“Risk is like fire: If controlled, it will help you; if uncontrolled, it will rise up and destroy you.”-Theodore Roosevelt
Small to medium businesses are exposed to risks all the time. Such risks can directly affect day-to-day operations, decrease revenue, or increase expenses. Their impact may be severe enough for the business to fail. Most business owners know instinctively that they should have insurance policies to cover risks to life and property. However, many other risks are faced by businesses, some of which are overlooked or ignored.
Types of risks universal for all business entities:
➢ Hazard risk: Liability due to wrongdoing, Property damage, Natural catastrophe
➢ Financial risk: Pricing risk, Asset risk, Currency risk, Liquidity risk,
➢ Operational risk: Customer satisfaction, Product failure, HR-related, Reputation.
➢ Strategic risk: Competition, Social trends, Capital availability
Why is risk management necessary for SMEs?
It is common to find SMEs survive on thin margins and low capital bases. As a result, their risk-bearing ability is relatively low. Sound risk management should reduce the chance that a particular event will occur, and if it does, sound risk management should reduce its impact.
Sound risk management can produce the following benefits:
- Lower insurance premiums
- Reduced chance that the business may be the target of legal action
- Reduced losses of cash or stock
- Reduced business downtime
- Reduced revenue loss
Identifying risks and how to respond to them
Risk management starts by identifying possible threats and implementing processes to minimize or negate them. Please see How does a business identify and manage the risks specific to business
The risk response strategy for specific risks identified and analyzed may include the following:
a) Avoidance: exiting the activities giving rise to the risk
b) Reduction: taking action to reduce the likelihood or impact related to the risk
c) Alternative actions: considering other feasible steps to minimize risks.
d) Share or insure: transferring or sharing a portion of the risk or financing it
e) Accept: no action is taken due to a cost/benefit decision
Undertake self-assessment of Risks:
Every business is unique. However, few risks are typically common but impact to varying degrees. We have collated some sources of risk, tried to estimate the impact, and identified some remedies to overcome. Please see RISK TOOL KIT FOR SMEs.
This kit identifies some of the risks and areas where they may emerge and provides some strategies to manage them. However, it is not exhaustive on coverage of risk management. So, you may need to seek external advice specific to your business circumstances to implement appropriate risk management strategies for your business.