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News Positive returns from MSME risk management

Positive returns from MSME risk management


The higher the risk, the higher the return’ is perhaps the most common investment principle that entrepreneurs are familiar with.

However, the emphasis is often more on return than risk — focusing on the positive rather than dealing with the negative. Many consider risk management expensive and complicated. Its contributions to revenue generation are not as clear and evident as that of profit (or return) management. Little attention is given to risk and businesses, especially micro, small and medium enterprises (MSMEs), become vulnerable to changing economic and market conditions.

Every business faces risks. No matter how prepared, educated and experienced business owners are, internal and external risks can harm finances or even their businesses’ reputations. Risk management does not have to be expensive and complicated. It only requires, at a minimum, a proper appreciation that the future might not unfold as expected and thus business owners need to be prepared. While there is no one-size-fits-all approach, there are areas that MSMEs can work on.

Liquidity risk

Managing liquidity risks should be one of the top priorities, especially for MSMEs that are in the infancy stage. Business owners often invest their hard-earned savings — for some the proceeds of huge personal loans — to start their businesses. Consequently, the pressure to be successful is sky-high.

A survey conducted by Asia-Pacific MSME Trade Coalition in April 2020 — at the height of the Covid-19 pandemic — found that the foremost challenge for MSMEs was the lack of operational cash flows. Just a month after the government had imposed a strict lockdown, 50 percent said they had less than a month or just a month’s worth of cash reserves. Cash reserve problems, however, do not come in a snap. These accumulate over time, in different forms, while business owners are busy facing what seems to be obvious problems at that moment.

To mitigate liquidity risk, business owners should keep an eye on current and future finances. This can be operationalized by knowing the timing of cash flows. This includes sales, purchases, salaries, operating expenses and unexpected expenses. On a regular basis, business owners should know their financial condition by calculating how much cash is on hand and how long this will cover expected outflows. This critical financial information will help warn business owners of liquidity risks.

Reputational risk

The explosion of consumer presence across social media platforms has made reputational risk a vital concern. Business reputation is not reflected in a company’s books; it is an important off-balance sheet asset that cultivates the business. Social media is a double-edged sword that makes managing business reputations harder and, at the same time, easier. It is harder because customers can easily access internet fora with vast audiences and fire off negative reviews without being contained. It is easier, meanwhile, because positive and happy reviews can serve as advertisements that encourage other consumers to patronize the business.

A recent BrightLocal survey found that more consumers were reading online reviews than ever before. In 2021, 77 percent ‘always’ or ‘regularly’ read reviews when browsing for local businesses (up from 60 percent in 2020). Further, 67 percent said they would consider leaving a review for a positive experience while 40 percent said they would consider leaving a review for a negative experience. Given these statistics, it is a must for business owners to initiate and own the exchange of thoughts. Dedicating effort and time by tuning in on customer reviews and professionally acknowledging and responding to reviews can make customers engage more with the business.

Operational risk

Power and internet interruptions, bad weather, employee absences and supply chain problems, among others, can disrupt business operations. These can cause missed opportunities, loss of customer relationships and, worse, the inability of the business to function. MSMEs can prepare by having a business continuity plan (BCP). As a risk management tool, BCPs do not need to be complicated. A good BCP, at minimum, should articulate the risk or disruption, actions to be taken by employees at a specified timeframe and a discussion of continuous improvement. Having a good BCP allows business operations to get back on track at the soonest possible time.

All these approaches to risk management will not be meaningful and effective if business owners do not properly communicate them to employees and other stakeholders. Having a common understanding will promote consistent and risk-informed decisions. It will be a lot easier to work on returns when everyone knows that risks are being actively managed.

Risk management might not have a direct impact on returns in the short run. It will, however, enable MSMEs to earn more with certainty over the course of uncertain times.

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