Finance

With the change in business environment, it has become necessary for organizations to focus on sustainable wealth creation. Some organizations have invested substantially in risk management and internal control measures. Risk management is the identification and assessment of risks and the application of resources to prevent, monitor and control the chance, and impact of an eventuality. It is very clear that appropriate responses must be prepared to counter any risk that would affect business strategies or earnings. There are various methods used to manage risk for SMEs. These range from avoidance, diversification via monitoring and insurance coverage. This paper will critically examine risk management and internal control for SMEs. The paper will also examine the contradictions and limitations of risk management as highlighted in studies on risk management for SMEs.

The benefits of risk management and internal control
Every enterprise operates in an environment that exposes its business activities to potential risks. For business to survive the increasingly uncertain business environment, they must implement effective risk management strategies. It is therefore clear that strategic business planning efforts must encompass risk management strategies. This should enable the small and medium-sized enterprises to respond swiftly and effectively to any changes in the business environment. Through risk management and internal control, the Small and Medium-sized Enterprises are able to identify potential threats and challenges and hence prepare in advance on how to meet those challenges (Stern, 1996). SMEs derive value from internal control measures. One of the benefits of internal control measures include improved business operations and risk management assessments. Internal control efforts play a vital role in enhancing business performance through reduced operational costs, minimizing regulatory impediments, and enhancing revenue predictability. Another benefit of internal control is that it gives confidence to the shareholders, local and foreign investors since they are aware that any investment is secured of internal frauds.

Special legal regulations for Small and Medium-sized Enterprises
Small and Micro Enterprises have to comply with several regulatory frameworks. The United Kingdom Government has formulated a special regulatory framework to regulate and control the operations of SMEs. The growing concern for environmental impact assessment and harsh economic situation has prompted the government to implement technical regulations pertaining to environmental conservation. In addition, Health and safety regulations ensure that SMEs operate under the required health standards and safe business conditions. These regulations help to protect workers and encourage business managers to expand their business operations without the limitation of increased risk exposure. Capital regulation ensures that SMEs comply with the government financial requirements. Interestingly, human resource surveys in the UK indicate that most SMEs within the market struggle to comply with the legislative requirements. This has created the need to evaluate the existing legislation to attract investments in the SME market.

Risk reporting and management comparison between SMEs and large corporations in the UK market
Small and medium enterprises have for a long time been ignored despite their imperative role in both national and international developments. This section of the paper gives candid information on the implications of regulations on SMES as compared to large corporations.

The international financial reporting standard for small and medium size enterprises (IFRS for SMEs) has simplified and relaxed the accounting requirements and reduced disclosure provisions. The accounting standard board (ASB) has developed new standards for accounting in UK. The history of risk management in the UK dates back to 1992. During this time, there was a substantial increase in high profile corporate frauds and financial scandals pushing the London Stock Exchange to introduce new regulations for companies listed. Recent surveys show that more than 98 of companies in the UK are SMEs. There contribution to the UK economy is therefore significantly high. The recent economic slump down exposed SMEs to the risk of insolvency and necessitated a change in planning management. Reports show that the UK SMEs rely more on package products for their cover. The risk management for SMEs is diverse and comprises of a wide range of products. Most small businesses utilize recognized insurance brokers to cover their business. Although SMEs are loyal to their insurance providers, studies have revealed that more SMEs changed their provider in 2009 than in the previous year. Traditionally, SMEs have established affinity partnerships targeting trade associations. Several insurance providers have therefore come up with tailor made broker offerings for SMEs. Apart from the usual insurance coverage, providers offer small businesses with legal advice. It is also evident that banks have a bad reputation among the SMEs, as they are expensive alternatives. Some studies have suggested that for banks to capture the lucrative SME market, they need to change their pricing strategy and reinvent their image. On the other hand, research has revealed that banks are not willing to lend to small business units and hence the banking conditions are not favorable to SMEs. This has led business owners to borrow from friends and personal credit especially during hard economic times. It is therefore notable that about 28 of SMEs used this kind of funding to finance their business activities. This has led to increased insolvency levels and personal risk thus discouraging small business owners from investing in the UK market. Security for UK SMEs is very crucial due to the contribution of these business units to the UK economy. It is also very clear that SMEs need simple and flexible cost effective security solutions tailored for them.

