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Risk Management as a Key Aspect of a Business Or an Enterprise

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About this sample

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Words: 2194 |

Pages: 5|

11 min read

Published: Aug 30, 2022

Words: 2194|Pages: 5|11 min read

Published: Aug 30, 2022

Table of contents

  1. Introduction
  2. Methodology
  3. Small and Medium-Sized Enterprises
  4. Risk Management
  5. Requirements of Risk Management in SMEs
  6. Concepts of Risk
  7. Risk in SMEs
  8. Management and Team Knowledge
    Cost
    Technology
    Customer
    Increment of Interest
  9. Managing Risk
  10. Identification of risk
    Evaluating and Analysing the risk
    Controlling and Monitoring the Risk
  11. Conclusion

In the fast-evolving world, the management of risk has to be carried out efficiently and quickly. Risk management involves the analysis, understanding, and addressing of risk so that it businesses can achieve the objectives and goals. The processes of risk management must be understood to minimize and reduce risk. The purpose of this paper is to deliver a systematic literature review of previous evidence on risk management in (SMEs). Findings that have been gathered from the research have illustrated that risk can be split into two groups which then can be managed with the plan. This is the first paper that has critically analyzed risk management in Small and Medium-sized Enterprises. Furthermore, the implications faced was due to the lack of information on the methodologies used by small firms. Moreover, further studies are required to compare the different techniques used to manage risk and the effect on the organization.

Keywords: Enterprises, Management, Project, Risk, Small, and Medium-sized

Introduction

Risk management is a key aspect of a business or an enterprise, due to the fact that risk management will allow certain actions to be carried out when risk is present. The management of risk includes 5 processes which are considered as the identification of risk, the analysis of risk, the evaluation of risk, treat of the risk, and finally monitoring and reviewing the risk. The purpose of this review is to carry out a research study that will assist small and medium-sized enterprises with regard to managing and planning risk.

The literature process will proceed by describing the problem and the purpose behind the research carried out. Moving on, the methodology executed will be explained with a clear analytical structure which is used to carry out certain aspects of the review. The collection of data and research will be applied to the literature review which will conclude the main body of the paper. A discussion of the findings will be provided and finally, a conclusion and a summary will be drawn from the key areas.

Methodology

The procedure of which the methodology was carried out consists of causation of risk, management of risk, overcoming the risk, and techniques that can be used to minimize and reduce risk in a Small and Medium Enterprise (SME). To be able to achieve the research a literature review was employed by using the University of Wolverhampton Website (Library Search) to gather sources of information such as; Books, Journals, and Articles relating to risk. The aim and objective of this paper are to be able to analyze and reduce potential risks in Small and Medium-sized Enterprises.

Small and Medium-Sized Enterprises

Small and Medium-sized Enterprises (SMEs) consist of independent firms that employ less than a provided number of employees. Across different countries, this number varies, as in the European Union there is a frequent limit of an SME which is 250 employees. On the other hand, some countries have their limits set at 200 employees, where as the United States contemplates firms of SMEs to be less than 500 employees.

Risk Management

The main attribute of risk management is that it focuses on the identification and assessment of risk by managing those risks in order to have a reduced impact on the project. However, there are no projects that are risk-free due to the fact that there is a countless number of even that can have a negative impact on the project.

Many studies of risk management have been carried out by Tzvi Raz, Aaron J. Shenhar, and Dov Dvir, (2002) in various different industries. The results they have gathered towards risk management practices include;

  • Risk management is not used in various projects.
  • Projects that were most likely to have a risk management plan were those that were perceived to be high risk.
  • The use of risk management assisted in the completion of many successful projects
  • An approach to risk management improved the project schedules, costs, and goals that influenced the project quality.
  • Adequate time spent on risk management increases the likelihood on a successful project.

Grant et Al state that risk management is used to assist project managers anticipate the delays that cause late deliveries of projects.

Risk management is carried out to define various objectives, improve the control of the project, increase the chances of a successful project and improve the communication between the project participants.

