Managing SME Business Risks

Managing risks of an SME business

Ah, risk! That unsavoury word that conjures both clear and muddy impressions in the minds of a business owner. Risk is an integral part of our personal lives. Almost every activity of our daily living has inherent risk – driving, eating, giving birth. However, we have built mechanisms, through safety procedures or self-control, trained medical practitioners, regulations, etc. to safeguard us from such risks.

Running your own business, in many ways, exposes you (and your business) to many risks. A key element of managing your business is to protect it from failure. The nature of risk your company is exposed to also typically changes as your company grows and evolves in its own life cycle. Many risks however have the potential to adversely impact businesses of any size. Events that are rare but carry highly disproportionate impact, such as Brexit, for e.g. have widely sweeping implications for most businesses.

Hence understanding the types and nature of these risk is critical to ensure long term survival of your organisation. Consider some of the following risks your business could face:

Customer Risk

This involves risks of customers deserting your product (customer churn) or service in favour of your competitor’s. Credit risk is another common factor – customers could either delay payments or not pay at all. Customers are entitled to complain if they feel the product is not delivering to promise – rising customer complaints can be substantial risk. Customers expect the process of engaging with your business i.e. researching your products, buying, getting support to be increasingly through a digital medium  – not having digital channels for your customers to interact with your brand or business could result in customers moving to your competitor

Supplier Risk

Disruption of supply chains can affect your production process. Suppliers could go bankrupt or deliver faulty parts or input services hence effecting your downstream manufacturing or service delivery operations. Logistics disruptions could delay shipments and impact your ability to complete customer commitments in time.

Market Change Risk

Competition in open markets can be relentless. Inability to keep up with technology could add significant costs and risks of disrupting your manufacturing or service delivery process. You could quickly lose customers if you do not have digital channels such as mobile apps or ecommerce facilities, as discussed earlier. Changing market regulations governing your industry could be another highly potent form of risk.

Employee Risk

Quality employees make a quality company. Inability to attract high quality calibre can quickly erode your competitiveness. Inadequate training or a corrosive culture can often result in your top performers leaving the organisation.

 Financial Risk

We often associate risk with money matters. The above points show that business risk is significantly broader. However, managing financial risk is ultimately the key to survival. Managing your cash flow risks will ensure that you have adequate money to fund your working capital requirements while maintaining necessary capital expenditure to invest in growth. Export/import requirements could create currency risks. Level of leverage (debt) and interest rates can unduly increase interest payments and forcefully impact profitability and even ultimately solvency.

One cannot wish away risks. In fact, actively seeking risks is a crucial first step in managing them. CMC Partners works with owners of SME businesses in identifying and managing business risk systematically and then helping put a plan for mitigation. Business owners who are able to master the skills of managing risks ultimately create well run, profitable and valuable businesses.

Growth-and-Profitability of an SME Business

Are growth and profitability of a business linked?

Growing profitably is the holy grail of good management. Research has consistently shown that as companies grow their revenues, they become more profitable, on average. Businesses with 50 or more employees typically generate 6x more net income than smaller firms. This begets the question – what links growth with profitability? For Small and Medium Enterprises (SMEs) often, sometimes with scarce resources to deploy, the answer to this question could unlock significantly business value.

Multiple components of a business need to be balanced to achieve profitable growth. Consider the following:

Scale Economies

Very simply put, this is a concept where your cost per unit of product manufactured or service delivered falls as volumes (or sales) increase. A software company incurs product development costs initially during software design and development. However, the costs of producing additional copies, as more and more customers demand the product, continues to fall per copy of the product sold. Of course, here we assume that the costs to acquire customers (such as marketing and sales, for e.g.) do not increase faster than your other expenses. The same principle holds true for manufacturing or any other sector, for that matter. The more you sell of the same product or service in the same market, other expenses being same, the more profitable your business will be

Customer Growth

As an SME owner you must have experienced the struggle (and joy) of winning your first customer. Your sales effort to now acquire your second customer, however, just got a lost easier. As more customers buy your product it becomes easier to convince yet more (new) customers to do so, i.e., the more you grow the more customer acceptance you get.

