

Small businesses need to be more stringent in managing credit risks due to their lack of resources. Before giving credit to a potential customer, an SME has to be diligent in performing credit assessment on the customer's ability to make payments.

SMEs can also turn to credit ratings and business information that is readily available from sources such as the Credit Bureau. Even after a potential business partner has been assessed as credit worthy, SMEs should continue the diligence to either impose or monitor credit limits to limit and proactively manage their credit exposure.


Human Capital Risk
Most SMEs in Singapore are family-run businesses with typically the founder as the CEO, the offspring as the managing director and other extended family members working in various departments in the companies. The top risk in this set-up is the lack of succession planning.

We have heard enough stories of companies not doing well with the passing on of the CEO. As the senior positions are usually filled by family members, such SMEs will find it tough to recruit and retain talent since there is limited or no avenue of progression for non-family members.

Another associated risk is the lack of knowledge and training of staff. Technical know-how is often "passed down", which may lag behind current technology and may not be the most innovative for the company;s good. Such "training" is not structured and provides no continuity.

Worst, SMEs may run afoul of the law such as MOM's requirements on workplace and Health Safety Act and overtime provisions as they may not be aware of updated or trained on these regulatory requirements.


External Parties Risk
Since SMEs usually have limited resources, the focus should be on their core competencies and attraction and retention of talent. A small and flexible workforce would be easier to manage. SMEs can outsource their finance, administration or payroll/HR functions.

However, such outsourcing vendors have to be managed to ensure the quality and timeliness of their deliverables. In addition, SMEs may also lack the resources to engage legal expertise to check that they are protected by the terms and conditions in the contracts that they enter into, especially in times of disputes with the outsourcing counter-parties.

Conversely, for contracts that they enter into with their customers, many SMEs do not spend enough time understanding these contract risks, in particular, those areas relating to liquidated damages and performance obligations. Many of them overestimate their capabilities and get into trouble later on as they undertake projects that are too big for them.

In addition, some SMEs make their key purchases solely or heavily from certain suppliers. This puts their supply chains at risk of disruption if these suppliers could not meet their delivery requirements for various reasons. SMEs must ensure that they have alternate back-up suppliers for their key purchases.


Intellectual Property Risk
SMEs are required to be innovative in order to survive and flourish in the current business environment. In today's knowledge-driven economy, intellectual property (IP) rights are a key consideration. In many cases, SMEs do not fully exploit their innovative and creative work simply because they are not aware of IP rights system or the protection it can provide.

SMEs often overlook or are ignorant of the risks that they are facing as chasing deals and bottom lines are usually their key priorities. They should be aware of the risks they are facing and establish an appropriate risk-management framework to address them.

BT