How to identify and mitigate risks in a small business
Although small and medium enterprises (SMEs) face a number of the same risks and challenges as large businesses, their limited capacity to absorb subsequent profit losses can severely affect the business’s cash flow, and in extreme cases, lead to bankruptcy.
This is according to Gerschwyne van Wyk, Country Manager at Business Partners Namibia, who said that it is therefore essential for small business owners to establish an effective risk management (ERM) policy to ensure that the business knows how to deal with risks promptly and appropriately.
“Although it is not possible to completely eliminate risk from a business, the first step towards successfully mitigating it is for small business owners to recognise the various types of risk that their business may face,” said van Wyk. “These include strategic risk, compliance risk, internal risk, financial risk and reputational risk.”
In order to assist SME owners in developing their ERM policy, van Wyk lists principles to consider when developing an ERM policy:
Adopt an enterprise-wide approach: The first issue to tackle is to communicate the company’s risk appetite to every employee. Effective risk management is only possible when every member of a company, from top executives to entry level employees, are on the same page in terms of managing all the above mentioned risk aspects.
Assign a risk officer: Every SME needs one team member whose job includes identifying risks, ensuring that the ERM policy is formalised and that procedures are followed. While a small business might not have the budget to add another employee to the business with this express purpose, adapting the job description of one team member to coordinate the company’s ERM policy is crucial.
Be personally involved: Appointing a risk officer does not absolve the business owner from taking control of ERM, and no risk management strategy will ever succeed if a company’s director is not part of the process.
Keep a formal risk-management policy statement: A formal ERM policy statement is much like a mission statement and serves as a guiding principle for managers and workers. If the business owner wants a team that is always looking for opportunities and risks, it needs to be communicated as a company mission.
Schedule risk management discussions: The risk officer may be the central point for ERM planning, but they cannot identify all of the organisation’s risks alone. Regular scheduled meetings on the subject, with all senior staff, are paramount.
Tie risk management to incentives: Part of the organisation-wide approach should also be to offer incentives to team members who find innovative ways to manage enterprise risks. Communication with all levels in the organisation is key, and new perspectives can potentially help the SME owner to solve persistent challenges more easily.
“Although risk is an inherent part of running a business, all companies, regardless of size, can effectively manage and mitigate its adverse outcomes. The greatest challenge faced by small business owners is finding the proper balance between peace of mind and profitability. Attempting to completely eliminate risk from the business is unrealistic, and can even result in a company instituting an ERM policy so risk averse that the business never grows,” concluded van Wyk.