Competitiveness

Many companies build competitiveness by investing in strong Research & Development, or making products easy to use, or investing in strong marketing and sales capabilities or superior customer service. Building these elements of competitiveness need investments. The more profits you have the larger is your ability to invest in areas that you have strategically identified as your competitive factors.

Financing

Every business, whatever stage it is in, requires some form of financing. Many SME owners chose to invest their own personal funds. Others raise either angel or venture capital. For most traditional SME businesses borrowing capital from a bank (debt) is an available path. However, banks require collateral. A business with a strong or growing balance sheet with assets on it will convince banks to lend more. The more you grow, the more profits you generate. The more profits you generate the stronger is your ability to raise more money to generate more growth. It’s (kind of) a cycle that feeds on itself.

Strong Management and Teams

As companies grow complexity of managing the business grows. There are more customers to service, more products and services to build and deliver. In other words – more work to be done. As a founder or owner you alone cannot support all these growing demands. You need to hire managers. Strong managers like to work for companies in which they can see growth and professional fulfilment for themselves. Growing companies become attractive to good managers.

CMC Partners works with SME and owner-managed businesses in identifying pathways to generate business growth and value. Working directly with the owners we help identify hidden sources of growth and competitiveness in the business. We also help manage profitability of the company that ultimately increases business value.

Growing a Enterprise Software Business

Case Study – Transforming, Increasing Value and Selling an Enterprise Software Business Successfully

A family-owned, enterprise software business, with double-digit revenues

CMC provided this family owned, enterprise software business with business realignment, cost restructuring and sales growth experience. Working directly with the founders and company board in setting a growth path for the company. The transformed business was then sold successfully at an enterprise value over 3 x more than originally valued prior to CMC Partners engagement.

The Challenge

The client is a leading provider of specialised enterprise software for the telecom industry. While the management team had managed to penetrate the market controlled by larger software manufacturers, they were unable to scale the business cost-effectively. The business was stagnating at 4% revenue growth with a market growing at almost 10%. The Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) levels were almost a third of industry averages. A deeper investigation, by CMC, of the company’s strategy and direction revealed the following core problems:

  1. The sales team was taking a very product feature centric approach to selling. Almost no one in the organisation understood the concept of value selling
  2. In addition, there were inadequate sales professionals to provide effective customer and market coverage, resulting in lost sales and insufficient touch with the customers. Over 50% of revenue was coming from a single customer increasing risk due to customer concertation
  3. Product management function was unable to effectively plan the roadmap and deliver regular version updates to their customers
  4. Insufficient partners with the right skills and training to deploy the software making customer adoption difficult and expensive
  5. Operating expenses were rising faster than revenues
  6. Sales were growing much slower than market and competitors

The Solution

CMC Partners worked with the founder and the company board and through a strategic audit of the company identified the core problems described above. Through a series of detailed functional workshops and conversations with the company founder the following steps were agreed for implementation:

  1. Appointing an experienced Sales VP who brought in a value-selling approach
  2. Series of sales training workshops conducted by specialists brought in by CMC
  3. Hiring of 50% additional sales personnel and reallocation of territories amongst sales reps for better account management and customer coverage
  4. Tying sales incentives to targets and performance
  5. Introducing offshore and nearshore development resources to right-size product development costs
  6. Establish a product roadmap planning and version release process based on high priority customer requirements and market demand
  7. CMC Partner and client founder, board and senior team members to set up a monthly business review

The Outcomes

CMC Partners guided the founder in systematically executing the above action plans. Specialist resources, such as sales trainers or experienced head hunters were brought in as required to recruit new talent who then drove many of the agreed actions. The following was achieved:

  1. Revenues increased at an annual rate of 15%, double the historical run rate
  2. Dependence on the single large customer was brought down from 50% of total revenues to less than 25%
  3. Operating margins increased from an unhealthy 6% to a respectable 18%
  4. Two major new product versions were successfully released adding to the follow-on potential of cross-selling new services

Successful Business Sale

As these changes were rolled out and the company began demonstrating solid growth and vitality the client received informal interests from prospective trade buyers. CMC Partners worked with the founder and board to understand what the shareholders intended to do as a result of market interest in acquiring the firm. CMC Partners advised an investigation process for determining the feasibility of selling the company. We worked with the client in establishing shareholder objectives, an expected value for the company and then formally proceeded to engage with buyers.

