“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 serious 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, there are many other risks that all businesses face, some of which are overlooked or ignored.
Types of risks universal for all business entities:
1. Hazard risk: Liability due to wrongdoing, Property damage, Natural catastrophe
2. Financial risk: Pricing risk, Asset risk, Currency risk, Liquidity risk,
3. Operational risk: Customer satisfaction, Product failure, HR related, Reputation.
4. Strategic risk: Competition, Social trend, Capital availability
Why is risk management necessary for SMEs?
It is common to find SMEs survive on thin margin and low capital base. Obviously their risk bearing ability is quite low. Sound risk management should reduce the chance that a particular event will take place and, if it does take place, sound risk management should reduce its impact.
Sound risk management can produce the following benefits:
1. Lower insurance premiums
2. reduced chance that the business may be the target of legal action
3. reduced losses of cash or stock
4. reduced business down time
5. reduced revenue loss
Identifying Risks and How to respond to them
Risk management starts by identifying possible threats and then implements processes to minimise 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:
1. Avoidance: exiting the activities giving rise to risk
2. Reduction: taking action to reduce the likelihood or impact related to the risk
3. Alternative actions: considering other feasible steps to minimize risks.
4. Share or insure: transferring or sharing a portion of the risk, to finance it
5. Accept: no action is taken, due to a cost/benefit decision
Undertake self assessment of Risks:
Every business is unique. However few risks are normally common but impacts to varying degree. We have collated the some sources of risk and tried to estimate the impact and identified some of the remedies to overcome. Please see RISK TOOL KIT FOR SMEs
This kit identifies some of the risks and areas where risks may emerge and it provides some strategies to manage them. However it is not an exhaustive on coverage of risk management. You may therefore need to seek external advice specific to your business circumstances to implement suitable risk management strategies for your business.