Risk Mitigation Strategies and Management Plan for Micro, Small and Medium Enterprises (MSMEs)

By Dr Peter Ayim

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The Art of Strategic Planning for MSMEs
Dr Peter Ayim

Risk Mitigation seem to be alien and usually never mentioned in the conversation about Micro, Small and Medium Enterprises. Important as the subject matter may seem, it is rarely a subject of conversation among MSMEs. This is a clear indication of the fact that either MSMEs are outrightly ignorant of the critical imperative of Risk Mitigation or lack the skill and capacity to mainstream and articulate a comprehensive Risk Mitigation Plan for their businesses.

A Risk Mitigation Plan is very critical to the survival and growth of any business.It is not only an integral component of a Business Plan for internal control and accountability purposes but also a critical credit assessment determinant.Financial Service Providers are very particular about the Risk Mitigation Plan of any enterprise that is seeking for a credit facility.

Doing business is innately associated with tremendous uncertainties that can oftentimes be beyond the comprehension and capacity of enterprise operators to respond to or handle effectively.

Depending on the degree of the impact of the threats, the resilience of MSME is largely dependent on their pre-emptive capacity to perceive, prepare for and manage unforeseen circumstances.

Evidently, the awareness of the imperative of a Business Risk Mitigation is lacking among MSMEs and the capacity to assess and plan for risk mitigation and management remains a major challenge for Micro, Small and Medium Enterprises (MSMEs).

That is why most MSMEs are always caught napping and usually disrupted whenever there is a sudden negative shock. Most MSMEs are not able to recover and rebound from the impact of negative occurrences.

Risk mitigation is the process of planning for disasters and having a way to lessen negative impacts.

What is a Risk?

Generally speaking, risk are uncertainties that constitutes potential or possible threat, danger or actual harm.Contextually, the term Risk is variously defined depending on the perception of the authority or the context.

For instance, while the Oxford Dictionary defines Risk as a “Situation involving exposure to danger. Possibility of loss or danger”, Mirriam Webster Dictionary defines Risk as a “Probability of an unwanted event that translates to unwanted event” and Ostrom and Wilhelmsen defines the term Risk as the “Measure of economic loss, human injury, or environmental damage both in terms of both the incident likelihood and the magnitude of the loss, injury or damage”.

Just as risk constitutes potential or possible threat, danger or actual harm to humans so it is with a Business.

What is Business Risk?

According to the Business Dictionary, Risk is “A probability or threat of damage, injury or loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through pre-emptive actions.

The Economic Times also posits that “Business Risk implies future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain from an investment”.

For Micro, Small and Medium Enterprises (MSMEs), risk can be said to be uncertainties that can manifest in different forms comprising of human error or negligence or natural disasters that constitutes potential and possible threat, damage or loss to a business.

How can MSMEs Mitigation Risks

Some risks can be perceived while others may be unforeseen.MSMEs can mitigate their business risks by assessing all potential risks associated with their business and design a comprehensive risk mitigation plan.

Risk mitigation is a business strategy that is prepared to lessen the effects of threats faced by a business. Comparable to risk reduction, risk mitigation takes steps to reduce the negative effects of threats and disasters.

Strategies for Mitigating Risks

There are basically four strategies for Reducing or Mitigating Business Risk is what I have chosen to refer as MATA and these includes; Risk Mitigation, Risk Avoidance, Risk Transfer, Risk Acceptance.

Risk Mitigation simply refers to putting in place practical measures that will reduce the impact of potential risks to the business to a tolerable level.This suggests that business risks may not be completely eradicated but the impact of any sudden shock can be substantially reduced.

Risk Avoidance is a risk mitigation strategy that is designed to completely avoid potential risks in its entirety.

MSMEs must learn how to assess and identify such potential risks and plan on how to respond effectively in the event of any unforeseen circumstances.

A Risk Avoidance strategy is designed to avert unnecessary pitfalls. Avoiding risk is a function of the capacity of the MSMEs to make effective business decisions that does not put the operations of the business in jeopardy or that could cause the business to incur avoidable losses.

Risk Transfer Strategy simply refers to transferring potential risks to a third party to cushion the impact of unforeseen circumstances.A comprehensive insurance policy is a typical example of facilitating a Risk Transfer Strategy. An insurance policy will always help MSMEs to recover losses substantially.

Service Outsourcing where the MSME does not have the internal capacity to handle to a third party who has the expertise to provide support services can also be considered as veritable Risk Transfer Strategy.

Risk Acceptance refers to potential risks that are reasonably tolerable and does not pose any threat to the profitability of the business.Though some potential risks may be tolerable but it is important that such risks are clearly identified and planned for as an organisational policy.

Strategies for Managing Business Risks

There are best practices in managing the effective implementation of a Risk Mitigation Plan and it involves the following;

–           A functional Corporate Governance structure, transparency and accountability framework for MSMEs is a critical imperative for risk mitigation.

–           MSME must design and effectively implement a standard operational manual.

–           MSME must undertake a comprehensive assessment to identify all potential risks associated with their business and develop a holistic Risk Mitigation Plan.

–           MSMEs must ensure that their Risk Mitigation Plan and implementation process is clearly defined to avoid ambiguity.

–           MSMEs are to adequately train all their employees and clearly communicate their Risk Mitigation Plan to their employees.

–           MSMEs must institute an organisational risk mitigation culture.

–           MSMEs must clearly defined the roles and responsibilities of each of their employees in the implementation of the Risk Mitigation Plan.

–           MSMEs should put in place routine risk tracking mechanism.

–           MSMEs must also design an effective Monitoring and Evaluation mechanism.

While all of the internal systems enumerated above are being taken care of, MSMEs must endeavour to stay alive and remain conversant with external factors that can constitute serious upset in the operations of the businesses.

External factors of the business operational environment such as the uncertainties associated with Political, Economic, Social, Technology, Legal and Environmental factors can constitute serious threat to a business. The activities of Competitors also have the capacity to constitute disruptive impediments to business operations. Inventory and supply chain disruption is also a potential risk factor.

MSMEs can reduce the threat and impact of external threat by first understanding them and evolve practical strategies to navigate their ways around such threat such as considering a contingency plan and prospects of adaptation and diversification to mitigate the impact of external threats. A regular comprehensive assessment and analysis of their MSME’s SWOT can to a large extend, mitigate risks arising from external factors.

Considering the obvious prevailing capacity gap with MSMEs in addressing some of these complex challenges, MSMEs will do well to engage the Services of Business Development Experts to help them strengthen their internal weaknesses, vulnerability and unnecessary exposure to avoidable risks as the cost of the risks far outweighs the fees payable to Experts to provide support services.

Dr. Peter Ayim is an Enterprise Development Expert and Principal Consultant/CEO, MSME Business Development Services Limited

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