Requirements of Risk Management in SMEs

According to Steve Giles, small and medium-sized enterprises (SMEs) are impervious to up-to-date approaches. However, some firms will take in account methods of loss prevention measures, whereas, many do not proceed with a formal risk management process. Many organizations tend to interpret it as an unnecessary task that costs time and money without adding value to it. Furthermore, failure to proceed in risk management techniques can make SMEs vulnerable in some occasions. Recent study indicates that 50% of SMEs fold before there completion of the fifth year due to times of unprecedented uncertainty. The use of risk management allows better decisions to be made and contributes toward preventing loss.

Concepts of Risk

Kerzner describes risk as the lack of knowledge for upcoming events. This definition can be applied for the derivation of common features to all risks with an uncertain outcome. However, the comparison of interpretations of definition can be split into two simple groups. The first group of definitions attributes towards the negative side of the risk when it is held as a threat. Consequently, Vochozka and Mula acknowledge risk as the fear of the potential tangible and intangible effects on the environment of achieving the goals. According to Fort and Hnilica interpret as risk as possible negative deviations from the objectives set. Likewise, Smejkal and Rais understand risk as the situation of which there is an outcome of an unfavorable deviation from desired results. Group two consists of risks that focus on potential opportunities. This can be used as a guide to carry out improvements by ticking or reducing certain factors of risk. As stated above, the most successful projects consist of a structured risk management process carried out. Nevertheless, taking risks as an opportunity will assist towards a positive impact to the project.

Risk in SMEs

Management and Team Knowledge

Referring to Gilmore et al., 40 interviews were carried out by the authors and it is implied that the majority of businesses are exposed to the loss of knowledge when skilled employees with high-level intelligence and knowledge leave the firm. Therefore, this concludes that this is a high risk for SMEs due to the fact that based on long-term staff and skilled staff many of them will not share the same level of knowledge. Gao et al. has found case study findings that imply the knowledge towards risk management can be mostly informal in SMEs, therefore making it harder for the creation of risk management size with regard to SME team members.

Cost

According to Moore et al a large number of SMEs are seeking methods in which the costs can be reduced with regard to the materials. The authors have provided evidence of the volatility of raw material prices over recent years. Moreover, there is an increase in the competitive market and increased commodity prices. Moore et al. discussed that a variety of large companies have invested into advanced technologies so therefore, they can easily take in the fact that when the prices are increasing, they can transfer to cheaper resources. On the other hand, many small and medium-sized enterprises cannot be able to pay for these types of investments and thus why they are exposed to cost risk.

Technology

A research task was carried out that involved 15 qualitative interviews and a survey that was based on 125 small and medium-sized enterprises in the UK, which demonstrated that the highest risk was considered to be online safety. Sukumar et al. The risks consist of mainly online issues which include cyber-attacks, false identity, and credit card fraud. Technology risk refers to the installation of computer systems and the type of security that is applied to it. Poba-Nzaou et al. portrayed that software can be a great risk to SMEs because the implantation of software requires greater resources compared to larger organizations.

Customer

With regards to customer risk, the managers of small and medium-sized enterprises surveyed in the study carried out by Sukumar et al. justified that consumer confidence is one of the most important risks based on a business that it situated online. The argument from the authors stated that it is very difficult for managers to regain confidence due to the fact that they are a limited size company and the number of transactions. It was implied that many gaps of online security can have a huge reflection on customer trust and on the reputation of the organization. This concludes the reason behind customer risk which is complicated to rebuild after a security-related incident occurs.

Increment of Interest

Altman et al., studies states that in some occasions SMEs are dependent on external finance, this involves loans to account for a source of finance. Nevertheless, the risk in this is the increase of the interest rates. Considering banks, Mutezo states that SMEs can possibly be able to reduce bank fears by taking in attention to information and asymmetries. Understanding SMEs' thoughts, Bruns and Fletcher carried out a study that demonstrated that SMEs that had a weak financial spot but had a high-risk probability were mostly declined compared to companies that had a robust position. Furthermore, Bruns and Fletcher recommended that being able to have a stronger position in terms of finance can possibly counteract for high risk. They also gathered that SMEs that had limited collateral are less likely to be provided with a loan despite the accountability of taking a risk, whereas organizations that had high collateral had greater chances of having the loans approved despite having a low-risk intake.

