Business risk management is an essential aspect of business operation. It assists businesses in eradicating the detrimental activities and promoting the beneficial ones. Consequently, every business should utilize the concept of business risk management. Studies have mostly focused on big businesses in relation to the management of business risks. However, the importance of SMEs has become evident. Therefore, the current paper aims at conducting an analysis of the importance of the business risk management to SMEs. It presents an evaluation of the assertion that “Business risk management is of no value to small enterprises.” It also entails the use of theoretical models that revolve around business risk management in relation to SMEs. The structure of the assignment will include the sections about the nature of BRM in the SMEs, definition of traits of the SMEs, advantages of BRM, limits of BRM, and analysis of the SMEs perspective.
Nature of Business Risk Management (BRM)
Risk is the combination of the probability of an event and its impacts (Crouhy, Dan and Robert 4). It is the possibility of an event and its effect that constitute benefits or impediments to success in an undertaking (IRM 2). In an enterprise, identification of a hazard has both a helpful and a harmful aspects. Consequently, both the benefits and threats to the success of business operations are considered in the assessment of risk. When focusing on safety, risk only takes the perspective of negative consequences (Spedding and Adam 126). As a result, it focuses on the alleviation and avoidance of harm. Threat management is vital in organizations’ tactical management. It entails a process where organizations tackle the risks connected to their actions with the objective of attaining constant benefit within individual activities and across a range of all actions (IRM 2). Businesses are affected by both interior and exterior factors relating to risks. Some risks can be categorized as external, while others are internal. However, there can be overlapping of some risks, which makes them both internally and externally driven. Some of the external risk factors include competition, credit, interest rates, industry changes, environment, culture, and regulations, among others. Some of the internal drivers include information systems, accounting controls, liquidity and cash flow, intellectual capital, and research and development, among others. However, some of the overlapping risk drivers include staffing, employees, and properties (Toledo 4).
Business risk management takes different phases and it can be implemented on different stages in the business life-cycle. There are business start-up risk, business permanence risk, and business termination (COSO 4). There are different models provided for the threat management procedure. In order to explain the process, this report will utilize the Abridged Model. It has five stages which assist in the management of risk (Holmes 52). The first step entails business environment audit. It involves both interior and exterior sources of risks in the enterprise. The business has to perform the assessment of the risks and recognize the sources so as to develop a plan on the mitigation of the risks. The second step involves risk identification and assessment. It entails identifying the actual risks that the business is facing, and assessing their impacts. The third step involves risk mitigating strategies. These are the strategies that the organization should embrace in order to eradicate or prevent the risks.
It is the planning stage of the model; hence, the organization has to incorporate all the planning strategies required to ensure that the once it is implemented, it serves the targeted purpose. The fourth stage is the implementation stage, and it is the time when the organization puts the strategies set in the third stage into practice. The implementation stage is usually difficult due to the resistance from the workforce. Usually, when an organization faces change resistance, it is usually rife (Sonneberg 45). Consequently, it makes it difficult to implement any changes. The fifth stage is the feedback, and it entails evaluating the entire process and getting feedback on whether the plan succeeded as intended. If it is agreed that the process is not successful, it has to be repeated until the organization has been able to mitigate and prevent risks.
SMEs: Defining Characteristics
There is no particular universally approved meaning of an SME. Diverse aspects, such as sales, assets’ value, and the number of workers, are considered in an effort to identify small businesses and medium enterprises. However, most of the literature has adopted the definition given by the European Commission, in which SME is a business that has less than 250 employees, and its balance sheet total does not exceed forty-three million euros, or its revenue per annum does not exceed fifty million euros (European Commission 2). However, the United States uses a different criterion, with SMEs constituting those that have less than five hundred employees. The literature reviewed in the study uses both of the definitions, and at times refers to SMEs as small businesses. Small and medium enterprises are an essential part of the world economy. They represent almost the entire private sector and employ more than fourteen million people, or fifty nine percent of all the employees of the private sector, and it has about forty-eight percent of the private sector’s revenue (FSB 1). At the same time, small enterprises account for forty-seven percent of all jobs in the private sector, and revenue of thirty-three percent (FSB 1).
Majority of the economies have begun appreciating the contribution and value of the SMEs. The main reason is their innovativeness, dynamism, quicker process of making a verdict, and efficiency (Floyd and Anthony 56). SMEs are beneficial in numerous ways including job creation, opportunities to reduce income disparities, and development of a collection of expert and semi-skilled employees (Gilman 37). They also offer prospects for the development and adaptation of appropriate approaches to technology. Stimulating innovation by the SMEs has led to an immense development in the economy. In addition, most SMEs do not require massive start-up capital; therefore, it is easier to start them. Increase in the SMES spurs the competition in various industries, which is essential in raising productivity, as well as stimulation of economic development. Job creation is also a significant impact of the SMEs, and it has prompted various governments to establish policies that ease and motivate the establishment of SMEs. SMEs are driven by entrepreneurship, which assists in ensuring that they develop and meet the objectives of their owners.
