Today, SMEs face all kinds of risks on a day-to-day basis so it’s important to carry out risk identification and assessment. In this article, we’ll explore the basics of risk management and the range of tools available to help SMEs mitigate risk.
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Entrepreneurs who found small or medium-sized enterprises (SMEs) are no strangers to risk. Starting your own venture requires confidence and vision, but also a sense of realism given the many threats to an SME’s survival. The past few years are testament to the fact that even the best-laid plans can be disrupted. Climate change, geopolitical instability, the pandemic, and growing cybersecurity threats have all added new risks for SMEs.
Companies that truly understand risk work to its limits, because the rewards can be great, but the consequences of getting it wrong are also disastrous— the financial crash of 2007-2008 was caused in large part by financial institutions having taken on unacceptable risk.
Many large enterprises —especially in the finance sector— have now realized the importance of having a risk management process in place, and a huge industry has sprung up to support this. Research from Insight Partners found that the operational risk management solution market is expected to grow from $1.65 billion in 2021 to $3.09 billion by 2028.
But managing risk is not just a luxury for larger companies. Today, tools exist that help SMEs with risk identification, management, and mitigation across their business. Risk management software, compliance software, and cybersecurity software are an everyday part of many SMEs’ risk management toolkits.
In this article, we cover the basics of risk management for SMEs and explore some of the software available to help them set up their risk management process.
What is risk management?
To understand risk management, we have to understand business risk. Any organization faces threats ranging from the small (a rival setting up shop next door) to the large (your business being forced to shut its doors due to a global pandemic).
Risks also vary in how predictable they are. Few could have foreseen the impact of the COVID-19, for example, but a bank can predict the level of risk when it loans money to someone. In this case, it uses information about that person’s financial history to assess how likely it is they will be able to repay the loan.
This is where risk management comes in. The bank can foresee the risks and set interest rates accordingly. When it lends to someone with a less-than-ideal credit history, it may make a healthy profit on the loan interest, but it also accepts that the person may default and it may not see a return at all. Aggregated out over billions of dollars worth of loans, that risk may be deemed acceptable.
– Risk identification: figure out what the risks are for your business and industry
– Risk analysis: weigh up the potential outcomes and the risks vs. rewards
– Risk monitoring: keep an eye on risks over time to ensure they are controlled
Balancing these risks and rewards is at the heart of risk management. We can think of it as the practice of accepting, assessing, and controlling risk. Because this is a broad task that touches upon many areas of a business, SMEs may want to consider specialist tools that work across the various areas of their business that are affected by risk.
What does risk management software do?
Risk management software helps businesses reduce their exposure to risk, and it does this by helping them better manage data. Just as in the example of a bank calculating its risk/reward when considering whether to loan someone money, managing risk requires gathering as much information as possible. Risk management solutions therefore allow SMEs to carry out risk identification, measure risks within existing processes, categorize them according to how critical they are to the business, and create reports to communicate about risk across the business.
Although risk management is a broad software category, these are four common features:
- Risk identification and classification, which also includes the ability to score risks according to their level of urgency or seriousness.
- Process auditing, so SMEs can ensure that their internal processes are in line with industry regulations or local legislation.
- Key risk indicators (KRIs), which can be defined using software and used to trigger alerts when certain conditions are met
- Reporting, so risk managers can share an overview of risks, incidents, and risk trends within the organization
When considering a purchase, there are several factors to take into account. As well as cost and features, SMEs may want to look for a solution that is designed specifically for the risks in their industry. Products exist to meet the unique challenges of finance, healthcare, oil and gas, and other sectors. The deployment model may also affect your decision.
How does compliance software help reduce risk?
Risk management software is often used in conjunction with other tools to help reduce risk, and one key area of this is compliance. For regulated industries like finance, health, or law, organizations must ensure they meet their legal or regulatory obligations, and many use compliance software to do that.
Did you know? The Consumer Privacy Protection Act (CPPA) was proposed in the house of commons in November 2020 and will soon become law in Canada. The act may mean that businesses have to replace their current Personal Information Protection and Electronic Documents Act (PIPEDA) processes, specifically in how they gather, process, and disclose data.
You can read a full exploration of what the CPPA is and how it may affect compliance for SMEs in Canada in our recent blog post.
Compliance and risk are intimately linked because the consequences of failing to meet compliance standards can be disastrous, and include fines, reputational damage, lawsuits, and even jail time for executives. In October 2021, for example, the Public Company Accounting Oversight Board fined Deloitte Canada $350,000 civil for breaching its rules by failing to maintain independence when carrying out audits.
Different compliance software may focus on particular areas. It could aid financial compliance by streamlining financial documentation, audit trails, and reporting. But there are tools to assist with other areas of compliance, too. For example, companies can ensure they are adhering to environmental regulations by monitoring emissions, hazmat procedures, and regulatory policies.
In short, compliance software helps SMEs manage risk by maintaining tight oversight of their operations, and tracking the processes that might lead to compliance risks.
Managing risks from cyber attacks
Managing cybersecurity risk is such an everyday part of our lives that we often take it for granted. Passwords, fingerprint scanners, and multi-factor authentication make it possible to keep our critical data and systems safe and show that we take cyber risk seriously.
The threats to SMEs are at least as great, but the potential risks are perhaps greater. Managing personal cyber risk relies on just one person, but managing cyber risk within a business —even among a small organization of ten people— means ensuring that all employees all follow good cybersecurity practices. And just because SMEs are small, that doesn’t mean they’re not a target for cyber criminals. In fact, because SMEs typically can’t spend as much on cyber defence, they are actually a more attractive target for hackers. An October 2021 report from the Insurance Bureau of Canada revealed that nearly half (47%) of Canadian small businesses do not dedicate any budget to cybersecurity, yet the cost of an attack, according to 41% of businesses that had suffered one, was at least $100,000.
For this reason, SMEs choose cybersecurity software to protect their people, their data, and their business. As well as identifying and blocking threats such as viruses and other malware, modern solutions protect against phishing attacks, ransomware, and attacks to the cloud systems that many SMEs use. These attacks tend to prey on human vulnerabilities and are often where modern breaches occur.
For small companies that may not have dedicated technical personnel, cybersecurity software is a great way to mitigate the risk of cyber attacks and the losses they can cause.
Canadian SMEs face numerous risks, but identifying and controlling these risks with the right tools is a vital step in managing them. These tools don’t have to be complex, time-consuming or expensive, so even the smallest business can find software to suit their needs and budget. Businesses should ensure they have a risk management process in place so that they are prepared for any outcome.