How to manage your business risks

The economic crisis has made small and medium-sized enterprises (SMEs) more cautious when it comes to managing risks, new research has revealed.

The tough trading conditions of the last five years have caused businesses to change their attitude towards risk, according to a study by insurance firm Zurich. The survey has shown 53% of SMEs now spend more time coming up with a business strategy and working on risk management than they did in 2008.

Planning for the future is becoming more important to companies focused on business growth, with 35% spending more time on long-term financial planning and a third are revisiting their business continuity plans more often.

Avoid being too cautious

But while carefully planning for the future is always a good idea, Richard Coleman, Zurich’s Director of SME, says becoming too anxious about risks is bad for the economy and can stifle business growth.

He said: “It’s great to see the increased sophistication and long term view of many SMEs, but for the SME economy to drive growth, we need them to regain their appetite for controlled, calculated risk-taking. In the face of such a challenging environment, however, some are understandably reluctant to do so.

“This vicious circle is likely to play out until either the context for risk-taking decreases for UK SMEs, or the wider economy starts to show signs of rebounding. SMEs are essential to the UK business and economic environment, so ensuring that a balance exists between risk taking and risk prevention represents a significant economic and policy challenge today.”

So how should companies manage their risks without becoming overly cautious?

Flexible business space

For many SMEs and start-ups it is a fine line between success and failure. Getting tied in to expensive leases for commercial premises can be dangerous for some businesses, because if revenues fall, it could become difficult to carry on paying the rent.

Bizspace offers affordable workspace for companies of any size. Businesses can sign up and move in with a single payment and our customers are not tied in to long-term leases, which may become a burden. In the current economic climate, Bizspace understands that flexibility is essential so businesses can quickly adapt if income levels change. Our customers have the flexibility to move to different sized units in our business centres which best suit the needs of their business – all of which offer fantastic value for money. Bizpace allows start-ups and SMEs to stick to their budgets and find the right business space for their needs, without committing to a long-term fixed overhead.

Think about potential risks

Steve Fowler, chief executive of the Institute of Risk Management (IRM), says businesses need to work out exactly how they are affected by economic conditions before coming up with plans to prevent, minimise or deal with the impact of the potential threats. For example, if a rise in your utility bills would cause a major cashflow crisis, you could introduce efficiency measures to bring down your use of gas and electricity or raise your prices to prepare for this.

In contrast, if a drop in sales would cause a major crisis, you could bring in measures to try to increase sales figures by dropping prices, bringing a range of cheaper product or increase efforts to attract new customers.

Come up with a plan B

Clive Lewis, Head of SME Issues for the Institute of Chartered Accountants, suggests always making sure you have a plan B if the worst happens.

He says: “Are your customers or suppliers looking wobbly? If they go out of business, what’s your back-up plan? Think about your credit policies and how they may be exposing you to risk. Do your payment terms need tightening up?

“If a customer wants to extend their credit terms, how will you react? Are you carrying out the right checks on new customers?”

And coming up with a good risk management strategy will not only help your business cope in the future, it will also make you a more attractive prospect for securing business funding and, in turn, help to achieve business growth.

However, preparing for potential problems should not mean you are not confident about the future. Zurich’s research showed that the 59% of people questioned who were confident about the outlook for their business performed better than those who lacked confidence.