From Where We Sit

Positive returns from MSME risk management

Seb Serrano
By:
Seb Serrano
Contents

“The higher the risk, the higher the return.” This is perhaps the most common investment principle that every entrepreneur is very familiar with. However, often, the emphasis is more on return than risk; that is, focusing on the positive side of the principle rather than dealing with the “negative” side, or the risk. Many have considered risk management as an expensive and complicated activity. Its contributions to revenue generation are not clear and evident as compared to profit (or return) management. Such typical scenario leaves risk with diminutive attention, and businesses, especially the micro, small, and medium enterprises (MSMEs), vulnerable to ever changing economic and market conditions.

Every business, be it an MSME or a large corporation, faces risks. No matter how prepared, educated, and experienced business owners are in their turf, internal and external risks can harm finances or even the reputation of their business. Risk management activity 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 prepare ahead. While there is no one-size-fits-all approach that works on different businesses, there are areas that MSMEs can work on by giving necessary consideration and planning to avoid small business risks.

Liquidity risk

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

In a survey conducted by Asia-Pacific MSME Trade Coalition in April 2020, at the height of the COVID-19 pandemic, the foremost challenge for MSMEs is the lack of operational cash flows. The survey showed that 50% of MSMEs surveyed had less than a month or just a month’s worth of cash reserves, taking into consideration that the strictest lockdown imposed in the country happened just a month before the survey was conducted. Cash reserve problems do not come in a snap. These problems accumulate over time in different forms while business owners are busy facing what seem to be obvious problems of the business at that moment.

To mitigate liquidity risk, business owners should consistently keep not only the current tabs but also the future tabs of business finances. This can be operationalized by knowing the timing of the ins and outs of operating cashflows. These include sales, purchases, employee salaries, operating expenses, and other unexpected expenses. On a regular basis, business owners should know the financial condition of the business by calculating how much cash reserves are on hand and how long it will cover the expected cash outflows. Sounds like a student budgeting his or her monthly allowance, right? Having this critical financial information on a regular basis readily accessible will give business owners an effective sight on any looming liquidity risk.

Reputational risk

The explosion of consumer presence across different social media platforms makes reputational risk a vital concern for MSMEs. Business reputation is not reflected in the company’s books, but it is an important off-balance sheet asset that cultivates the business. Social media is a double-edged sword that makes managing business reputation harder and at the same time easier. It is harder because customers, whether prospective or current, can easily access internet fora with vast audience and shoot ballistic negative reviews without being contained first by the business owner. It is easier because positive and happy reviews can serve as walking advertisement encouraging other consumers to patronize the business.

In the latest survey made by BrightLocal, more consumers are reading online reviews than ever before. In 2021, 77% “always” or “regularly” read them when browsing for local businesses (up from 60% in 2020). Further, 67% will consider leaving a review for a positive experience, while 40% will consider leaving a review for a negative experience. With these key statistics, it is a must for business owners to initiate and own the exchange of thoughts with the customers about the business and its products and/or services. Dedicating efforts and time by tuning in on customer reviews and professionally acknowledging and responding to these reviews can make them engage more with the business.

Operational risk

Power and internet interruptions, bad weather, employee absence to supply chain problems can disrupt operations of the business. These disruptions can cause missed opportunities, loss of customer relationships and worse, inability of the business to function. MSMEs can be prepared for these unexpected events by having a business continuity plan (BCP). BCP, as a risk management tool, does not need to be complicated. A good BCP, at a minimum, should articulate the risk or disruption, actions to be taken by the employees at a specified timeframe, and 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 of MSMEs will not be meaningful and effective if business owners do not properly communicate them to employees and other stakeholders. Having a common understanding of the said approaches will promote consistent and risk-informed decisions of MSME owners in running their business. It will be a lot easier to work on returns when everyone knows that risks are being actively managed.

In the short run, risk management might not have a direct impact on returns, but it will enable MSMEs to earn more with certainty over the course of uncertain times.

 

As published in The Manila Times, dated 20 July 2022

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