CMC Partners acted as the project manager in the company sale process. The firm was ultimately sold to a competitor who was looking to increase market share. The transaction delivered value 3x more than the market was willing to offer prior to the business transformation engagement with CMC Partners.

SME Business Challenges

6 Challenges Facing Small Businesses in 2019

As a business owner operating a small business, you will know how time consuming and stressful it can be to  grow during changing times.

With 2019 set to be another challenging year for small businesses with particular focus on Brexit, managing volatility and facing challenges will be a skill all business leaders need to nurture. The comforting aspect is you’re not alone. Other business owners are experiencing the same issues as you.  When you understand the challenges, you can take action by setting up the systems and processes, or seek help from the right professionals to solve these problems before they even happen.

Our long-term experience working with small and medium sized businesses has helped to identify the most common and time-consuming challenges that are, or have been, bothering our clients recently. Clearly, there are numerous challenges lurking in small businesses, but we’ve boiled them down to the top 6 with number 1 being no surprise.

1. Brexit

Right now the key challenge facing small businesses would appear to Brexit. 2019 brings uncharted waters as the UK prepares to face one of the biggest and most drastic changes in generations – leaving the EU.

45% of UK Businesses say Brexit is impacting their confidence– and is therefore impacting their business’. YouGov & Sage Survey 2019

Of course, if you are a small business with exporting very little then the Brexit pressures will not directly apply to you.

The Situation

In the first quarter of 2019 there has been no agreement on the Withdrawal Agreement and therefore it has been difficult for businesses to plan. Once the scenario is known there will be several possibilities:

  • There could be political instability as the recriminations take place from the disappointed remainders or disappointed Brexiteers
  • The pound may be volatile for a period making planning difficult

Contingency Planning

We may be heading into a grey area as far as post Brexit is concerned but that does not mean businesses cannot prepare themselves.

Our CMC Partners have prepared a list of key questions that all business owners should be asking themselves as part of their Brexit Contingency Planning to help them prepare.

Opportunities

Whilst the economic situation could bring difficult trading conditions, it’s important to remember the UK economy will not come to a halt – for ever downside there is an upside. There will still be opportunities for entrepreneurial and sales led companies to exploit market niches and continue to invest in a stronger future. Businesses should continue to plan forward on a three-year cycle with growth in mind. That should be the main priority for any progressive business, no matter how small.

It’s important to remember the rest of the world is open for business. Take the opportunity to research and understand the rapidly developing markets beyond the EU. Many trade organisations provide support for trading abroad. For example, Department for International Trade (DIT) run very worthwhile Trade Missions in industry specific sectors to a wide choice of countries.

Brexit should not become an excuse for holding back on key investment decisions unless of course you export to Europe, in which case some additional precautions may be necessary.

In summary, the key business drivers remain as they always have been, and the companies that look positively for exploitable opportunities in uncertain times will emerge stronger than others. But this is nothing new – the spectre of Brexit should not change anything.

2. Cash Flow

For small businesses cash is the lifeblood to keep daily operations running. Too many business owners struggle to manage it effectively or recognise the importance.

‘92% of business owners surveyed experienced problems from time to time or consistently.’ CMC Partners Survey 2016

It is normal to have cash flow inconsistencies but being in control is essential not only for the health of your business but to free up some of your time to focus your attention on managing and growing your business.

Tips for Cash flow Management 

To minimise the impact of peaks and troughs, download our Cash Flow Whitepaper here.

3. Recruitment and Staff Retention

It is inevitable that Brexit will have an impact on recruitment and the mobility of the European workforce. Employee changes will become apparent, with many individuals expected to leave the country. This will create gaps in the marketplace and potentially lead to skills shortage in some sectors. As part of your Brexit planning, think about who this may affect within your team. It’s important to keep communications flowing between you and your EU employees. Our blog on ‘Brexit Planning: Talk to your EU Employees’ discusses this more.

