Risk Management: An invisible act against harms for SMEs
Risk management plays a unique role in protecting and sustaining the business yet does not figure in performance metrics. It is invaluable to survive as going concern for SMEs.
Recently we all heard tragic event in Mumbai wherein 15 died in the fire incident in a bar. Upon investigating, it was found that fire safety measures were not in use and escape routes were not available in an emergency. The police have booked the case against owners of pub and owners are put behind bars. Sadly the owners who do not have any criminal record nor had any intention to do so, have to face criminal proceedings for culpable homicide. Upon analysis, one can find that they have not given enough attention to key risks and their mitigation in the event they become reality. In the nutshell, enough thoughts on potential risks and management strategies would have averted the crisis now they are in.
In another instance, I came across an entrepreneur who has been very successfully running his business and has acquired sufficient standing the industry. Swayed by the property price rise, he drifted himself to the idea of building an investment portfolio of properties which he anticipated that will grow much faster than the cash flow from the business. He financed the acquisition of properties by raising the loans anticipating that the business will generate profit to service the debt and did not foresee any risks to it. However, the series of events like demonetisation and introduction of GST along with industry related factors, his anticipated cash flow from business dwindled. One other hand he could not dispose of the properties instantly. Loans borrowed started sticky and pressure from bank and creditors started mounting. His core business which was built assiduously over the decades by a sheer sacrifice from him and his family become a distressed one. While borrowing he did not analyse the probable risks to cash flow from internal and external factors.
There are many such instances in SME space, we have been hearing the news of the burning of industrial units, inventory catching fire in the shops, companies going bust due to actions initiated for non-compliance with regulations, etc. There are many types of harms, hazards, etc, the businesses are exposed to. Further with the passage of time the types of risks, businesses are exposed to also changing. In other words, the exposure to risk is dynamic and continuous for any business.
What is Risk?
A chance of encountering harm, hazard, or danger. Alternatively to expose to a chance of injury. It is also an expression of the danger of an adverse deviation in the actual result from an expected result.
Categories of risks:
There are many examples of risk in small business. In order to identify these risks, it is helpful to consider risks in ‘areas’ or ‘categories’. For example, a business may encounter areas of risk such as ﬁnancial risks, safety risks, reputation risks, or operational risks.
Common Categories of risks are:
a) Financial b) Equipment c) Organisational d) Security
e) Legal & regulatory compliance f) Reputation g) Operational h) Service delivery
i) Commercial j) Project k) Safety l) Stakeholder management m) Strategic n) Technology
Risk Management is a planned method of dealing with potential loss or damage. It is an ongoing process of risk appraisal through various methods and tools which continuously
a) Assess what would go wrong
b) Determine which risks are important to deal with
c) Implement strategies to deal with those risks
Advantages of Risk Management:
• Cultural shift from “firefighting” and “crisis management” to proactive decision making that deals with the potential loss before they arise
• Anticipating risk as to what might go wrong will become a part of everyday business.
• It ensures that risks are taken consciously with full knowledge, clear policies and understanding so that it can be measured and mitigated wherever it is felt necessary
Consequences of No Risk Management:
• Organisation will not have a proper insight into underlying risks in the business
• Decision without complete information or adequate knowledge of underlying risks can sometimes result in catastrophic problems (surprises) without warning with no recovery possible and with no chance to correct the problems
Inhibitors for adoption of Risk management among SMEs in India
Risk management for a business of any size relates to systematic assessment and strategic response to threats. By their nature, small business owners are frequently entrepreneurs, successful and optimistic entrepreneurs. They have the tendency to be confident based on their success in establishing and leading the business, and it might be common for small business owners to put risk management plans down the list of priorities.
Secondly, in a small work environment, every activity is handled or monitored by the entrepreneur himself or with other partners. They are obviously so obsessed with that they give less emphasis on events and activities which are not directly contributing to performance metrics. Efficiency and productivity are a top priority for them.
Thirdly, organisation processes and structures are not so matured to encourage employees and others to open up and discuss the issues of risk in many SMEs.
However in the event risk become reality, the organization owner will ultimately have to take responsibility for the risks.
Risk Management is an invisible act:
Many experts suggest the importance of risk management in ensuring sustainability of the organisation. Any long-standing organisation has its secret of success lies in its robust risk management.
However, risk managers are not treated well by the majority of the employees in any firm- small or big. Because they are seen as obstructionists or people who speak negatively..
Risk Managers do not contribute to the performance metrics. Hence they are invisible. They save the firm by preventing disasters through admonishing the people, improving the systems and policies Since the real impact of risks are not experienced because of their active intervention, their role is not well appreciated in many of the firms and industries.
Remedy for SMEs
Majority of SMEs cannot afford to have a separate team for risk management. But they need to keep updating and embracing new practice to remain sustainable organisation. There are many solutions to avail of benefits of the best risk management practice.
One such method is having a practice of Internal Audit at regular intervals through an outside specialised agency who do not have any other relationship – pecuniary or social bondage with employees and promoters. Internal audit will be a comprehensive tool to unravel the risks.
Secondly, all firms need to build an inventory of risks and that will prompt them to develop robust mitigation approach for their firm. Every industry and location will have a unique set of risks, for which mitigation can be developed in-house or with the help of experts in the industry.
Please see Risk tool Kit for SMEs
Comprehensive risk assessment and continuous appraisal are important to ensure that business will not run into rough weather. Long-term sustainability and blissful entrepreneurial journey embedded to scrupulous adherence to risk management.
Anil Kumar Shetty, Founder SME ADVISORS
We advise on building risk management practice for SMEs.