They need differently treatment from the large corporate organizations to lower their capital investments and realize efficiency and productivity. Many large corporations are adopting Enterprise Risk Management (ERM) to increase their risk management profile. According to the Institute of Chartered Accountants (ICA) in England and Wales 2006 report, some SMEs have integrated risk management to overall business management practices. Large corporate have developed risk control systems that are capable of assessing potential risk factors. Some of the risk areas covered by large corporations include strategic, operational, financial, compliance and environmental risk. Risk management studies have not focused on developing appropriate credit risk models to reflect the specific needs and peculiarities for SMEs. These studies need to focus on provision of qualitative information to gauge credit worthiness for the SMEs, ensure good flow of finance and develop adequate risk management models. To determine the business environment, Non-financial data need to supplement accounting data. This is especially important due to the lack of adequate data for private companies and unlisted firms. According to studies by Everett and Watson (1998), the reason why SMEs fail is due to inadequate capitalization and poor planning. The study also revealed that there is no relationship between failure rate and size of company as measured by asset value.

Influence of family board members on corporate governance issues
According to a 2008 report by the Institute for Family Business (IFB), family businesses account for approximately 65 of the total private sector enterprises in the UK economy. The report showed that most family enterprises are SMEs while 56 operate as sole traders (Abor and Adjasi 2007). These family businesses vary in size and level of family involvement in corporate governance. The UK policy environment is supportive of family businesses. For example, these businesses benefit from inheritance tax exemption since 1992. The government has also introduced capital allowances and research and development tax credits and incentives to family enterprises. In 2000, the UK government introduced enterprise management incentives scheme to help small firms recruit by giving tax-free incentives to employees. Family firms are therefore important governance structures for business organizations in the UK. It has been reported that human resource development activities for owner-managed SMEs where based mainly on succession planning. It is notable that the owner solely does decision making in SMEs particularly on training and human resource development. Even in those SMEs with human resource personnel, the ultimate decision lies with the business owner or influential family member. Most family enterprises are reluctant to hire outsiders hence they cannot utilize external knowledge leading to weak corporate governance. That is why most family owned SMEs are conservative, lack professionalism and are slow in acquiring new technology (Cadbury, 2000).

Studies that have examined the risk management practices for SMEs
Several studies have examined the risk management practices among SMEs. Some of the studies have identified barriers to risk management in the supply chains for SMEs. These are strategic risks for SMEs (Gorrod, 2004). Other studies have focused on the Basel Capital Accord and its impact on SMEs. These studies have also focused on the operational definition applied by major lenders. Some other studies have examined the credit risk models and their application in risk management for SMEs. All these risk management studies seem to raise several questions.

Methods and Key question arising from risk management studies
Some of the questions raised by these studies include concern over the availability of data for unlisted companies. According to studies by Watson and Everett (1996), there is limited data on both financial and non-financial fronts making business environment analysis and calculation a difficult task.

Recent literature has raised the question of including qualitative variables in making analysis for risk management models. Researchers and academicians have raised questions on the appropriate modeling methods that can be applied to predict the failure of SMEs. Globally, there is no universal definition of an SME and this has posed a bigger challenge to business managers who are keen on internationalizing their business. In the European Union for instance, the criteria for definition uses the number of employee and the annual turn over rate of the business. In the United States, the Small Business Administration (SBA) deals with defining SMEs to reflect the North American Classification System. The current SBA requirement differs for each industry but the number of employees is 500 and an average annual receipt of less than 28 million (Thomsen, 2000).

Generalizations, Contradictions and limitations of the studies
Risk management for UK SMEs operating in the international market is one of the areas that have elicited controversies and contradictions among academicians and researchers. The controversies have centered on risk management at market entry level for SMEs. Risk management for these SMEs is based on the use of resource models, cost theory and organizational capability theories. However, the studies have generalized some issues. Generalized issues include the need to develop specific regulations and risk management tools for SMEs. Risk managers agree that risk assessment and management for SMEs need to address the unique business issues specifically for SMEs. Management experts also agree that SMEs need Government support through the provision of incentives to encourage economic growth and creation of employment and wealth.

These studies have also raised several limitations. Definition of SMEs is one of the limitations highlighted by the studies. Different countries have different requirements and definitions on the criteria of classification of business entities. There is limited data on both financial and non-financial fronts making business environment analysis and calculations a difficult task. Recent literature has raised the question of including qualitative variables in making analysis for risk management models. Several studies have also tried to come up with modeling methods that predict the failure of SMEs (Begley, 1995). One of the limitations affecting all studies is that risk management is about preparing for uncertainties. It is therefore clear that the process will require complex management strategies that may not appeal to small business managers.

Conclusion
Based on the above analysis of SMEs, it is evident that for small and medium-sized enterprises to create wealth sustainably, they need to make risk management an integral part of the overall strategic planning management. It is also notable that to ease the pressure on SMEs, governments and other stakeholders should come up with specific regulations that meet unique needs and peculiarities of SMEs.