Value creation and innovation for SMEs

Insights into risk management

For the purpose of this article, it is important to understand how risk management can be a lever for value creation and innovation for SMEs.

On an entrepreneurial level, value creation exists in increasing a company’s productivity to better remunerate investors (shareholders, creditors, etc.). This capacity, which can go hand in hand with the pursuit of sustainable growth, is achieved when investments generate a return above the weighted average cost of capital.
The objective of a company’s value creators is to create this shareholder value in order to increase the wealth of its owners and shareholders.

Research defines risk as a hazard or volatility of market parameters, such as material prices or exchange rates, that can lead to both negative and positive changes in the value of the company.

The first is that risk is not bad in itself, because it can lead to loss as well as gain. The second is that this risk or volatility can create value when properly managed. In fact, uncertainty often creates opportunities for those who know how to exploit it, therefore risk management creates value mainly through two channels:

• It allows companies to make better decisions. By integrating risk into projects and valuation, companies can select and structure the best investments. And by adjusting performance according to risk, we highlight the true value created by different projects.

• Risk management minimises the cost of the financial flexibility required by companies to achieve their growth objectives, even in the face of adverse business conditions.

Many companies still have to work to align risk management with strategy and value creation, while at the same time a phase of uncertainty rarely seen in previous years is beginning (Brexit, geopolitical unrest, conflicts).

Nevertheless, it is important for a company to identify the risks that really correspond to its core business and to take the necessary precautions in terms of insurance, prevention, processes, etc.
Taking the measure of the risks, therefore, means making the company evolve. The more a company engages in risk management with the idea that risks can be ‘valued’, the more it is transformed.

Moreover, despite the rapid evolution of digital technology, many companies tend to downplay the importance of cyber risks.

In recent years, the number of incidents related to IT attacks has increased significantly. The reason for this resurgence is the sharp increase in the use of information and communication technologies. All companies, even the smallest, are gradually entering the digital age, becoming favourite playgrounds for these new modes.
The impact of these attacks often results in slower productivity or loss of sensitive data.
It therefore seems very important for a company to have state-of-the-art risk management.
To the extent that this will initially allow opportunities to be taken in order to create value and then to protect against these new types of risks linked to the development of the technology.

Jeremy Carvalho
Credit risk analyst, Populous World.