Benefits of BRM
Business risk management is beneficial to businesses in numerous ways (Accharrya 23). Some of the advantages of implementing a business risk management include:
- It forces the management to think about issues relating to the business, including strategies, aims and objectives. When an organization has a business risk management strategy, the management has to ensure that it adheres to the business strategy. Among the steps involved in the implementation of a BRM model, there has to be the assessment and analysis stage. It involves checking the organization’s position so as to identify whether the business is meeting its targets and whether it is necessary to alter its operations in order to avoid the potential risks.
- It assists in the configuration of risk appetite and tactic. The risk appetite is the amount of risk that an enterprise is prepared to seize so as to meet its objectives. It is important for an organization to have a connection between its strategy and the risks that it can take.
- It also reduces the operational losses and surprises associated with unseen risks. When an organization implements its strategy on BRM, it identifies and mitigates potential risks.
- It also enhances risk response strategies as the business has planned for the potential risks. In addition, it analyses available responses to risks, and chooses the most appropriate ones in the organization’s situation. Therefore, in the event when a risk occurs, the business can mitigate it in time and appropriately.
- It enables businesses to deal with threats efficiently. When analyzing the business risks, the company checks on available approaches, and those that have worked in other organizations. Consequently, when faced with a threat, the company deals with it effectively.
- BRM links the organization’s growth, risk and return. When a business has an efficient business risk management strategy, it grows as the risk is reduced, and its returns increase. It emanates from the elimination of costs associated with risks.
- It also creates pressure for the organizations to become innovative. It assists in identifying the risks facing the organization. These risks require to be mitigated, and the business has to develop new approaches to deal with them. It is especially common when the risk is new or it has developed from the dynamic nature of an industry.
Limitations of BRM
Although the implementation of the BRM is vital, there are limitations to the process. Some of the limitations include:
- BRM is potentially time consuming and costly. When an organization has to implement the BRM, it has to take time for the entire process to be done. Additionally, it requires funding for the processes involved. Among the processes are research and development, which may be expensive for some organizations.
- It relies on extensive knowledge of information, which an organization may lack. In case where an organization does not have sufficient information relating to BRM, it cannot develop efficient means of mitigating the risks.
- BRM may lead to an overload of information, which can further result in decision paralysis. When the information available to the organization is too diverse, the management may be unable to make decisions as it may realize that all available options are linked to risks. Additionally, it may take a lot of time to make decisions as risk analysis is required prior to finalizing a decision.
- Since not all risks are known, businesses face problems of anticipating them. At times, a business may invest a lot towards BRM, but still, a risk, which had not been identified, hits it.
- Since the process requires agreement on the magnitude of the risks in the management, there may be disagreements and conflicts. Such disagreements may be detrimental to the business, and it may lead to a failure to achieve its objectives.
SMEs in Context
The SMEs require BRM so as to remain relevant in the industry. Organizations that have implemented BRM face fewer risks of failure. In addition, they have the necessary strategies to ensure that they can combat the risks (Henschel 44). For example, an internet company that falls under the SME category needs to have its business risk management strategy. It will assist it to understand the changes in the industry and the risks that it may pose to the company. Consequently, it is necessary for such a company to understand the risks and mitigate them so as to remain in business. The SMEs have a small size; hence, decision making is usually quick. Since there may be only a single manager, deciding takes little time, thus finalizing on the implementation quickly (Trehan 1). However, the small size may limit their ability to finance the process it requires funds.
Additionally, the management may lack the expertise needed to identify all the kinds of risks that the organization may face. Since SMEs do not have a lot of revenue, they may not be in a position to hire experts to undertake the task; as a result, even if they have a BRM strategy, it may not cover the organization completely. However, it is important. as it enhances their ability to respond to the risks, and as such, their development is enhanced. The SMEs are also able to seize opportunities as they have already conducted relevant research on the risks that may be involved and the way that they should be combated. The management, as well as other employees, becomes innovative as they analyze the risks and develop mitigating strategies. However, with all the benefits and limitations involved, it is vital for the SMEs to have a BRM strategy, as it will enhance their sustainability in the industry (Virdi 54).
Summary and Conclusion
I do not believe that SMEs do not need business risk management. Every company requires implementing its BRM strategy. It will promote its growth and revenue, and sustainability in the industry. Although the process requires funding, it cannot be said to be more expensive than the probable impact of the risks. If an SME fails to have a BRM, it may not survive the impact if the risks that hit it. In addition, most companies have embraced the strategy. Therefore, for a company to remain competitive, it needs to be aware of the risks that may be faced. In addition, it is vital to ensure that the BRM strategy fits for the company. Understanding the nature of the industry is also essential. It assists in the development of mitigation strategies that fit the industry.