Exxperientia | Aug 12,2020
No doubt any business entity needs a robust risk management framework but the small and medium enterprises (SMEs) need much more than that as they may not have financial resources and professional ability to manage and control risks due to their very size and several limitations. As a result of their size and access to capital, small businesses face more acute challenges than ordinary businesses.
The SME sectors are exposed to some specific risks, some of which are:
Operational Risk: Operational Risks for an organisation include. These operational risks have emerged as an significant set of risks in business.
1. IT, interface, information and other system failures and deficiencies
2. confidentiality or security breaches
3. human error
4. fraud and theft
5. weaknesses in internal controls or supervision
6. physical disasters
7. manufacturing and other core business failures
8. product liability and other legal risks
9. delivery failures
10. health and safety / regulatory / compliance requirements
11. staff resource deficiencies (including succession)
12. Dependency on third party contractors or outsourcing.
Financial Risk: Financial risks include market risk, interest rate risk, foreign exchange risk, asset liability mismatch risk etc. Many SMEs do not do enough analysis of the financial risks they are exposed to in their day-to-day transactions. These risks are required to be identified, analysed and accordingly managed to optimise the business performance.
Product risk: Product Risk can be categorised under the following main headings:
1. Product definition
2. Development team
5. Manufacturing outside resources
6. Quality and legal
7. Sales and distribution.
Liquidity risk: Liquidity risk can be described as the risk of not having sufficient cash to meet operational needs at all times. It is concerned with the form in which resources are held.
External Party Risk: SMEs can outsource their finance, administration or payroll/HR functions. However, such outsourcing vendors have to be managed to ensure the quality and timeliness of their deliverables.
Credit Risk: Many SMEs are typically dependent on a few major customers due to limited resources. A default or slowdown in payments by one or two such customers could add immense pressure to their already tight cash-flow situation. Small businesses need to be more stringent in managing credit risks due to their lack of resources. Before giving credit to a potential customer, an SME has to be diligent in performing credit assessment on the customer's ability to make payments.
In order to manage risks at every step, we need to first conduct an effective and efficient internal analysis and review of all the departments to understand the standard operating process.
The process will give rise to a number of risks which may be financial or non-financial risk. We need to identify all the risks and categorise them into various categories such as market risk, business risk, credit risk, liquidity risk, operational risk, regulatory and external risk.
We need to assess the frequency and severity of various risks identified and also understands their correlations. Depending on the analysis we may decide to Avoid or Reduce or transfer or retain various identified risks.