Risk Management in SMEs– A process to harmonise survival and growth
ecently Deccan Herald has reported a serious fraud happened in a Bangalore-based private company which likely to push the company to the brink of collapse. (http://www.deccanherald.com/content/539095/cid-ordered-probe-multi-crore.html)
The brief of fraud:
It is reported that 11 officials of the company have misappropriation of funds of Rs 200 crores. Bank staff were also suspected. They used cheques and documents forging signatures of MD of the company.
MD of the company was not aware of what was happening behind him!!!
What might have gone wrong?
One answer could be- poor internal control commensurate with the size of the operation and excessively trusting people than process orientation in managing the affairs. In other words lack of effective risk management.
What is the way forward?
Mere mention about failed internal control may be scary. But it is possible to minimise the damage if we take steps in advance to implement effective risk management practice.
Identifying risks and how to respond to them:
Undesirable events, the probability of their occurring and their possible impact vary considerably from business to business and from industry to industry. How does a business identify and manage these particular risks?
• The first step is to identify the events which could cause a loss or disruption to the business.
• Those events should then be analysed to ascertain the likelihood of their occurring and how serious the result would be if they did occur. Start simply by assessing each event as ‘very likely’, ‘moderately likely’ or ‘very unlikely’. Prioritise them by putting a Rupee value on each one (e.g. the replacement cost of a critical piece of machinery; or in the case of potential bad debts, the total value of amounts owed by customers).
• Attend to the most likely and the most expensive events first.
• For each possible event, develop procedures commensurate with the level of risk the business is willing to accept.
Once a procedure is put in place, it should be monitored to ensure it is properly implemented and is effective.
Refer Risks Management Tool Kit for SMEs to have a broader understanding of various risks and mitigation small business owners need to address.
The obvious question is whether small firms can afford the more detailed risk management process. A Simple thumb rule to decide the intensity of details is the span of control a promoter himself can exercise.