Owners and managers at start-ups, small companies and mid-sized enterprises can no longer have a cavalier attitude to risk management. Because government, banks and corporate customers recognise how vital they are to the economy and to global supply chains, SMEs are increasingly expected to show that they take a disciplined approach to managing the many risks that their businesses face.
Defining risk management
In this case, a risk refers to the probability of an event occurring that will have damaging consequences for the business. Risk management is about taking steps to prevent such a risk from becoming a reality or to lessen the negative impact of the event if it cannot be completely avoided.
Here are some examples of the risks that your business faces:
1. Operational and IT risks
These risks are all about events or issues that hamper the normal day-to-day running of your business. What if thieves steal Telkom’s copper cable in your area so that you don’t have an office landline for a month? And how will you manage if your office or factory burns down? Could your business keep running if a key staff member is involved in an accident? If one of your key suppliers goes bankrupt, can you source materials or inventory elsewhere?
2. Reputational risk
This class of risk is all about incidents that could harm your business’s brand or reputation. You might think that your chances of appearing in Carte Blanche exposé are small, but even word-of-mouth from unhappy customers can hurt your business. With social media, bad news can spread fast, so even small businesses need to think about risks to their reputation.
3. Financial risk
This is all about any potential threats or risks to your business’s usual cash flow. Can you cope if the bank increases the interest rate on your loan? What if your key customer goes bankrupt or refuses to pay for goods they have bought from you? Are you protected against threats such as internal fraud?
4. Market risks
In a climate of market volatility, changing customer expectations, and rising competition, SMEs must also manage a range of threats related to the social and economic environment. Perhaps you might face unexpected competition, such as the metered taxis competing with Uber. Or changing customer needs might make your product redundant – for example, digital video has put video shops out of business.
5. Compliance risks
Businesses around the world face more and more government red tape, closer scrutiny from tax authorities, and tough regulations. It’s important to ensure that you comply with them – there could be stiff financial penalties for breaches of these rules.
Managing risks in a systemic manner
Risk management is the process of identifying the risks facing your business and the steps you can take to mitigate them. You can follow this process in determining a risk management strategy:
A balancing act
Risk management is a balancing act. There are many risks that can be completely eliminated if you spend enough money, but the costs might be so high that it’s not worth it. For example, you could make your office so secure that it would be nearly impossible for someone to rob it. But the expense would be prohibitive, so it makes more sense to take insurance to transfer the risk and to put in place moderate security precautions to reduce it.
On the other hand, if your business relies on being able to transact online and in real-time, you might want to spend the money it will take to ensure that you always have access to reliable IT and telecoms infrastructure. Thinking about risk management and having a formal policy for your business can help you to remain profitable and sustainable, no matter what the world throws at your company.