Risk indicators for smaller businesses

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46737862_sWhen things go pear shaped in business people look back and often see that there were warning signs.  Hindsight is a wonderful thing! Especially in a smaller business.

Smaller businesses v larger ones

Small and medium sized businesses are very different to larger ones – here are a few examples:

  • Directors are likely to be more involved in the day to day nitty gritty.  This reduces the time for working ON the business.  It can also create a conflict with wider business interests (say, if someone prefers sales to finance).
  • Less formal procedures. There is a cost/benefit trade off.  When directors are seen as being close to the detail, cost can win out at the expense more robust checks and balances.
  • Less segregation of job responsibilities, which increases the risk of fraud.
  • Smaller businesses are:
    • less likely to employ specialists or to provide bespoke training.
    • can be susceptible to ‘mission creep’.  The roles of staff may evolve (rather than being managed in a planned way).

   People tend to gravitate towards what they do best and may not be so good with the other stuff.

  • There may be no annual audit or if there is it may well pay little or no attention to the way things are controlled.

Having said that, there are some smaller businesses that are very well managed  – but there are others that might be hit by a curved ball and not spot it’s coming.

Risk indicators

23072376_sRather looking back and with hindsight ruefully saying  ‘if only we’d taken notice!’, why not think about the warning signals?  Here are a few pointers:

How things are working at the moment?

  •  Are there areas of the business that are by their nature difficult to control?
  • Are there warning signals?
    • From KPIs or management accounts (especially unexplained cash shortfalls)
    • Areas that are proving difficult to improve
    • High staff turnover, absences or disciplinary issues
    • Areas of the business that are not working well together
    • Bonus arrangements which create a conflict of interest
    • Other factors that give cause for concern, such as overbearing staff or people working under intense pressure
  • Are there less obvious signs?
    • Remote locations or multiple tiers of staff where messages from the top may be diluted or where there is little scrutiny.
    • People being asked to do work outside their core skills.
    • Areas run by long standing staff who have had little challenge over the years.
    • Working practices which have evolved in an unplanned way.

How will things work in the future?

  • Are there planned changes where:
    • weaknesses in practices could be compounded?
    • there could be new control or information requirements?
    • lessons learned in the past should be considered?
  • Is risk factored into important decisions?  (eg: major projects or selection/retention of suppliers)

Wrapping up

Each situation needs to be looked at on its own merits, but more warning signs are likely to point to greater risks.

The potential for fraud may be one concern, but the possibility of simple leakage through lack of skills or inefficiency may be more likely.  Either way an impartial review can be a great way forward!

If you liked this article you might also like to read Fraud should be seen as a business opportunity!!  And if you would like to discuss having an impartial review then please get in touch.

 

 

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