Informal risk management practices within SMMEs in the Vaal region

Abstract

Risk is an inherent characteristic of doing business. Whether that risk originates from the events and changes in the environment that the business functions in or from within the business itself, the business must always seek to optimise the risk reward relationship so that it optimises profitability. Risks are, traditionally, individually defined within practice, with the definition being contextually bound to the source of the risk, the nature of the risk, or some archetype relating to the specific outcomes of a risk event or situation. To manage these risks, risk management systems have been devised to aid the manager in addressing the potential risk sources. A risk management strategy provides direction as to what risks should be mitigated, when they should be mitigated, and to what degree they should be mitigated. SMMEs generally lack formal risk management skills with the cost of a risk management system being beyond SMMEs capability to afford. The complexity and technical application of a holistic risk management system is also beyond the scope of SMME managers. The lack of risk management skills within SMMEs leads to inadequate risk management across the enterprise and result in losses and business failure SMMEs thus resort to risk avoidance through unstructured crisis management, which tends to be non-systematic and unevenly applied within the organisation. The SMME crisis manages with reactionary measures such as lending to cover operational costs and losses, or attempt to transfer risks by means of insurance to a third party. SMMEs do not implement formal risk management strategies. The purpose of this study was to identify the informal risk management practices within small, medium, and micro enterprises (SMMEs) in the Vaal region. The study aimed to identify whether there are inherent/innate decisions taken by SMMEs that constitute an informal risk management process. The study did this by determining the SMME risk perspective, identifying the informal risk management practices in use, comparing the aforementioned process to formal risk management methods/strategies and creating context for this within South Africa. The target population for this study is small, medium, and micro enterprises (SMME) within the Gauteng province. Gauteng has South Africa's largest population of SMMEs in the country. The sampling frame for the study constitutes a sample of SMMEs within the Vaal region in the Gauteng province. Data has been gathered using a non-probability sampling technique. Face to face interviews were used to gather the perspectives and what constituted the risk management processes of the SMMEs This study utilised SMMEs within the Vaal region as selected case studies on which to base the empirical analysis. Face-to-face interviews were conducted in order to gather data from the selected cases. Once SMMEs were identified, they were recruited for participation in the study. The recruited participants were only interviewed once the purpose of the study and the interview process was clear to them. Informed consent was gathered and interviews commenced. The theme of SMME risk identified the risks that SMMEs were aware of in their business, from their perspective of what a risk was. In relation to the other main identified risk, business risk, awareness of this risk was spurred on by the potential losses that could be experienced due to the lack of a sufficient business offering in relation to the competitive forces at play in the market place. The awareness of business risk is unsophisticated in the sense that it only accounts for a very limited portion of what comprises business risk and is reactionary when present. SMME owners identified their risk from a practical business or operations perspective. They do not have a structured way to identify, classify, or manage against their risks and tend to deal with their risks as they come or once they have experienced it previously. The theme of SMME risk management systems addresses those actions taken by SMMEs in an attempt to improve their business viability and reduce the risks that they faced on a day to day basis.The strategies followed cannot be classified as a risk management system since there is no feedback loop. However, this theme gives insight into what is perceived as risk management by SMMEs. Beyond the strategies outlined, the SMME owners identified certain actions as their risk management strategy, however, this came up to personal judgement calls and a personalised relations with their clientele. The approach of the SMME owner was consistently shown to be reactionary, and not precautionary. The actions taken to minimise risks always occurred after a risk was already experienced. The risk management in the case of SMMEs is thoroughly lacking in the sense that it does not incorporate the aspects of a business's strategic orientation, account for vital success or failure conditions, it does not rate risks on a scale of effectuality nor differentiate between the importances of risks that are present in the business. Controls are resourced and reactions are planned at the moment that a risk occur. In the absence of a large cash flow reserve this could result in bankruptcy. The participant interviews have produced the key insight that SMMEs do not have a formal risk management system and are wholly dependent on their personal experience and judgement in both identifying and responding to risk. In addition to the confirmation of the lack of a formal risk management system it was shown that the informal risk management system can, at best, be qualified as a non-iterative risk reaction process. In a follow up encounter with the participants of the study participants were asked if they would be interested in an SMME risk management system. The majority of participants (71 percent) indicated interest in a SMME risk management system. The remainder of the participants were hesitant but not opposed to a SMME risk management system because of expected costs of implementing the system. Whether they would be willing to accept assistance in implementing a risk management system rendered a strong response with all of the participants saying that they would take this assistance. The main finding from this question is that the SMMEs are indeed willing to implement risk management at a SMME scale and that they would like to be partner in the development of such systems within their own businesses if they were assisted.