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Why Managing Governance and Risk is Just as Important for SMEs

Why Managing Governance and Risk is Just as Important for SMEs

Managing governance and risk may sound like a big corporation problem, a "nice to have" if you have the budget or people to work on it. Yet nothing could be further from the truth.

Small and medium enterprises (SMEs), with access to fewer resources and who experience constant cash flow headaches, have a much better chance of survival and easier scalability, if their governance structures are strong and operational procedures are well documented from the onset.

[Related: Five Reasons Why Now is the Perfect Time to Start Your Business]

What is governance and risk management?

Cutting through the jargon, governance and risk management makes sure that your company protects and improves its operational and financial performance, acting in an ethical and legal way.

It provides assurances to all that the business activities are structured, and everyone knows what to do. This provides greater stability for employees and visibility to leadership - creating a environment of trust and a strong company culture.

According to the U.S. Bureau of Labor Statistics, approximately 20% of new small businesses fail during the first two years of being open, 45% during the first five years. Governance and risk management can help you avoid many of the pitfalls of a new business, and make sure you are part of the 25% that make it to fifteen years and beyond.

Why is governance and risk management so essential for SMEs?

Who could have predicted at the end of 2019 that businesses would be told to close their physical doors for weeks, even months, and that clients would disappear overnight?

The global impact of COVD-19 has hit SMEs hard. As you come out of the curve, it’s crucial that you create lean and strong balance sheets for the business, with accountable individual roles, so employees and the company can benefit mutually and survive in the coming months.

At THG Advisory, we work with SMEs to review and strengthen both ESG and GRC.

[Related: Four Steps to Building a Sustainable, Successful, Soul-Driven Business]

What is the difference between ESG and GRC?

  • ESG (environmental, social, and governance factors) covers a wide spectrum of issues that traditionally are not part of financial analysis, yet have financial relevance, such as health and safety, water management, supply ethics, etc. ESG helps companies manage costs and identify their specific impact within sustainability. This is ethically important and as investors globally (according to PWC, 83% of investors believe higher ESG management will improve returns or reduce risk) seek this information in establishing corporate responsibility.
  • GRC (governance, risk management, and compliance factors) covers direct impact to the bottom line, such as rules, practices, legal compliance, and financial risk.

Our top three governance and risk management tips for SMES.

1) Document core business procedures.

An investor looking at two proposals will most likely invest in a business with good governance as opposed to an average one. A business partner doing due diligence on a partner for a large project would feel more comfortable with one who appears well-organized and has solid procedures and controls in place.

Employees who are clear about how their job is to be performed, where to get information from, and what is expected of them, typically enjoy their work environment more. Having clear goals and accountability structures are the basis of a successful company. Governance reduces risk and allows greater opportunity to develop improvements and forecast better.

2) Understand your risks.

When the organization has the right structure and processes, it is easier for leaders to identify and put the right risk mitigation/controls in place. Here governance and risk go hand-in-hand.

While no one could have predicted a global pandemic, a robust risk register could have accounted for some of the outcomes and given your company a chance to react to known risks faster, while determining a response to newly formed ones.

Supply chain disruptions may have been predicted, but customer demand due to the lockdown, not so much. This task is much harder if your core teams are too busy with seemingly unpredictable day-to-day procedural concerns.

3) Manage expansion with robust support structures.

When a business expands too fast, it can lose focus on essential activities like its research, strategy, and planning. This creates financial strain, which can be disastrous.

Good corporate governance can help a company know when to engage outside expertise, attract investor funding, and create a good long-term structure for growth. Developing the right approach and implementing long-term governance structures can help you stay the course while retaining your company values.

Summary.

Every global crisis has devastating impacts for SMEs – a double shock of a drop in demand for goods and services and a tightening of credit terms and cash flow as seen in the OECD report post 2008.

SMEs play a significant role in all economies, as they are key generators of employment and income and drivers of innovation and growth. Now is the time to implement more sustainable practices, implement governance that makes sense, and focus on solid business considerations benefiting both current and future shareholders.

[Related: Founders, Do Your Potential Investors Know You Are A Problem Solver?]

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Audrey Hametner has spent over 20 years in the corporate world across the globe working with media technology firms, educators, recruiters, and advertising agencies. She brings financial structure, risk management, and operations leadership to the table. She is the founder of The Hametner Group, where she manages two companies: The Bedrock Program is focused on career coaching for teenagers and young adults and THG Advisory Group is focused supporting SMEs and educational institutions with risk, operations, and governance support.


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