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Sophistication of Risk Management
Subciass
Numbe r o f
employees
Annua l turnover
(mi l l ion Euro )
Ba l ance sheet total
(mi l l ion Euro )
Mi c r o fmn
< 10
< 2
Sma l l flnn
< 50
< 10
Medium-sized f i rm
< 250
< 50
Table 1: Small and Medium-sized Enterprises: EU Subclasses
< 2
< 10
<43
xity. Naturally this has strongly made insecure
many SMEs how such a risk management
should be designed and implemented (see Pla–
cke and Siemes, 2005).
Further uncertainty in SMEs has been provoked
by Basel II, the new international equity capital
regulations on lending by banks
(Coming
into
force on
1
January 2008; Basel Committee on
Banking Supervision, 2003). In connection with
the evaluation and rating process borrowers are
subject to Basel II demands trom the banks to
make
an
assessment as to how the companies
deal with the opportunities and risks presented
by their development. The Basel II regulations
do not explicitly demand to establish a compre-
hensive and strictiy formalized risk manage–
ment
System
(see Basel Committee on Banking
Supervision, 2003). Nevertheless, when rating
an SME, the lending bank will assess the ma–
nagement accounting Instruments and the abi-
lities of management.
For SMEs the estab-
lishment of a risk management system
therefore becomes essential to their sur-
vival, since
it affects their ability to continue
to receive credit from the banks. A risk ma–
nagement
System,
however, is necessary for
SMEs, not only because it is required by law or
by the Basel II regulations, but rather because
it is in the essential interest of the SMEs. The
reason is that such enterprises have a high
Potential to become insolvent and the most
frequent causes of insolvency
are
manage–
ment errors and weaknesses in the
Company
structure. This is especially true during the
first 7 years following the establishment of the
Company
(Günterberg and Kayser, 2004).
Definition of Small to Medium-
sized Enterprises
Workable definitions for quantitative criteria pri-
marily focus on annual turnover and/or the
84
number of employees. Offen a certain criterion
ONTROLLER
of legal independence is also included (Dana,
2006). The European Union utilizes the fol–
lowing definition to group SMEs (Table
1):
To belong to one of the classes micro, small
and medium-sized, a firm must fulfil the fol–
lowing conditions:
1.
The number of employees lies below the re-
spective threshold in Table
1.
Furthermore, at
least one of the thresholds for annual turnover
and balance sheet total is met.
2.
The "legal independence cri–
terion" must be fulfilied: A maxi-
mumof 25 percent is owned by
one or more companies which
themselves do not match the
threshold conditions of No. 1.
The above definition has been
valid since 2005 and is upda-
ted in terms of annual turnover
and balance sheet total at lon–
ger intervals of time (Commis-
sion of the European Commu-
nities, 2003).
Considering the national view-
point, Germany has no official
definition of SMEs. There do exist
individual regulations such as
those in the German Commercial
Code § 267 (HGB) which can be
applied for special purposes,
specifically for the preparation of
accounts. For more general pur–
poses there is a recommendation
from the IfM in Bonn which sets
values for the limiting criteria of
number of employees and of an–
nual turnover.
The EU and the German defini–
tions on the value of the upper
threshold of annual turnover are
identical, but the definitions for the limiting va–
lue tor maximum number of employees vary
greatly. However, the IfM refers to the EU defi–
nition and notes that the EU definition will pro-
bably be adopted in Germany too at some time
in the future (Kayser, 2006). In order to ensure
comparability with other research results, the
EU size dass definitions for SMEs will be taken
as a basis in this paper. Further, an additional
dass from 250 to 499 employees will be inclu–
ded as size measure.
Resarch Design
At the beginning of the investigation in 2004,
only little data was available on the
State
of risk
management in German SMEs. This gave rise
to the decision to determine current risk ma-
Total '
Size bv annua l turnover (Q 1.5)
Mi c ro
(up to 2 mi l l ion t u r o )
Smal l
(more than
2
to 10 mi l l ion Euro)
Med i um (more than 10 to 50 mi l l ion Euro)
L,arge
(more than 50 mi l l ion Euro)
No Statement
Total
22
179
85
7
21
7.0%
57.0%
27 . 1%
2.2%
6.7%
314 100.0%
Size by number or employees (Q 1.6)
Mi c ro
(up to 9 employees)
16 5 . 1%
Smal l
(10 to 49 employees)
47 15.0%
Med i um (50 to 249 employees)
237 75.5%
Large
(250 to 499 employees)
14 4.5%
Total
314 100.0%
Indus t r i a l sector (Q 1.1)
Construction
92 29.3%
Engineering
107 34 . 1%
Information technology
42 13.4%
Auditing/consulting/training
32 10.2%
Trade/service/logistics
41 13.1%
Total
314 100.0%
Lega l Torrn (Q 1.2)
Unincorporated firm
Incorporated finn
Total
61 19.4%
253 80.6%
314 100.0%
Pa r t o r a group (Q 1.3)
Yes
No
Total
117 37.6%
194 62.4%
311 100.0%
Aud i l ed (Q 1.4)
Yes
No
Total
235 76.3%
73 23.7%
308 100.0%
E a r l y wa r n i ng System establ ished (Q 1.9a)
Estabi ished
Planned
Not planned
Total
196 63.6%
74 24.0%
38 12.3%
308 100.0%
Table 2: Descriptive Statistics of Questionnaire Respondents