Why Risk Management is Key to success of SMEs

FRANCIS ZIBA writes@SunZambianTHE current uncertain economic times have had a major effect on how companies operate these days and going forward. Small and Medium Enterprises (SMEs) that used to operate smoothly with the help of forecasts and projections will now have to refrain from making business judgements that are cast in stone. With COVID-19 firmly becoming the new normal in our midst, companies have a renewed focus: to manage risk!Risk is the main cause of uncertainty in any organization and has become inherent to every part of any business. Companies need to take risk in order to grow, become profitable, and contribute to the economy. Thus, companies increasingly focus more on identifying risks and managing them before they even affect the business. The ability to manage risk will help companies act confidently on future business decisions. Their knowledge of risks they are facing will give them various options on how to deal with potential problems. Early recognition and mitigation of risk is a critical factor for success in all types of businesses, even more for small and medium enterprises including start-ups, as the cushion for absorbing failure is relatively low. Some of the examples of ineffective risk management leading to failure would be – incorrect market understanding, operational challenges like – managing product quality, alignment to customer need, managing team members, incorrect expansion plans etc.Effective risk management has become a critical factor for the success of businesses such that without it, a firm cannot possibly define its objectives for the future. If a company defines objectives without taking the risks into consideration, chances are that they will lose direction once any of these risks hit home. And this is the more reason, companies need to incorporate risk management processes in their strategic plans from inception.Risk management is a new phenomenal in Zambia and recently, many companies including those in the public sector have added the risk management function to their teams. The role of this function is to identify risks, come up with strategies to guard against these risks, to execute these strategies, and to motivate all members of the company to cooperate in these strategies. Risk Management also encompasses multiple activities that a risk manager has to perform, to ensure maximization of business value.It is important to remember that risks do not always come from negative sources or events. Risks can also originate from positive sources such as company growth or opportunities. When companies grow and expand, they may face new and different risks. The goal of risk management therefore is to minimize the risks a company faces and must manage.Larger organisations generally face more risks, so their risk management strategies also need to be more sophisticated. Also, the risk management team is responsible for assessing each risk and determining which of them are critical for the business. The critical risks are those that could have an adverse impact on the business; these should then be given importance and should be prioritized. The whole goal of risk management is to make sure that the company only takes the risks that will help it achieve its primary objectives while keeping all other risks under control.To ensure proper positioning and ongoing success, businesses and especially SMEs, will have to understand that risk is omnipresent, and needs to be managed in all business processes like finance, procurement, sales and marketing, manufacturing, logistics. This is why Risk Managers design risk-mitigating frameworks in a way that encompasses all activities that can affect the marketability of the product to ensure success for the business. These frameworks allows businesses to attempt to prepare for the unexpected by minimizing risks and extra costs before they happen.It is important to also note that risk management in SMEs provides a framework to deal with and to react to uncertainty. Whilst it acknowledges that nothing in life is certain, the modern practice of risk management is a systematic and comprehensive approach, drawing on transferable tools and techniques. These basic principles are sector-independent and should improve business resilience, increase predictability and contribute to improved returns. This is particularly important given the pace of change of life today.By implementing a risk management plan and considering the various potential risks or events before they occur, SMEs can save money and protect their future. This is because a robust risk management plan will help a company establish procedures to avoid potential threats, minimize their impact should they occur and cope with the results. This ability to understand and control risks enables organizations to be more confident in their business decisions. Furthermore, strong corporate governance principles that focus specifically on risk management can help SMEs attain their goals.For comments and feedback contact: fziba@irmza.org The Sun