Additional reading (Study Unit 3 - LO5 and LO6)
From Krüger, N.A. (2020). A risk management tool for SMMEs: the case of Sedibeng District
Municipality (Doctoral dissertation, North-West University - South Africa). Chapter 2 and 3
Define the concept of risk management
Risk management is the continuous, forward looking, iterative, systematic and shared process through
which a business relates all internal and external events, economic climates, economic activities and
actions taken throughout a business as coordinated parts of a whole (Valsamakis et al., 2013:12-14). So
that the response of a business, to those events, matches the goals and capacity of the business to which
it relates and bringing risk exposures to acceptable levels within the business using the processes of
identifying, assessing, treating, controlling, planning reactions and monitoring both hazards and risky
scenarios that could yield economic profits (Chicken, 1996:19; Aven, 2007a:17; Hopkin, 2018:34)
Risk management in context of small businesses
Small business management teams are limited to a single person or a very small number of owner partners
that actively participate in business activities (Van Aardt & Bezuidenhout, 2014:22). Small business
employees also tend to be generalists that perform multiple activities instead of being highly specialised;
as a result, organisational structures are informal and flat (April, 2005a:98). Hiring of advanced specialists
is reserved for moments of absolute necessity as they tend to be expensive (Herbst, 2001:26). Small
businesses also, traditionally, have comparatively informal, flat and highly flexible business structures,
with employees that perform business actions across multiple functional areas (Ehlers, 2000:63;
Andreassi, 2003:102; Nieuwenhuizen, 2003:69). Although flat managerial structures allow for fast
decision making, limits on man-hours available, to specialise in any single managerial function, limit
efficiency (Manalova et al., 2011:16). In addition to the structural limitations of small businesses, they also
traditionally face limited growth potential and competitive saturation within range of their business
activities and are geographically limited to the directly marketable consumer base (Martin, 2006:35;
International Leadership Development Programme, 2014:74). Operational and business risks come about
as a result of the lack of effective managerial intervention and skills training in this regard (Meyer,
2019a:115).
However, the most common risks SMEs experience are, business risk, managerial risk, reputational risk,
operational risk, moral risk, and legal risk (Kruger, 2017:116). The primary risk focus of small business is
their business and operational and business risks because these are the easiest to identify and measure
(Kruger, 2017:116). Furthermore, small businesses generally do not have structured and systematic ways
to identify, classify or manage their risks and tended to deal with their risks as they arose or once they
had experienced them (Kruger, 2017:116) This leaves small businesses with exposure to risks that they at
times are not even aware exist (Kruger, 2017:116). Risk management protects and amplifies the growth
of a business by reducing exposures that could result in critical losses and thereby freeing up resources
and liquidity that providing the business with mobility and amplify its capacity to adapt to unforeseen
circumstances. Moreover, holistic risk management brings all risk considerations of a business into the
awareness of the business, thus it amplifies strategical considerations and brings various exposures into
relation with each other.