The importance of risk management in SMEs

Published on 17/03/2021 by Capterra

When running an SME, it can be easy to underestimate the importance of risk management. Small businesses can rarely afford to weather accidents and other unexpected incidents if they are not well-prepared. There are many different dedicated risk management software available to help businesses organise, track and mitigate the risks facing their business. If your SME has not yet implemented risk management policies, read on to find out why you should.

importance of risk management

What is risk management?

Risk management is the process of highlighting and tracking risks to your business operations and structures, performing thorough risk assessments to understand these risks and providing mitigation tools to help prevent, or minimise the impact of these risks to your business.

The scope of risk management is very broad. It can include everything from data protection and privacy policies to the hiring and firing of employees, foreign currency fluctuations, sales opportunities and plenty more.

The exact risks faced by your SME will heavily depend on the specifics of your business, but in general, every business should be aware of the risks it faces and have policies and procedures in place to deal with those risks.

Why is risk management important?

Risk management is important because of a variety of reasons, from providing businesses with a solid understanding of the risks their operations face, to dealing with audits and compliance with relevant regulations.

Businesses that fail to show that they have performed their due diligence before undertaking certain business arrangements can fall foul of the law. On some occasions, the penalty may result in fines, a loss of income or lost business opportunities.

What is the standard for risk management in Australia?

The standard for risk management in Australia is the Australian New Zealand Risk Management Standard (AS/NZS ISO 31000:2009). This defines risk management as “coordinated activities to direct and control an organisation with regard to risk”.

The main purpose of these standards is to provide guidelines for how risk should be analysed, assessed and mitigated with regards to a business and its operational activities. These standards cover a wide range of topics within risk management. One such section deals with prioritising business objectives.

For example, a business wanting to hold an event will need to acquire permits from local officials and acquire sufficient insurance to cover the event. If a business does not do this, it will be denied the permit.

In another example, the same business has a customer that wants extra stall space and will pull out of the event if they do not get it. Risk management involves analysing and categorising these risks by the severity of recourse. In the first situation, not gaining the permits would be considered a high risk to the business, because the event will be called off.

The second situation would be a much lower risk, as a single customer pulling out will not significantly impact the event.

The above examples are simplified, but risk management entails a detailed analysis and evaluation of all potential risks. This also includes a prioritisation based on their criticality to the survival of the business and the safety of all personnel involved.

What is the first step in risk management?

Risk management first involves creating a uniform structure for identifying and analysing the immediate risks to your business and business operations. It’s highly recommended to use risk management software for this, as it can significantly help with the organisation and centralisation of all business risks.

Step 2

Once a structure has been developed to contain all identified risks, the next step is to perform risk analysis. When in the risk analysis stage, it is important to classify each risk by severity and assign a level of risk for each identified risk. This can range from low or trivial to critical, depending on how much risk it poses to your business.

Step 3

Once an understanding of the risks facing your organisation has been established, a series of responses can be generated, based on the level of risk.

For example, developing a routine procedure is suitable for dealing with issues assigned a low level of risk, whereas something identified as a severe level of risk should have a detailed plan drawn up by senior management for mitigation purposes.

To give an example, a single desktop computer failing might be considered low risk, with a plan being to simply replace it with a new one. A company that keeps all its critical business documents and files on a single shared server, however, might represent a significant risk, as if the server fails, all business documents are lost. In such a situation, a plan should be developed in order to mitigate that specific risk.

The importance of risk management

Having a sufficiently detailed risk management assessment may sometimes be a requirement for certification depending on your business and jurisdiction, but even when it is not legally mandated, having a thorough risk management plan is crucial for SMEs. Good risk management involves being aware of the current and future potential risks to your business, as well as having plans in place to mitigate the impact of said risks. The importance of risk management truly becomes apparent when SMEs grow beyond what can be reasonably managed by a single director or core group of business owners.

Once a team is required to keep all business operations running smoothly, plans must be put in place in order for everyone to understand what risks the business faces and what to do in the event that they occur.

Understanding what is risk management helps to keep business operations running smoothly and employees safe. Mistakes, accidents and incidents outside of your control are unavoidable, so when an issue inevitably occurs, it pays to have a plan already in place for dealing with it.

Being aware ahead of time of what is likely to go wrong and how you should react helps to minimise disruptions to your business operations. It also offers the best chance for a business to ameliorate any long-term impacts. Failing to realise or combat business-critical risks can have severe consequences, so the time and effort put into risk management can pay dividends

Looking for risk management software? Check out our catalogue.

This article may refer to products, programs or services that are not available in your country, or that may be restricted under the laws or regulations of your country. We suggest that you consult the software provider directly for information regarding product availability and compliance with local laws.

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