How can SMEs conduct risk analysis with confidence?

Small businesses are the lifeblood of the UK economy. 99.9% of British businesses are SMEs, accounting for over 60% of private employment and generating £2.3 trillion in annual turnover. 

Small business is everyone’s business. When SMEs struggle, so does the economy, and that’s why we should all be concerned about current trends and level of financial risk. Almost 400,000 small businesses have disappeared since the pandemic, and many of those that remain are facing an uncertain future. In situations like these, risk analysis becomes crucial. 

We’re sure you want to support small businesses during this difficult time. Whether it’s extending credit, offering insurance or underwriting a loan, your actions play a vital role in keeping SMEs afloat. 

But you also need to protect your own business. SMEs are uniquely vulnerable to market shocks, and partnering with an unstable company could leave you out of pocket. 

A standard risk analysis will flag up some of these dangers, but it only provides a surface-level assessment. We go deeper to identify hidden financial risks, both now and in the future, so that you can support small businesses with confidence. Here’s how it works.  

A rocky road ahead

It’s no secret that the UK economy is struggling. The aftermath of the pandemic has collided with the war in Ukraine to create a perfect storm of high inflation, spiralling energy costs, supply chain delays, and low consumer confidence. Conducting a thorough risk analysis is crucial in this climate. 

Small businesses saw their energy bills rise by over 300% in 2022, leaving over half fearing for their survival. Prices are set to increase further in March when the government’s Energy Bill Relief Scheme comes to an end. 

With inflation still running at over 10%, these price increases are too harsh to pass onto customers. Instead, many small businesses have been forced to take a loss in the hope of retaining customer loyalty in the future. 

This is creating a chronic cash shortage. Many SMEs  are applying for loans, only to find that lenders are unwilling to give them credit.  A recent risk analysis report by the Federation of Small Businesses shows the extent of the problem:

• 57% of small businesses have applied for a loan in the last five years

• Only 37% found this process easy

• The acceptance rate for business loans has fallen to 46%, down from a historical average of 65%

Find out more about the report - listen to our interview with FSB Policy Director, Paul Wilson 👇

This doesn’t just harm long-term investment. It significantly adds to financial risk. 40% of micro-businesses say that they have less than three months of cash on hand. With no buffer against market shocks, a lost customer or a late payment could be enough to create a serious risk of insolvency. 

Working with small businesses definitely carries more risk than it used to, but this is no reason to give up on SMEs completely. For every high-risk company, there’s another one that is rock-solid. The challenge is telling them apart, and this is where we can help.

How to conduct a comprehensive risk analysis 

Information at your fingertips

When conducting risk analysis of an SME, your first port of call should be the Companies House website. Here you can access annual reports on thousands of companies, containing everything you need to know about their current financial risk situation. 

This is a brilliant resource for risk analysis, but it has one major drawback. Companies House uploads company PDF reports as scanned images, leaving you no choice but to trawl through them manually. Until now, that is. 

SearCHeD is our very own Companies House search engine. We’ve turned hundreds of thousands of reports into searchable documents so that you can find the information you need in a fraction of the time:

• Enter a company name to find all the reports relating to a prospective customer

• Use keywords to narrow your search to a particular area of risk

• Search within your existing portfolio to spot weaknesses you may have missed

As simple as searching - find out more about SearCHeD 👇

Modelling made easy

Risk analysis isn’t just about judging the present state of a company. To truly gauge stability, you need to use this information to predict vulnerability in the face of unforeseen events. 

This is where our tools really come into their own. Company Watch clients have access to our intuitive dashboard, where they can build detailed models of company performance at the click of a button:

• Forecast View™️ lets you simulate a variety of market shocks, from a sudden spike in interest rates to the loss of a key supplier. You can see immediately how these would affect the financial health of a company, and compare this to the average performance across the industry to conduct an in-depth risk analysis.

• Easy-to-use sliders let you adjust the severity of market shocks to see how a company would cope in a variety of scenarios. You can isolate a single event, or simulate multiple shocks at once.

• Our Experiments feature lets you input custom figures to create even more accurate, up-to-date models. You can stress test financial statements and enter management accounts or forecasts, and then see how these would affect a company's future financial health.

Our models present risk as a single number known as the H-Score®. By using a standardised risk analysis measurement, we make it easy to compare risk across companies and present your findings to other stakeholders.

Working with SMEs shouldn't feel like a journey into the unknown. We shine a light on company finances so that you can avoid the pitfalls and seize the opportunities. 

Disclaimer- The past performance of a company is not always an indicator of future success. Read our terms and conditions here.