A risk management tool for SMMEs : the case of Sedibeng District Municipality

Abstract

Risk management is a managerial science that has developed formally in the wake of major risk events such as the subprime crisis. In response to risk events like this, risk management has seen a systematization of the processes and principles that govern risk. Structures and frameworks have been developed to address risks throughout the internal structures of businesses through enterprise wide risk management standards. Although these systems have been in practice for decades the uptake of formal risk management practices in small businesses rarely incorporate them. Small businesses, like all businesses, face risks daily through their operations and their positioning in the external environment. However, unlike larger businesses they lack the experience or scale to weather critical risks by merit of their internal structures. Small businesses generally struggle to maintain their survival because of competitive issues, poor business and financial management which leaves the failed entrepreneur heavily dissuaded to pursue entrepreneurial endeavors after their initial failures. Moreover, it has been found to be the general tendency of small business owners to wait until a risk event occurs before they apply themselves. This is due to poor risk identification by the small business and a dependency on their own observations and experiences. Small business owners also have the additional challenge of maintaining any risk management system they have in combination to all the other managerial considerations that they must maintain. In order to address the difficulties inherent to small businesses the study launched a literature review of risk management and the collected standards that are used as the benchmark for good risk management in practice today. Risk management was explored and dichotomized into the fundamental principles and processes required in a risk management system. Having identified the foundational components of risk management, the study then proceeded to explore small businesses in South Africa and abroad. Small businesses were defined by national documentation and the characteristics shared unilaterally by them. The reasons for their failure and those characteristics that contributed to their success was explored to account for the small business particularities that would have to be factored into a risk management approach tailored for them. To frame the discussion in a South African context the small business environment and policy supports and shortfalls as they relate to South African small businesses were discussed. From the literature review, the required data became more apparent. A methodology and questions were developed to gather it. This led to the initial development of two scales and a clear methodological process for interpreting the data once gathered. From the data various observations were made that confirmed a great deal of the theory gathered. Demographical characteristics were discussed, and the scales developed in the study were tested to produce reliable components that were in turn analyzed, correlated, and tested for differences in regards to selected demographical items. It was found that, small businesses do not have risk management personnel, are primarily distributed in the trading and service industry, tend to pursue high-growth businesses, and have high levels of education amongst small business owners. It was also found that most businesses do not apply any risk management standards and that a similar proportion of them do not survive for more than five years. Additional tests for differences were performed and it was found that different municipalities have the greatest effect on the components identified, while education only made a difference between how well employees reported their risks in the business. The findings generated by the demographical analysis were of secondary concern as the final frequency analysis gave a clear indication of how regularly small businesses applied the various risk management processes, and the deficiencies in their ability to identify and differentiate between various risks. The risk tolerance and risk taking of small businesses were also clearly identified respectively through frequency analysis of the Survey of Consumer Finances (SCF) tolerance assessment question and a Domain-Specific Risk-Raking (DOSPERT) scale. The analysis of these frequencies allowed for a clear identification of the deficiencies in small business risk management processes. To address the cumulative considerations of the observed shortcomings of small businesses in literature, and the shortcomings identified in the statistical analysis the Small Business Risk Management Intervention Tool (SBRMIT) was developed. The SBRMIT is the primary contribution of this study and guides a small business through every important initial risk management consideration needed to construct a risk management system internally. The SBRMIT developed through this study incorporates the considerations that limit small businesses. It is unlike other standards in that it is free of charge and serves to bridge risk management difficulties in SMMEs. The SBRMIT addresses the primary considerations of all major risk management frameworks but is not prescriptive. It is open for individualization based on the nuanced micro-particularities of the individual businesses. By applying the systematic steps discussed in it, the small business can practically incorporate those considerations into its internal structures. The SBRMIT can thus help small businesses overcome the challenges that face them and thereby improve the chances for their success.