The role of Small and Medium-scale Enterprises in any nation cannot be overemphasized. Small scale businesses have contributed, in no small measure, to the growth of our economy. Through the establishment and existence of small scale businesses, the risk, crime rate and the rate of unemployment have been reduced to a great extent.
One of the key issues that plague Small, Medium Scale Enterprises (SMEs) is sustainability. SMEs are exposed to risks all the time. Such risks can directly affect day-to-day operations, decrease revenue or increase expenses.1 Their impact may be serious enough for the business to fail.
Risk can be broadly defined as any occurrence that can impact the objectives of a business entity.
FACTS ABOUT RISK MANAGEMENT
- Risk Management is an ongoing process that can help improve operations, prioritize resources, ensure regulatory compliance, achieve performance targets, improve financial stability and ultimately, prevent loss/damage to the entity.2
- Risk Management plays a key role in protecting assets and resources, along with ensuring that risks are reduced to an acceptable level.
- The essence of risk management is to reduce the risks to a reasonable and manageable level, on an on-going basis.
- Sound risk management reduces the chances that a particular event will take place. it does take place, sound risk management should reduce its impact.
STEPS IN RISK MANAGEMENT PROCESS
No doubt, many business entities need robust risk management systems but for MSMEs, it is a priority. This because they may not have the ability to manage and control risks due to their size and several limitations.
Risks can be rated as low, medium or high depending on your risk appetite.In building a sound risk management system, it is important to follow these 5 steps begin with categorizing risks
Step 1: Identify the Risk.
You should uncover, recognize and describe risks that might affect your business or its outcomes. There are a number of techniques you can use to find business risks, this is where you prepare your risk register.
Step 2: Analyze the risk.
Once risks are identified, you determine the likelihood and consequence of each risk. You develop an understanding of the nature of the risk and its potential to affect your business’ goals and objectives. You input these information in the risk register.
Step 3: Evaluate or Rank the Risk.
You evaluate or rank the risk by determining the risk magnitude. You make decisions about whether the risk is acceptable, or whether it is serious enough to warrant treatment. These risk rankings are also added to your risk register.
Step 4: Treat the Risk.
This is also referred to as Risk Response Planning. During this step, you assess your highest ranked risks and set out a plan to treat or modify these risks to achieve acceptable risk levels. How can you minimize the probability of the negative risks as well as enhancing the opportunities? You create risk mitigation strategies, preventive plans and contingency plans in this step. Thereafter add the risk treatment measures for the highest ranking or most serious risks to your risk register.
Step 5: Monitor and Review the risk.
This is the step where you take your project risk register and use it to monitor, track and review risks.
TYPES OF RISKS AND MITIGATION STEPS
1. Risk of Single point of failure
“A single point of failure (SPOF) is when the failure of a unit leads to the breakdown in the entire workplace or general system.” SPOF analysis is the “process of identifying, mitigating, and removing any part of a business process and system whose failure would paralyze the entire process or render it redundant.” 3
Where you have any of the following situations amongst others, you will require SPOF analysis:
- If the resignation or death of a key staff affects the smooth running of your business.
- The failure in your internet connections affects your service delivery for days or more.
- If the shutdown of your supplier’s plant affects your production for weeks or months.
IMPACT & LIKELIHOOD:
Consider the following potential outcomes
- Partial and / or total loss of business
- Loss of customers to competitors
- Loss of capital
- Accumulation of huge debts
- Reputational issues / risk
- Total closure of business
- Carry out a thorough audit of your process
- Identify any SPOF
- Make extra efforts to mitigate it.
- Ensure that effective and sustainable plans are put in place to tackle any future occurrence.
2. Diversion of funds
This is the use of funds (especially bank loans), for purposes other than which it was approved. Be disciplined enough to avoid diversion of funds. Remember that the lender assessed your business and loan purpose prior to approval and disbursement.
IMPACT & LIKELIHOOD
Delay in loan repayment. Diversion might be dangerous as repayment might be difficult. Imagine forcing an unfed fowl to lay quality eggs, the same applies to making your business to pay a loan you never invested into it.
- Leads to poor credit rating.
- Denial of future credit facilities
- Avoidance is the key mitigation in this case. Avoid diversion! Be focused!
This is when you have different loans with different lending institutions. Several finance and lending institutions will definitely call you for loans to upgrade your business after COVID-19 pandemic. The onus is on you to determine which is appropriate at every point in time.
3. Multiple loans
IMPACT AND LIKELIHOOD
- It negatively your credit rating when you have several bad loans with different financial institutions.
- Denial of future loans.
- Delay in processing of new loans.
- Denial of securing a higher loan (repeat or downgraded).
- Determine and agree on the percentage of loan to your equity.
- Avoid multiple loans as much as possible except where you can pay it conveniently.
4.Risk of High receivables
Some of your customers have little or no cash to run their businesses, hence, the need to sell on credit is high.
IMPACT & LIKELIHOOD
- Loss of capital (in part or whole if not properly managed)
- Reduced stock level.
- Loss of profit
- Increased in debt / borrowing
- Set a receivable limit.
- Sell only on credit to well-known customers.
- Avail customers with good credit history records.
- Avoid selling to hit-and-run customers.
5. Risk of Theft, robbery/burglary, fraudulent deals
Due to the impact of COVID-19 pandemic on individuals and households, theft and robbery are likely to occur. This might come from your customers, members of staff or outsiders.
- Put proper mitigation checks in place as this might ground your business depending on the impact.
- Hire security guard, CCTV.
- Payment into banks instead of accepting cash.
- Regular stock-taking.
- Consider buying from confirmed sources only.
6. High labour turnover
Post COVID-19 will be welcomed with high labour turnover. This might be due to various reasons such as the need to start own businesses, reduction in current salary, need to seek for a greener pasture abroad. You can have a pool of candidates to contact in case there are resignations with short or no notice period. Do your best to retain your staff, especially key and competent ones.
7. Concentration risk
Try as much as possible to diversify your customer base after COVID-19. Assuming all your customers are in the education sector, transport sector, aviation sector, Oil and Gas etc. Remember the recent ban of motorcycles and tricycles in certain parts of Lagos? You are encouraged as well to diversify your sources of inflow. If there is another pandemic next year, will your business be badly affected as it is in the period of COVID-19? Think of other related businesses / services you can render or offer to both your current and potential clients.
Many new entrants will invade business scenes after COVID-19. Several people who have huge funds in the money market were planning on where to invest before the outbreak of COVID-19. These set of investors are warming up to join the business race. Hence, the competition will be stiffer than ever before now.
IMPACT AND LIKELIHOOD
- Loss of existing customers
- Shortage in patronage level
- Reduction in profit
- Loss in market share
- Offer unparalleled customer service that will attract repeat purchases.
- Add variates of products and services.
- Use price penetration strategy as applicable
Risk management is important in an organization because without it, a firm cannot possibly define its objectives for the future. If a company defines objectives without taking the risks into consideration, chances are that they will lose direction once any of these risks hit home.