Deploying Risk Management in SMEs

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Deploying Risk Management in SMEs

  1. 1. DEPLOYING RISK MANAGEMENT IN SME MANAGEMENT Sikiru SALAMI ACA, ACSI ICANPROFESSIONAL YAHOOGROUP Entrepreneurship Seminar
  2. 2. OPENING QUOTE:
  3. 3. ■ And the struggling pharmaceutical SME failed ■ How a fledgling Audit Firm put its owners in BIG TROUBLE CASE STUDIES ON RISK MGT FAILURES
  4. 4. Why Small Businesses Crumble So Soon
  5. 5. What is it about RISK? Risk as a cause – e.g. fire, theft, fraud Risk as a likelihood – probability of occurrence Risk as an object – the objects that constitute the risk, e.g., factory, aircraft, ship, young male drivers Risk as an action – taking a risk by doing something or not doing something Risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected  Risk is all pervasive of all human endeavour
  6. 6. SCARED OF RISK?
  7. 7. RISKS FACING SMALL BUSINESSES
  8. 8. TYPES OF RISK  Credit Risk: The risk of loss arising from loan default or unpaid account receivables  Operational Risk: The risk of loss resulting from inadequate or failed policy, processes and systems or from external events  Market Risk: The risk of loss resulting from adverse movements in the market prices, interest rate, equities, commodities, or currencies.  Liquidity Risk: The risk of loss to an entity arising from its inability to meet its obligations as they fall due.  Legal Risk: The risk of loss arising from inability to enforce a contract against a counterparty, or unfavourable legal proceedings.  Compliance Risk: The Risk of loss arising from breach of regulatory requirements  Strategic Risk, Reputational Risk etc.
  9. 9. TYPES OF RISK (cont’d)
  10. 10. Enterprise Risk Management (ERM) ERM deals with risks and opportunities affecting value creation or preservation ERM “is a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.” Source: COSO Enterprise Risk Management– Integrated Framework. 2004. COSO.
  11. 11. COMPONENTS OF ERM FRAMEWORK
  12. 12. Benefits of ERM Implementation  Aligning risk appetite and strategy  Enhancing risk response decisions  Reducing operational surprises and losses Improving overall risk rating  Improving deployment of capital Complying with regulatory changes Improving shareholder value Facilitating long term survival
  13. 13. Risk Assessment Process Identify relevant business objectives.  Identify events that could affect the achievement of objectives.  Determine risk tolerance. Assess inherent likelihood and impact of risks. Evaluate the portfolio of risks and determine risk responses. Assess residual likelihood and impact of risks.
  14. 14. Risk Assessment (Cont’d) Risks are analyzed, considering likelihood and impact, as a basis for determining how they should be managed Risks are assessed on an inherent and a residual basis. RISK MAP “Risk = (Probability of event occurring) X (impact of event occurring)” 5 LOW MED HIGH EXT EXT 4 LOW MED HIGH HIGH EXT 3 LOW MED MED HIGH HIGH 2 LOW LOW MED MED MED 1 LOW LOW LOW LOW LOW LIKELIHOOD 1 2 3 4 5 CONSEQUENCE L x C Score 0 - 5 = Low Score 6 - 10 = Medium Score 12 - 16 = High Score 20 - 25 = Extreme
  15. 15. Risk Response Actions Accept = monitor or Avoid = eliminate (get out of the situation) ▪ Mitigate = institute controls ▪ Share = partner with someone (e.g. insurance) ▪ Residual risk (unmitigated risk)
  16. 16. Business Continuity Planning (BCP) BCP is a roadmap for continuing operations under adverse conditions such as fire incident, server crash etc. Important documents should be duly protected with a back up facility and kept in an offsite facility.
  17. 17. KSF for an Effective ERM Implementation
  18. 18. Implementation Challenges
  19. 19. Concluding Quote “For firms to succeed in this increasingly global and competitive marketplace, risk management must become a state of mind. A systematic and proactive enterprise-wide approach to managing risks is essential to making risk management an integral part of the company’s DNA” -NURAG SAKSENA –CRO, Freddie Mac “There are risks and costs to a programme of action; but they are far less than the long range risks and costs of comfortable inaction” -John F. Kennedy

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