• Liam Wall

Successful SMEs require a finance and risk capability

As businesses grow they change.

  • Higher revenues require additional resources, more support and a greater sales effort.

  • Potentially 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.

Start-up grown to SME

Once a business reaches this stage in its development, there is a need to transition the organisation 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 need to be made, not just the ones they understand.

For many businesses that means the leader makes 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.

Growing and retaining the entrepreneurial spirit

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 set up and used correctly considerably enhance the performance of an organisation, sadly, in smaller ones, they can often slow the business down because they add unnecessary levels of bureaucracy and cost.

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

Role of the Risk Taker and the Risk Manager

There are two skill sets that are essential at the top of any organisation; 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 change is not made, businesses either stagnate because not enough risk is taken or, they fail because there is little or no understanding of how the organisation needs to be set up and managed to deliver the objectives set by the risk taker. The start of this process is often demonstrated through a constant shortage of cash and a multitude of seemingly stupid little mistakes at operational level.

The delegation of responsibilities for the management of the organisation 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 also 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 areas 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 organisations 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.

The issue here is that accountants use such processes to look back while the organisation 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 that appropriate resources are allocated so 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.

Because of the limited time that such an SME needs access to support skills, it makes sense for one executive to take responsibility over the areas of finance and risk management thereby ensuring that the organisation continues to have access to the necessary skills when and where they are needed together with the required finance to support the growth.

The executive with 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 at the top table there is an executive who accepts responsibility for every area not covered by the leader or another top team member.

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

Both the risk taker and the risk manager (together with other shareholder or founder) therefore become the forerunner 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 allow the organisation to grow in line with the business thereby creating an effective corporate governance system for mid-sized SMEs.

Ready to change?

If, having read this article, you recognise similarities within your business and would like to discuss how you can make the changes required to grow, please send us an email or give us a call on 020 7965 7216.

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