Barriers and Risks Affecting SMEs in Today’s Market

2.1 Introduction

Small and Medium Enterprises form an important part of the economy and it plays an important role in the growth of both the developed and developing economies. The contribution of SME towards national income and creation of employment is enormous. In recent years SMEs have also played a significant role in making their presence felt in international markets. Many SMEs are now involved across the value chain from production to export of goods across the globe. Despite these advantages which SMEs offer and the potential which SMEs have there are many barriers and risks which SMEs face in today’s market.

2.2 Risk Management

According to Webb (1994) and Chapman and Ward (1997) ‘risk is an exposure of loss in a given project’. Jaafari (2001) states ‘risk as the probability of losses which a project incurs’

The importance of enterprise risk management can be understood with the below statement given by ‘The Conference Board’.

“There is clearly a heightened awareness of the need to manage risks more strategically in order to achieve expected shareholder value” (The Conference Board, 2005).

Any plan, activity, project, investment or an action by company may result in two outcomes i.e. positive or negative. Positive outcomes are the representation of the benefits received by the company and negative outcomes are the representation of loss. The focus of risk is to avoid any uncertain unexpected events which lead to making loss for the organization (Williams, 1995).

Risk Management is the framework set up by a company which aims to develop objectives that are measurable enough to identify risks and to identify controls which helps to mitigate those risks (Francis and Richards, 2007). Risk is nothing but anything which prevails the company from achieving its objectives. Every organization faces some or the other form of risk and is very inevitable. In simple words, risk is the uncertainty of the plan (McNamee and Selim, 1998). The level of risk for an organization is basically the anxiety with which the future events are unknown and outcomes turn to be negative for the organization (Irwin, 2007). Within the gamut of risk management is the development of the term called ‘enterprise risk management’. Enterprise risk management is the identification and analysis of the risks which surrounds and surfaces the development of the organization, critical success factors for which efficient and strategic tools are used to influence decision making and organizational plans (Irwin, 2007). An organization who wishes to manage risk in a structured manner necessarily has a risk management team which comprises of internal auditors, risk managers, consultants and external auditors.

The process of risk management is a framework which intends to analyze the weak and uncovered areas which hinder the organization success by taking timely action so as to avoid risk, transfer risk, reduce risk and its impact on the entire organization (Risk Management Standard, 1999). The Australian Standard for Risk Management has recommended a seven step risk management model which aims to identify risk, analyze risk, communicate and consult all the relevant stakeholders of risk and lastly to monitor and control the risk.

Risk management is an important part of all small and medium enterprises companies. Risk and the uncertainty associated with it can have damaging consequences for the entire company which can affect productivity, performance, financial shock which may further lead to sickness. However it is important to note that no organization can completely be safeguarded against risk or eliminate risk but however it can transfer or reduce the impact of risk (Burchett, 1999). Risk management approach is done systematically can improve the chances of the organization to better handle the entire risk management process and eliminate and reduce the exposure towards risk. Godfrey (1996) has highlighted that systematic rick management helps an organization to identify, assess and rank the level of risks faced by the organization, helps to focus on higher risk areas, prepares the team to be better informed about bailing in risky situations, in the event of any adversity coming out of it with least damages and defines roles and responsibilities of each and every person associated with the project.

The impact of risk can be measured with respect to the likelihood of a specified unwanted event and its related unwanted outcomes or loss wherein:

RI stands for ‘Risk Impact’

L stands for ‘Likelihood’ and

C stands for ‘Consequence’.

The likelihood of any uncertain event occurring should be measured in terms of number of occurrences which takes place in a year (Godfrey, 1996). The outcome or risk is most of the times classified into a damage which is financial in nature (Godfrey, 1996). Not always can risk be measured and the exact cost of risk at all times cannot be determined. Most of the component of risk is indirect without any relation and is uninsured.

2.3 Application of Risk Management

To control, reduce, eliminate or transfer risk it is very important to first identify the risks and rank it. At the beginning of the risk management process, risk identification is very important as an appropriate action can only follow the identification step (Bajaj, 1997). Organizations need to take risk management as an ongoing activity for the entire organization rather than for a single point in time (Bajaj, 1997). According to Jaafari and Anderson (1995) risk management has three stages for every organization to follow:

Risk Identification

Risk Analysis

Risk Response

2.3.1 Risk Identification

The most difficult and important amongst all steps is to precisely and clearly define and identify the risks which are faced by the organization. The main question which an organization needs to ask itself is ‘What are the factors which will lead to failure for the organization and create instability and losses’? Risk identification will help the organization to develop contingency plans in advance for any occurrence of a specific type of risk (Godfrey, 1996). Identification of risk further helps the organization to design, plan and develop strategies (Godfrey, 1996).

2.3.2 Risk Analysis