We believe your people are the key to successful growth. Determining what resources are required in terms of people and skills is key to growing any business and in our experience of working with business owners over many years, most encounter problems when it comes to hiring the right people. Download our FREE whitepaper of ‘Growing your Business – The People Dimension’ which helps guide you to sustainable growth.

With the uncertainty surrounding Brexit, now is a good time to ensure your team are happy and motivated. Review your inductions, training and development programs, appraisal process along with the financial and non-financial rewards. Now is not the time to cut training and knowledge transfer initiatives and investment in your people. As a small business you need well trained, diverse and motivated people within your team.  You can read more on the motivation topic within our blog called ‘How do I motivate my staff’.

4. Too hands on

A remarkably common issue amongst business owners is being too ‘hands on’ with running everyday operations. Owners are having to focus on the day to day running of the business to such an extent that thinking about managing and growing their business is neglected.

This approach leads to the owner neglecting the overall strategy and their personal objectives, causing detrimental effects.

What can you do about it?

Stand back, review the situation and focus on managing and growing your business. Hire, delegate, lead and motivate your team. This will free up your time to focus on the key aspects to  successful growing your business.

5. The Right Systems

All businesses produce and rely on large volumes of information – financials, customer data and interactions, employee details, regulatory requirements and so on. To be efficient and effective, the right systems are crucial to business growth.

Responsibilities and tasks can be delegated as your business grows. However this does require solid management information systems to manage effectively. The larger your business grows, the harder it is to share information and work together effectively. Putting the right infrastructure in place is an essential part of growing.

Documentation, policies and procedures also become increasingly important as more employees join your business. Gone are the days of surviving on spreadsheets or filing on your desktop as customers and employee grow in numbers. You need proper contracts, clear T&Cs and effective employment procedures.

Investing in the right systems and technologies will certainly pay off both short and long term through efficiency and successful growth.

6. Overvaluing your Business

As a business owner, exiting or selling your business is personal since you have worked so hard over the years to nurture and build it.  This emotional attachment often leads to owners overlooking flaws and overvaluing their business. Of course, there is no harm of thinking well of your business, unless you wish to improve its profitability or plan to sell it.

Taking a step back to view your business as a potential buyer would see it will help you succeed in building real value in your business.

Developing a personalised and achievable exit strategy will help shape your business and maximise the value over the years, allowing you to exit at a time of your choosing.

CMC Partners specialise in Exit Strategy development and selling businesses. We help owners realise the full potential of their business whilst maximising its sale value. If you would like an initial conversation or realistic valuation with advice on how to improve it, contact us.

Conclusion

There is no doubt that 2019 will be an interesting year with challenges created by Brexit but it’s how you respond to these and whether you are in control of them that will determine your success.

Face these challenges, create opportunities from them and remain focused on running your business profitably with a motivated team.

Since 1989, CMC have been guiding business owners to achieve their goals whether sustainable growth, increasing business value, planning your exit strategy, succession or selling your business. As business owners ourselves with vast business experience,  we listen to, and support owners through the twists and turns of running a business. We give a range of practical advice, perspectives and direction to help you take control, make informed decisions and overcome challenges. If you would like help with the above challenges or other business problems, arrange your FREE 2hr appointment here.

Commercial Credit score, how it affects your access to finance

Your commercial credit score could be one way in which lenders and other companies you do business with assess your financial stability and set payment terms for you. Your commercial credit report says a lot about your business, determining how you appear to other companies and could be a deciding factor in whether or not people choose to trade with you. If you’re looking to grow your business and want a loan, your score may affect how much a bank is willing to lend to you, or even if they’re willing to lend to you at all.

