SMEs face unique challenges in risk management due to their limited resources and the higher relative impact of operational risks.
Risk management is often considered to be an unloved and misunderstood subject until disaster strikes. Risk managers struggle to make their voice heard in the face of more immediate and commercial pressures especially in small- and medium-sized companies. This article presents a simpler approach to risk management with the aim of changing the perspective that risk is a boring subject to address, by helping managers to better understand risks and apply effective, positive risk management techniques.
Understanding Proportionality in Risk Management
According to proportionality, minor risks call for little fuss, while major ones call for much attention. There will always be some level of risk, and some risks are acceptable on a daily basis. Examples of these risks include forgetting an email attachment, paying a small invoice twice, and missing an internal report deadline. Even with increased caution, extreme risks can result in significant financial losses if ignored, but organizations continue to underestimate their risks. The minor incidents are the most common, but they are not of upmost importance. The largest and rarest accidents of the year do the most damage; on average, the top 0.3% of incidents account for 63% of overall losses. It is unfortunate that risk managers continue to focus more on minor problems rather than focusing on major ones.
The Hidden Costs of Over-Control
Moreover, too little or too much control leads to inefficiencies, which are lessened by proportionate risk management. Overly cautious behaviour results in opportunity costs, rigidities, and slowness. One way to reward operational risks is to boost productivity by reducing expenses by removing some operational constraints.Finding the underlying causes of accidents is an excellent risk management strategy, particularly for the ones that have the most potential for damage. However, risk managers overlook and undervalue the factors that contribute to success when they exclusively concentrate on previous failures and mistakes in the future. There are established guidelines for managing risks effectively: being vigilant is essential, and acting quickly lessens the damage. Vigilance and discipline are also necessary for SMEs to succeed. More than just brilliant ideas are necessary for startups to succeed; they also require the unwavering focus of its founders, who must constantly assess performance and be on the lookout for potential problems. A young brand expanding internationally needs careful planning, understanding the market, careful due diligence, and capable management who can address a wide range of possible problems before they become catastrophes. Praise for effective risk management techniques prevents unwarranted criticism, encourages winning behaviours, and turns successful risk managers into mentors rather than pessimists. Risk management is welcomed and acknowledged as a component of success.
Effective risk management and performance management go hand in hand. The goal of positive risk management is to maximise the benefits of uncertainty while minimising its negative effects. Businesses need to be vigilant and react to dangers, or else they will cause chaos for themselves and others, since failure in risk management can bring down an organisation. Growth is risky, especially for smaller businesses. As complexity rises more quickly than size, rapidly expanding start-ups face more potential operational risks.