Business

Risk management is for all companies — not just the giants

Effective risk management can help smaller companies navigate uncertainty and identify opportunities.

Effective risk management can help smaller companies navigate uncertainty and identify opportunities. Image: Getty Images/iStockphoto

Hersh Shah
Chief Executive Officer, Institute of Risk Management - India Affiliate
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  • Micro, Small, and Medium Enterprises (MSMEs) are critical to economies worldwide.
  • They account for 90% of all businesses worldwide and account for half of global GDP.
  • In an increasingly unpredictable world, they must embrace risk management — a business practice once thought reserved just for the giants of the business world.

Micro, Small, and Medium Enterprises (MSMEs) are the lifeblood of many economies globally. They are pivotal in driving economic growth, creating jobs and fostering innovation.

According to the United Nations, MSMEs account for 90% of businesses, 60 to 70% of employment and 50% of GDP worldwide.

MSMEs are agile, can quickly adapt to market changes and often fill gaps in the market that larger corporations might overlook. They are usually highly adaptable and stimulate local economies by encouraging entrepreneurship and supporting vulnerable populations. MSMEs contribute to a diversified and resilient economic base, which is crucial for stability and long-term prosperity.

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MSMEs often act as ancillary units for larger enterprises, forming a vital part of the supply chain ecosystem. Their survival ensures the smooth functioning of bigger industries and contributes to the overall productivity and efficiency of the economy.

By providing employment and fostering entrepreneurship, MSMEs also contribute to social stability. They offer avenues for income generation, reducing income inequalities and ensuring more equitable wealth distribution.

The health and survival of MSMEs are intertwined with a nation's economic vitality. Their failure could lead to massive job losses, reduced innovation and a significant downturn in economic activity, causing systemic disruptions that could threaten wider economic systems.

Risk taking and risk appetite in MSMEs

Risk-taking is a quintessential aspect of entrepreneurship, and MSMEs are no exception. In fact, entrepreneurs are supposed to be the best risk managers — but issues arise when passion exceeds reality and an entrepreneur loses sight of the risk appetite and risk tolerance.

The Institute of Risk Management defines risk appetite as “the amount of risk that an organization is willing to seek or accept in the pursuit of its long-term objectives”. It further defines risk tolerance as “the boundaries of risk-taking outside of which the organization is not prepared to venture in the pursuit of its long-term objectives.”

To set the risk appetite and tolerance, MSMEs must first understand the risk universe and implement a basic ERM (Enterprise Risk Management) process. The risk universe is the full range of risks that could impact, positively or negatively, on the ability to meet long-term objectives.

MSMEs are vulnerable to a myriad of risks — financial, geopolitical, operational and because of their exposure to wider markets — that can impact their operations and sustainability. Each of these risks, while challenging, also presents opportunities for MSMEs to innovate and adapt in a dynamic business environment.

Building risk management processes for MSMEs

Setting up an ERM process involves a structured approach tailored to the specific needs, scale and challenges of MSMEs. ERM should not be considered an expense but an investment towards risk-readiness. While several regulations and guidelines mandate ERM for large organizations, here's how MSMEs can begin their ERM journey:

Work on the culture: Begin by securing commitment at the top. The involvement of the promoters and leadership is crucial. They should set the importance of ERM and allocate resources for its effective implementation.

Designate a Risk Officer: MSMEs may not have the necessary budgets to hire a dedicated Chief Risk Officer. Instead, they can identify an officer internally who can undergo the globally recognised ERM certification and then function as the designated Risk Officer.

Establish a risk management framework: Develop policies and procedures for risk management. This involves defining roles and responsibilities, setting risk tolerance levels and detailing the methods and tools used in risk management.

Identify risk champions: Risk champions are designated professionals across each department responsible for periodic risk identification and implementing risk management policies. The Risk Champions should also be put through formal training in ERM in collaboration with certifying bodies regularly and work closely with the leading Risk Officer.

Carry out a risk assessment: Identify, analyze and prioritize risks. Potential risks, whether operational, financial, strategic, or external, must be evaluated and their impact and likelihood quantified. From there, they can be ranked and prioritized, with appropriate response strategies developed.

Monitor and report continuously: Implement a system to continuously monitor and report on risks. Regularly review and update the risk profile, and ensure that any new risks or changes to existing risks are identified and addressed promptly. Consider using affordable online risk management software or tools that are tailored to MSMEs.

The opportunity of risk management

By integrating ERM into the fabric of their operations, MSMEs can better navigate uncertainties, optimize their decision-making processes and enhance their resilience in the face of potential challenges. Furthermore, by implementing ERM, MSMEs can showcase good governance practices to build confidence among stakeholders, including investors, creditors, suppliers and customers.

Demonstrating a proactive approach to risk management indicates that a business is forward-thinking and prepared for unforeseen challenges, fostering trust and strengthening business relationships.

While ERM may seem like a domain reserved for larger corporations, its principles are universally beneficial. For MSMEs, integrating ERM can be the difference between thriving in uncertainty and being overwhelmed by it.

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