Risk Management

Why Mid-caps Can’t Fund Overseas Growth

The lack of risk management plans among smaller firms may be scaring lenders away.
Marie LeoneSeptember 13, 2007

In this era of global markets, many smaller manufacturing and distribution companies still find it difficult to expand overseas. One possible reason: their bankers don’t think they have a handle on the risks.

According to research by RSM McGladrey, small and mid-size companies say that the biggest stumbling block to expanding overseas is “lack of financing,” specifically obtaining bank loans. Moreover, the funding problem is directly tied to risk management, asserts Tom Murphy, executive vice president of RSM’s manufacturing and wholesale distribution practice.

Smaller companies that want to use bank financing to expand overseas or develop new products for international markets will likely have to produce a business plan, rather than just a balance sheet, contends Murphy. And the business plan needs to include a systemic risk management strategy, avers the consultant. “Every bank wants to know how much money is being spent and be able to monitor a company’s progress.”

Only 13 percent of the 947 senior executives polled — 100 of them were CFOs — said that their companies have what RSM considers fundamental risk management: an independent audit committee to oversee risk management activities; a corporate risk management assessment process; and an internal audit function to manage the risk. Of that number, most of the companies were larger corporations, those generating $500 million or more in annual revenues.

The majority of executives claimed to have no risk management program at all. That is, 54 percent of the respondents, most from small (under $15 million in revenues) and mid-size (between $15 million and $499 million) companies, admitted to having adopted none of what RSM considers the three basic risk management processes. Those missing pieces leave smaller companies “vulnerable” to fraud, non-compliance with regulations, and lack of preparedness for catastrophic disasters, says Murphy, risks that lenders shun.

Moreover, executives at companies that lacked fundamental risk management didn’t seem to care about their exposure: 44 percent of those respondents said they were “comfortable” with their company’s management of risk. Conversely, executives from companies that already instituted all three risk management processes turned out to be a more concerned group. Those senior staffers said that they were either “not comfortable” or felt neither one way or the other about their company’s efforts.

Other barriers to international expansion that grabbed at least 20 percent of the vote included threat of intellectual property theft (28 percent) and lack of importing/exporting expertise (21 percent).

The annual survey also assessed tax credit usage at manufacturing and distribution companies, another topic on the CFO radar screen. Executives were polled on six federal tax strategies, as well as state and local tax credits. The results reveal that research and development tax credits are the most frequently used benefits, with 58 percent of the executives claiming to use them. State and local tax credits were ranked second, with 48 percent of the respondents confirming their use. About 7 percent of those polled said that their companies did not use tax credits at all.