Balancing the risk scale

03 October 2016 Nick Shutte, Zurich

With the South African economy shrinking drastically in recent years, increased focus has been placed on Small to Medium Enterprises (SMEs) to revive the economy and return it to an even stronger position of growth.

However, the burden of challenges facing SMEs is a harsh reality that many have succumbed to with less than 15% of small businesses crossing the five-year threshold. The main reasons for failure have been cited as poor planning, lack of access to finance, lack of skills, bureaucracy and crime.

Greater support and mentorship could make huge strides in moderating the extent of some of these challenges. It is essential that SME owners invest in robust risk management strategies that will not only help sustain their businesses, but also support ongoing growth and profitability.

We can often get lost on how to approach a risk based situation, but if we break it down into its bare parts and look at it on a step-by-step basis, we can achieve success.

Step 1: Possible exposures

So many small businesses are established as survivalist enterprises and little or no consideration has been given to identifying risks, mostly due to lack of business skills and more importantly, financial constraints.

As advisers, it is crucial to educate customers around the importance and benefit of having a sensible view of potential risks. Supply chain risk is often where SMEs fall short. Ongoing research suggests that most businesses neglect to factor supply chain risks into their holistic risk mitigation strategies. Not being insured against supply chain disruption and resulting losses could prove costly for any SME.

Step 2: Risk management strategies

The development of a practical strategy is equally important and risks should be tiered based on how detrimental they could be to a business.

This should not be an overwhelming process as some exposures can be nipped in the bud with a simple policy or procedure change. Some risks, however, may result in a business having to reassess its supply chain contracts and liability agreements and seek out safeguards against import delays, exchange rate fluctuations or ongoing political instability.

Somewhere in the middle, though, sits those aspects that need to be monitored on a regular basis and managed accordingly. For example, a cyber-attack could lead to a shutdown of operations or theft of key plant and equipment, resulting in work stoppages.

Step 3: Expecting the unexpected

While there will always be circumstances that cannot be predicted, there are still many that can be loosely factored into a risk management strategy.

When things go wrong, as they often do, the right insurance cover will help provide a much needed buffer against potential exposures; some of which could completely devastate a business. Reputational damage is one such example as often the impact is quite unpredictable, largely due to social media expanding the reach and influence of the consumer voice, and could force an SME to shut down its operations.

Manage the fire

A prime example would be in the hospitality sector where a guest can post an issue online and reach a huge audience almost instantly.

Containment cover as an extension to, or augmentation of, liability cover within hospitality policies would therefore be an essential customer benefit. This cover would comprise legal support, PR response or crisis consultation fees, ensuring that potentially damaging crisis situations are dealt with in a timeous professional manner and that negative publicity around the incident is minimised.

Of course, establishing the monetary value of potential reputation damage would be challenging, so insurers would need to assess the legitimacy of such losses on a case-by-case basis.

Ultimately, a head-on approach is the best defence for any business, especially SMEs. A realistic review of risks together with proper planning and insurance cover offer the best first line of defence. Resilience is the next.

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