Let’s first look at the basics of a commercial credit score

Company credit scores normally range from 0 to 100, with 0 representing a high risk and 100 representing low risk. It’s calculated differently according to different Credit Reference Agencies (CRAs), however most scores will take the following factors into account:

  • Age of company – how many years trading under the current ownership structure
  • Number of trade experiences – suppliers who report your speed of payment to the CRAs
  • Payment history – on company credit cards
  • Personal credit history – for firms with less than three principals
  • Companies House – for limited companies only
  • Information available from public records such as bankruptcies or County Court Judgements (CCJ’s)

Combining all the data from these sources the CRAs have developed algorithms that aim  to predict the likelihood of a business failing within the next 12 months. As data is updated the commercial credit score is re-calculated and published to subscribers to the CRAs

So how can you build a healthy commercial credit score, for your business to be reflected in the best light possible?

Steps to building a healthy commercial credit score

  • Keep business information current with the main credit bureaus

For personal credit scores, there’s a standard set of guidelines to be followed to assess your finances but for business credit scores, different bureaus could be calculating it differently resulting in different credit scores. You don’t know which credit bureaux the potential business or bank you want to work with could be using, so it’s best to check your information is correct and up to date with the top three credit bureaus every six months. The more comprehensive your profile, the better. Don’t leave this until the last minute when your business does need finance but make sure you’re prepared for any circumstances your business may face.

You can request  a copy of your company credit report from the three leading CRA’s

Experian

Equifax

DnB

  • Establish trade credit with suppliers

If you purchase products, ingredients or other materials from third party suppliers, these purchases could help you build your business credit. Many suppliers will extend credit for you so that you can pay for the goods or services after they’ve been delivered, whether this be a few days or a few weeks. More than likely will have this sort of relationship, if you do, ask them to share your payments with their credit bureau so it can be put on record that your business pays on time.

  • Make your payments on time

Although each CRA will use different methods of calculating your commercial credit score, most or all of them will consider your history of paying creditors bills. To ensure you obtain the best score possible, make sure you pay your creditors on time. To help protect your business against the potential of cash flow issues and delays in payment that may affect your own commitments, check your customer’s payment performance. The more detailed your credit history, the more favourably and accurately you can be assessed so the sooner you can start to establish credit, the better.

  • Keep your public records clean

In addition to detailing your business’ history of paying bills on time, your commercial credit report will also include any public records filed in your business’s name. This includes any adverse information such as bankruptcies or CCJ’s; reflecting negatively in your credit score. Bankruptcies can stay on your file for almost ten years whilst adverse information such as CCJ’s can stay on your file for up to seven years.

Credit reports are only part of the decision
Credit reports are only part of the decision

It’s simple…whether you’re applying for finance with a lender; credit with another business, competing in a tender process or simply trying to get a good deal on your business mobile contract, your commercial credit score will most likely play a role. SMEs are particularly vulnerable to economic changes, so a strong credit score can help you to access the right type of finance for your business, during difficult times.

Having a positive company credit score could help your company achieve more competitive loan rates and terms, remember however, that your score will form only part of the lenders decision, but it is the one area where you can have an influence.

 

Managing Volatility in Business

With 2019 set to be another challenging year, managing volatility and uncertainty will be a skill all business leaders will need to nurture. Here is our checklist for helping you to review your business to ensure it’s as strong as possible. In this post, we focus on the elements that you can control especially from a cash flow perspective:

Review current activity

Put the customer at the centre of your efforts, make sure your customer relationships are solid. Remember it is easier to maintain what you have rather than win additional new business.

Review and map out the main processes in your business (e.g. sales processing, order fulfilment, marketing etc.) get your team members to suggest and challenge their efficiencies.

Review your budgets and set realistic and achievable targets. Use ‘bottom up’ budgeting where everyone in the office gives input on areas over which they have control – target a 10% cost saving.

Review your realistic staffing needs over the next 12 months…

Get your members of staff involved in a discussion of likely trading conditions and get their input on reducing costs and maintaining revenues.

Review your list of products and services and eliminate those that are unprofitable or not core products/services. Any services identified as ‘non-core’ can be outsourced.

If appropriate, review banking facilities and discuss future needs. If you are going to require additional funding ask for it at least 3 months before you need it.

Measure, Measure and Measure again.

