18TH AUGUST, 2020

How SMEs Can Recognise And Reduce The Risks Of Innovation

Know the risks - and plan for them

Risk is unavoidable in any business, from the smallest start-ups to the largest multinational enterprises. Many of these risks are the same, no matter what sector the business is in. For example, there are risks around staff and customer safety, consumer market transitions, possible legal issues and more.

However, the difference in how risks are addressed between small businesses and larger ones basically boils down to money. Smaller businesses need to be able to identify risks much more quickly, as they don’t necessarily have money or resources to spare when the going gets tough.

Important risks an SME will face in innovating

All the different types of risk are similar between businesses, but the specifics will be unique. When something goes wrong, it could be a disaster to one business but only a minor inconvenience to another. This is why it’s essential that individual businesses know exactly where their risks lie, particularly with innovation and growth.

Risks also evolve over time and be shaped by money factors outside the business’ control. This could be market forces, the state of the economy, Brexit and, of course, coronavirus.

Financial risk

Financial risk is inherent in running a business and strong cash flow is vital. Financial markets and global economies can be volatile, and there are social and environmental factors to consider too. All these things can shape a company’s bottom line, not to mention the risk of investors losing confidence and pulling out.

Now that the UK is officially in a coronavirus-driven recession for the first time in ten years, there’s also the human side of financial risk. Customers may have trouble regularly paying their instalments on credit agreements, or may stop paying altogether.

Managing all these financial risks can be like spinning plates. If the plates start to drop, the cash flow can slump and the business could even fail entirely. This makes it all the more crucial that innovation is properly costed and budgeted for, with avenues of credit lined up if needed.

Strategic risk

Even the most well-considered innovation strategies aren’t risk-free, particularly for SMEs. Making decisions that will help to grow the business often means balancing risk against reward. Get it right and your business could achieve its goals and turn over some serious cash. But get it wrong and the impacts could be long lasting and far reaching. Plus of course, it’s not just down to how good the strategy itself is, but also how well it is executed. A strong innovation strategy that’s executed poorly can bring about huge challenges, such as dissatisfied customers, a damaged reputation, disappointing sales and low profits.

Reputational risk

Speaking of reputational risk, this one’s a big one as it can take years to build up a good business reputation and days to tear it down again.

Damage to a company’s reputation is often because its business risks have not been managed effectively. This could be because one or a number of employees have not met their responsibilities or because a situation was totally misjudged by management.

In today’s super-connected world, customers tend to rate businesses against a backdrop of wider issues, such as sustainability, and gender and racial equality. SMEs in particular need to recognise that they’re not immune from this - far from it - and consider how their plans for growth and innovation will be judged by the wider public.

Compliance and regulatory risk

All UK businesses must adhere to a huge range of guidance and legal requirements around things like data handling, safety and business regulation. Some of these will be voluntary and some will be mandatory. These compliance risks are likely to cover the general field in which the business operates, but many will be related to specific companies.

The risks lie in failing to be complaint. The penalties of non-compliance can be severe, including fines, legal action or even closure. Again, the company’s reputation can be seriously damaged too.

Technology and cybersecurity risk

The world is becoming more and more automated and technology driven, and while this brings massive benefits it can also be risky. Data breaches can lead to serious legal and reputational hot water, while cyber-attacks can literally bring the business down overnight. Even a temporary loss of power or a piece of machinery going offline can have extremely negative consequences.

Fixing any issues around cybersecurity can be expensive - a cost that many SMEs an ill-afford. Therefore it’s essential that businesses have robust systems in place, and include a plan for ongoing cybersecurity maintenance as they grow.

What is "pivoting" and how can it help manage these risks?

A business will tend to “pivot” when it needs to recover from a particular difficulty or tough economic period. It usually involves operational changes, branching out to new product lines, or offering additional services so that the company can adapt, survive and grow. It’s essentially about changing direction, and examples of pivoting include:

  • Adding a new feature to a product
  • Using different technology to make a product more affordable, better quality or more reliable
  • Expanding a customer base, often by branching out into a new market
  • Streamlining the way products are manufactured

We recently wrote an article entitled How Innovation Pivots Can Provide Huge Business Boosts During COVID-19 which you may well find useful at this point.

R&D Tax Credits can help fund innovation and make the risks easier to handle

If your company has undergone any innovative projects, however small, then R&D Tax Credits can reduce the costs. Worth as much as 33 pence in every £1 of R&D expenditure, claims can quickly add up to thousands of pounds.

The benefit is offered either as a reduction in Corporation Tax or as a lump sum credit if the company made a loss. Any UK company in any sector can apply as long as a scientific or technological advancement was made in the field.

To find out more and how to apply, see our R&D Tax Credits page or contact our team on 0207 360 4437. Don’t forget, you can also use our Tax Cloud portal to make a great value, fully guided claim that gets your company the tax relief it deserves.

Barrie Dowsett, ACMA, GCMA
Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud
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Meet some of the team behind Tax Cloud

Barrie Dowsett Barrie Dowsett ACMA CGMA Chief Executive Officer
Jillian Chambers Jillian Chambers Technical Analyst/Writer
Lauren Olson Lauren Olson Technical Analyst Manager
Rabia Mohammad Rabia Mohammad Corporate Tax Associate