The Importance of Risk Management in Small, Medium and Micro-Sized Enterprises (SMMEs)
Economy, Opinion
Nkabwela Gerald Banda (KPMG)

The Small, Medium and Micro-sized Enterprises (SMMEs) sector is estimated to account for 97 percent of all businesses in Zambia. SMMEs play an important role in Zambia’s economic development by contributing to the Gross Domestic Product (GDP), employment generation, creating opportunities for future growth, contribution to products and exports as well as facilitating equitable distribution of income.

However, a significant number of SMME’s incur huge losses or ultimately fail due to lack of adequate risk management processes in place.  SMME’s with inadequate risk management processes fail to identify risks with significant impact in a timely manner and fail to adequately address the risks identified with sufficient and appropriate remedies. Therefore, this makes managing risks to reduce and minimize the loss exposure essential and imperative for every small, medium and micro-sized enterprise.

 

Defining Risk Management

Risk management is a process that seeks to eliminate, reduce or control risks, enhance benefits, and avoid negative outcomes from speculative exposures (Anderson and Terp, 2006).  The management of risk is one of the most important issues facing SMME’s in Zambia today and can be the difference between success and failure of the business. Having a process to identify major business risks in place is one of the crucial procedures of running an effective control system in companies. Identification of key risks in a timely manner, considering their likelihood, measuring significance of their financial impact on the business outcomes, establishing priorities for allocating necessary resources and communicating results are among the most important criteria for assessing effects on identification and evaluation of risks and control objectives.

 

What should SME’s lookout for in managing risk?

Small, Medium and Micro-sized Enterprises (SMME’s) by their very nature and definition may not have vast capital or resources compared to multinational corporations, this does not make them any less susceptible to the negative impacts of risks. SMME’s should, therefore, allocate an appropriate amount of resources to managing and mitigating risks.  The risk management framework SMME’s adopt may differ in terms of size and complexity from company to company but must always have the four main pillars highlighted below:

Figure 1: Risk management process. Source: Adapted from Smit (2012)
  • Risk Identification – This is the process of listing potential risks and their characteristics.
  • Risk Evaluation – is the process of determining the significance of the risk and likelihood of occurrence of the risk.
  • Risk Mitigation – This is the strategy of placing appropriate actions in place to eliminate or significantly reduce the impact of the risk.
  • Risk Monitoring – This is an ongoing process that tracks the levels of risks and their impact on the organisation.

An effective risk management process is continuous and does not end at the risk monitoring stage but feeds back into risk identification as highlighted in Figure 1.  It is also important that for SMME’s to have a completely effective risk process a culture of risk management must be encouraged at all levels throughout the organisation.

 

The Benefits of an Effective Risk Management Process

Some of the benefits for SMME’s having a robust risk management process include:

  1. Significant risks are well-identified in time before they occur and appropriate actions are devised to mitigate their impact.
  2. An effective risk management process helps SMME’s identify opportunities for growth and avoid actions that can cause setbacks.
  3. With an effective risk management process, the SMME’s are able to keep track of exactly how much risk they have taken on board and whether these risks are within acceptable levels.
  4. Mitigation or reduction of potential loss after an event has occurred
  5. An effective risk management process highlights operational inefficiencies and can significantly improve the financial performance of SMME’s.

 

Conclusion

For Small, Medium and Micro-Sized Enterprises having a robust risk management process in place is imperative towards their success.  It can mean the difference between their success in, achieving their organisational goals and their failure.  Small, Medium and Micro-Sized Enterprises’ management or those in charge of governance must, therefore, ensure a robust and effective risk management process is in place and is embedded throughout the organisation.

 

Reference List

 

About the author
Nkabwela Gerald Banda is Risk Officer and Supervisor in Finance at KPMG in Zambia. He is a Fellow member of the Zambia Institute of Chartered Accountants (FZICA) and a Fellow member of the Association of Chartered Certified Accountants (FCCA). He holds a Masters degree in Financial Management and a Bachelors degree in Applied Accounting.
The views expressed in this article are his own and not necessarily those of KPMG.

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