Risk Management in SMEs

 

Risk is omnipresent and all pervasive in any walk of life. It is more so in the business sectors, particularly in Small and Medium Enterprises (SMEs). The etymology of the word “Risk” may be traced to the Latin word Rescum, which means Risk at Sea. In business, risk is always measured against capital and therefore the Capital to Risk-weighted Assets Ratio (CRAR) is much in vogue. Risk is the potentiality that both expected and unexpected events may have an adverse impact on the capital and earnings.

 

When we use the term “Risk”, we all mean fi nancial risk or uncertainty of fi nancial loss. If we consider risk in terms of occurrence frequency, we measure risk on a scale, with certainty of occurrence at one and certainty of non-occurrence at the other end. When the probability of occurrence or non-occurrence is equal, risk is the greatest. Risk can be broadly defi ned as any issue that can impact the objectives of a business entity, be it fi nancial service or commercial. Risk Management is an ongoing process that can help improve operations, prioritise resources, ensure regulatory compliance, achieve performance targets, improve fi nancial stability and ultimately, prevent loss/damage to the entity.

 

Business, more so in the context of SMEs, is the art of extracting money from other’s pocket, sans resorting to violence and unethical means. But profi ting in business without taking risk is like trying to live without being born. Risk taking as all of us know, is failureprone as otherwise it would have been termed as sure taking. Every enterprise, be it small or medium, has its own objectives and mission. Risk Management plays a key role in protecting its assets and resources and ensuring that risks are reduced to an acceptable level. The essence of risk management is to reduce the risks to a reasonable and manageable level, on an on-going basis.

 

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