Bring your planning time horizon in to the short term, establish your key performance indicators (KPI’s) and measure them on a weekly basis e.g.

Sales leads generated

Sales fulfilled

Cash balance

Stock turnover

Debtor days

Gross profit

Net profit

The weekly review should include setting objectives and reacting early to trends, managing volatility is a hands-on activity and is the primary responsibility of the business leader. For more advice on which numbers to focus on read our blog on Keeping Control. 

Manage Cash

In challenging times, whatever size of your firm, there is one immutable truth – cash is king.

Identify and get rid of won’t pay customers, review debtors list and chase up overdue invoices. Make sure your terms of business contain explicit payment terms. Offer existing debtors inducements to pay early. Offer all debtors flexible ways to pay and assign responsibility to one individual for invoicing and collections.

One last thought on managing volatility

In conclusion, in volatile times things never go as planned. Some business leaders are inclined to want to reflect and plan for contingencies. Others will wait and then react as problems arise before dealing with it. We have seen both work – when managed properly. The important thing is for the business leader to pick one style and follow it through!

 

 

Brexit Planning

Brexit Planning: Talk to your EU Employees before Christmas

As part of your Brexit planning, it is important to keep the communication flowing between you and your EU employees. Your EU employees may be feeling very uncertain and uneasy about their future within the UK. Talk to your EU employees before their return home to their native country to ensure they return back to your employment in the New Year.

Our understanding is the rights of 3 million plus EU nationals who have made their lives and homes in the UK would be preserved.

We understand that no matter what is eventually agreed between the UK and the European Union, and (crucially) even in the event of a ‘no deal’ being reached that the settled status visa application process will apply. Although it’s been delayed the scheme should be open on 31st Match 2019. The deadline of with the deadline for making Settled Status visa applications set for 30 June 2021.

For information on the EU Settlement Scheme can be found here

 

 

 

Brexit Contingency Planning

Brexit Contingency Planning: 10 Questions for Business Owners to Ask

The impact of Brexit will undoubtedly bring its fair share of challenges for SMEs but this uncertainly doesn’t mean that business owners should bury their head in the sand and not carry out Brexit Contingency planning.

Contingency planning for any extreme scenarios such as illness or death is good practice. There will be some small businesses who already undertake business continuity planning as a matter of course and will be looking at many of the areas as part of their normal business planning. There are others, however that may not normally engage in contingency planning.

According to FSB research, only 14% of small businesses surveyed have started planning for a no deal conclusion to Brexit. Almost half (41%) believe that a no deal would have an impact on their businesses but haven’t yet started planning for the possibility and are even postponing major business decisions.

Our CMC partners have prepared a list of key questions that all business owners should be asking themselves as part of their current Brexit contingency planning.

10 Key Questions for Business Owners to Ask for Brexit Contingency Planning

  1. Has your business completed an assessment of the risks and opportunities presented by Brexit?
  2. Does this include consideration of a ‘No Deal’ outcome?
  3. Has your business established a contingency plan to respond to Brexit and a no deal outcome?
  4. Does your planning cover the impact on core operations including the impact on your transport, sales administration and governance?
  5. What about the impact on EU customers and markets?
  6. Does your planning include the impact with your EU suppliers and any cost implications?
  7. Have you planned for the impact on your EU employees including recruitment and mobility of staff across borders?
  8. What about the impact on indirect Tax and Customs – including changes to customs procedures and tariffs and the possible effects on cash flow and payments processing?
  9. Have you considered the impact on your margins, including the increase transport costs, storage costs and currency fluctuations following Brexit?
  10. Does your planning cover the impact on Legal, Regulatory & Data changes – including the ability to operate overseas?

Avoid burying you head in the sand and start with addressing the above questions. Whilst it is difficult to plan for the unknown, there are measures that business owners can take in preparation for Brexit and a ‘no deal’ outcome. If you view Brexit as an opportunity rather than burden then it will you to assemble a plan of action that can facilitate future growth of your business.

If you are feeling overwhelmed by the uncertainly and wish to take control of your planning, contact us to arrange a free confidential appointment with your local partner.