Managing Risk

Identification of risk

The first step in managing risk is to carry out a process that is continuous and systematically structured this will ease the identification process. Researchers Hollman and Mohammad-Zadeh, have gathered three methods that can be used to identify the risk of loss which include:

  • Methodical reviews of all the information on business assets, activities, and all staff and team members.
  • financial statements to classify the bases of likely financial losses
  • Create a flow chart or a work breakdown structure that analyses all the operations and activities of the business.

Marcelino-Sádaba et al. discovered that the identification of risk can be vital in the management of SMEs. Based on 72 Spanish firms, it was suggested that strategic project risk can possibly cause the failure to a project and therefore, individual and operational risk must be identified and analyzed in depth. Gao et al. implied that the procedure of efficient risk management can be held due to the fact that some employees in SMEs have limited knowledge of risk management. On the other hand, it is crucial for SMEs to identify the high risks and then move onto the analysis as well as train all the staff to understand risk management.

Evaluating and Analysing the risk

Moving on after the risk had been identified it must be analyzed and evaluated in terms of the effect on the business. This process involves, estimating and calculating the level of risk towards the company’s operation. In addition, the potential risk can be arranged with regards to high and low, as well as the probability of the risk. To make the analyzing procedure easy for employees in SMEs a table shown below can be used:

Controlling and Monitoring the Risk

Finally, the control and monitoring of the risks involve continuous review during the life-cycle of the project. Also, the table above can be used as a template to refer back to as well as using it for risk during the process. According to the Project Management Book of Knowledge (PMBOK)5th Edition (2013), to be able to control risk managers of organizations uses various strategies, execute contingency plans and take relevant actions. On the other hand, changes can be applied before the project or during the project to avoid risk as a whole.

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Conclusion

The motive behind this research paper was to understand risk management required for small and medium-sized enterprises as well as to highlight the types of risk that commonly occur in SMEs. This paper has identified the purpose of risk management in SMEs with regard to Grant et Al. Moving on, the requirements and concepts of risk management have been discussed to illustrate the effects of not using risk management in SMEs and the definition of risk interpreted by different authors. Kerzner and Vochozka and Mula. The purpose of the definitions illustrated different understanding and acknowledged interpretations from two different perspectives. Moreover, the paper has portrayed a variety of risk which includes; a qualitative study by Gilmore et al. to determine employee knowledge, resource cost risk discussed by Moore et al and finally customer and interest risk. Finally, the implementation of managing the risk had been carried out by discussing methods of which they can be analyzed. The findings gathered to create this paper assisted in understanding risk management in small and medium-sized enterprises and the implementation of which management needs to be carried out; identity, analysis, and control/monitor. In conclusion, this topic will require further studies regarding the types of methodologies used by SMEs and also the type of identification methods used to recognize potential risks.

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Risk Management as a Key Aspect of a Business or an Enterprise. (2022, August 30). GradesFixer. Retrieved October 12, 2024, from https://gradesfixer.com/free-essay-examples/risk-management-as-a-key-aspect-of-a-business-or-an-enterprise/
“Risk Management as a Key Aspect of a Business or an Enterprise.” GradesFixer, 30 Aug. 2022, gradesfixer.com/free-essay-examples/risk-management-as-a-key-aspect-of-a-business-or-an-enterprise/
Risk Management as a Key Aspect of a Business or an Enterprise. [online]. Available at: <https://gradesfixer.com/free-essay-examples/risk-management-as-a-key-aspect-of-a-business-or-an-enterprise/> [Accessed 12 Oct. 2024].
Risk Management as a Key Aspect of a Business or an Enterprise [Internet]. GradesFixer. 2022 Aug 30 [cited 2024 Oct 12]. Available from: https://gradesfixer.com/free-essay-examples/risk-management-as-a-key-aspect-of-a-business-or-an-enterprise/
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