“You can’t run a business without taking risks,” said Millar Drexler—who as the former CEO of J. Crew and Gap knows a thing or two about risk. But you don’t have to be the CEO of a company with household name recognition to know that every business faces risk.
Risk profiles, though, differ significantly between large enterprises, middle market companies, and small businesses. The reasons have to do with resources, market reach, exposure to unique risks, and operational complexities. For example, corporations with operations in multiple markets might face geopolitical and regulatory risks; on the other hand, they may also have greater resources to devote to risk management.
Middle market companies often face risks specific to their industry or niche market. These risks can have major consequences that affect their financial stability, market reach, or growth potential. Thinner resources—and gaps in risk management expertise—can affect their risk profile and ultimately jeopardize their business.
In this article, we’ll look at five risks unique to middle market companies to help business owners grow awareness, engage in better risk management, and protect their companies from the worst outcomes.
Risk management for middle market companies
Insurance. Of course, no discussion on risk management is complete without including insurance, especially at a time when instances of fraud are on the rise. Ensuring your business has appropriate and adequate coverage is essential. This includes policies covering cyber risks, professional liability including errors and omissions, property and much more, depending on your industry, structure, and operations. Having a knowledgeable, trustworthy insurance specialist who truly understands your business and ensures you are covered is non-negotiable.
Internal controls. Many middle market companies may be in the process of professionalizing their finance and accounting function. A key step is establishing and maintaining a strong system of internal controls. These are processes and procedures designed to prevent fraud and errors, while also safeguarding company assets and ensuring accurate financial reporting. To reduce risk of fraud and errors, consider having a professional financial adviser review or implement internal controls, ensuring proper segregation of duties and their appropriate administration.
Cash management tools. Many companies—even those generating millions of dollars in annual revenue—still rely on outdated tools or banking methods. These can include issuing checks, for instance, when paying vendors, instead of using ACH. Today, many secure cash management tools are available to businesses. They offer benefits like automation and security that can dramatically streamline work processes for business owners and finance professionals—reducing risk while also saving time.
Contract management. Many middle market companies have significant opportunities to professionalize how they generate, review, and manage contracts. And these opportunities can directly influence profitability and growth. Centralizing contract storage and implementing a formal contract review process can help companies address service consolidation and more effectively negotiate pricing. These measures can also reduce contract-related risks including oversights, errors, and pricing mistakes that can have serious consequences for an extended service contract.
Human resources. HR is critical for any company, but many middle market companies can benefit from professionalization of the function that also mitigates risk. Establishing policies and procedures and documenting them in an employee handbook, formalizing onboarding and communication, and establishing an approach to ongoing education, training, and development for staff are all important. So is creating a procedure for performance monitoring, along with a roadmap for handling potential personnel problems rather than waiting for a crisis. Consider the risk of a performance failure of a senior leader or highly compensated, critical role, and how the consequences can ricochet through a middle market company—ultimately increasing financial, performance, or customer risk.
The role of a fractional CFO in risk management
A chief financial officer (CFO) plays an important role in risk management for any organization because they bring financial expertise and strategic insight to helping businesses effectively recognize, analyze, and mitigate risk.
Many middle market companies, though, do not have the resources to hire a full-time CFO. In other cases, the recent departure of a CFO has introduced turmoil—and possibly left the business exposed to risk.
In these cases, a fractional CFO can be a good option. A fractional CFO is a part-time, outsourced CFO who provides strategic financial leadership support to the company. He or she handles financial planning and analysis, cash flow management, budgeting, and financial reporting. And, of course, a fractional CFO plays a key role in risk management, including:
- Identifying present or future vulnerabilities in company operations or finances; or external risks like market trends or industry pressures;
- Developing risk mitigation strategies aligned with the company’s goals and risk profile;
- Undertaking scenario planning to better anticipate and plan for responses to risk;
- Performing financial modeling that simulates the impact of certain risks;
- Reviewing insurance and contracts;
- Ensuring compliance with current or anticipated regulation;
- Professionalizing the finance function, including internal controls, cash management, and more.
Fractional CFOs can also conduct continuous monitoring and help to guide stakeholder communication regarding risk, or in response to emergent risks. In short, they play an essential role in protecting a middle market business. They can also help to guide a business through risk management to a more secure financial position and risk profile.
When you’re ready to explore hiring a fractional CFO, we can help. Marren Consulting supports privately held businesses with strong financial leadership and accurate, relevant reporting—helping business owners and leaders identify opportunities to improve performance, unlock growth, and achieve their firm’s full potential. Learn more at https://www.marrenconsulting.com.