CHAPTER 9

RISK MANAGEMENT IN SMALL BUSINESS

By:
Hisham bin Mohammad
SEFB, UUM
CHAPTER OUTLINE
 Risk classification
 The importance of risk management
 Risk management objectives
 Enterprise Risk Management (ERM)
 Risk management techniques
 Risk management decisions
 Personal conflict risks
 Risk management within the
Malaysian business context
 RISK CLASSIFICATIONS

Risk is the possibility of something bad happening

Risk management applies to many aspects of a business.
Your business is subject to internal risks (weaknesses) and
external risks (threats).

Generally, you could control internal risks once you have

identified them.

However, external risks may be out of your control.

Not all risks come from negative sources.
Risks may come from positive sources, or opportunities.
Expansion and growth are opportunities, but they also bring
additional risk.

The ultimate goal is to minimize the effects of risks on your

business.
 INTERNAL RISKS
HUMAN RISKS
The human component of your business is a source of risk. Think
about these possible human risks to your business:

1. Illness and death

A business owner or employee may be ill for a day or be
unable to work for months.

The death of a person involved in a business poses a risk to

continued operations
2. Theft and fraud
Most businesses want to have an honest working
environment, yet theft by employees and employee fraud are
major risks businesses face.

Timecard fraud is a risk.

Diverting funds to fictitious accounts are accounting risks.

3. Low employee morale
Unhappy employees can cost money through negligence or
through wilful acts.

For example, an employee who forgets to reorder inventory is

a risk to sales because back orders lead to cancellations.
EQUIPMENT AND INFORMATION TECHNOLOGY RISKS

• Older equipment may run slower or require more maintenance

than new equipment.

• New equipment may require adjustments to work with older

equipment.

• Worn parts may cause damage or cause company vehicles to

break down.

• E.g. What would a non-working delivery van cost a business for

one day?
• Downtime from physical damage or outdated systems may
slow business profits.

• Most businesses rely on a computer system to process credit

cards.

• These systems are risks to continued business when they are

not working, especially if no backup plan exists.

• Lack of administrative controls may lead to downtime, in

addition to fraud and theft.
Other Internal Risks
Another source of risk might be the physical plant of your
business.

Phone lines and other utilities are risks to a business.

The appearance of a building such as its walls, windows, and

doors may require maintenance to continue drawing customers.
• Injuries and damages may be caused by your business or your
business may receive damage.

• For example, a storm may cause damage to a business or a

business may cause damage by selling a faulty product.

• Either way, injuries and damages come with a cost.

• Cash flow is the lifeline of a business.

• When unexpected costs affect the ability of a business to

meet monthly expenses or when credit lines are lost, a
business may fail.

• A plan to maintain cash flow is crucial.

Even new financing has its own cost-associated risks.

The risks can include the following:

• Appraisal costs
• Closing costs
• Costs for points to buy down rates
• Deposits placed on hold as collateral
 EXTERNAL RISK

Competition and Market Risks

Competition can be tough and market changes can make life for
your business tougher if you are not prepared.

Consider these risks:

• Market changes will cause businesses to change. Competitors

advertise sales, wholesale costs go up and down, and oil and
gasoline prices affect your costs and those of your vendor.
• Rent increases may be caused by increased demand for
space.

For example, you may be able to lease space more cheaply in

a building/area under construction, but when the lease is up
for renewal, an increased demand for space in the vicinity
may result in your rent increasing.
Business Environment Risks
Your environment is more than the space you rent or buy.
What happens around your business affects it.

Here are some examples of environmental changes:

1. Federal, state, county, and city laws and ordinances can and
will change.

2. Weather and natural disasters can shut down a business for a

short period or close it.
3. Structural changes in the community may be the result of
progress or may be due to empty stores and offices in a
declining market.

4. Your community may change as the needs, age groups,

spending habits, and incomes of the population change.
 THE IMPORTANCE OF RISK MANAGEMENT
 Risk management is a technique of controlling and avoiding
threats to business organisation.

 It involves determining, analysing and mitigating harmful risk

to an organisation’s capital and earnings.

 Risk management is a practice which is required and followed

by every business irrelevant of their size and nature.
 It aims at recognizing the potential threats in advance and
takes all necessary steps to avoid their adverse effects on
business operations.

 These risks and unfortunate events are faced by every

business organization and may harmfully affect its capital or
even may lead to its permanent closure.

 Timely identification and prioritization of these risks are quite

important which is all done by implementing risk
management techniques.
 Risk management is a continuous process and works
throughout the life of the business towards monitoring all risk
factors.

 It focuses on controlling all possible future events by analysing

various past information like the probability of occurrence,
historical data, lessons learned etc.

 Risk management supports the organisation in the

achievement of their goals by ensuring that all activities are
running on their normal track.
 It develops a safe and secure work environment for all staff
and customers and increases the stability of business
operations.

 Basically, years of experience is needed in order to help

entrepreneurs to set up his/her own ‘internal database’
pertaining business risk(s) and its potential to harm their
business.

 Once the risk(s) have been successfully identified, appropriate

strategies could be properly planned to manage the risk.
 RISK MANAGEMENT OBJECTIVES
• To identify possibilities, measure risks and create strategies to
manage risks before they occur .

• With risk management, it allows business owners to regulate

procedures to avoid these risks and minimize their negative
impacts and overcome them.
 ENTERPRISE RISK MANAGEMENT (ERM)
Enterprise risk management (ERM) is a plan-based business
strategy that aims to identify, assess, and prepare for any
dangers, hazards, and other potentials for disaster—both
physical and figurative—that may interfere with an organization's
operations and objectives.
• The discipline not only calls for corporations to identify all the
risks they face and to decide which risks to manage actively,
but it also involves making that plan of action available to all
stakeholders, shareholders and potential investors, as part of
their annual reports.

• Industries as varied as aviation, construction, public health,

international development, energy, finance, and insurance all
utilize ERM.
 Companies have been managing risk for years.
 Historically, they've done this by buying insurance: property
insurance for literal, detrimental losses due to fires, thefts,
and natural disasters; and liability insurance and malpractice
insurance to deal with lawsuits and claims of damage, loss, or
injury.

 More recently, companies have managed such risks through

the capital markets with derivative instruments that help
them manage the ups and downs of moment-to-moment
movements in currencies, interest rates, commodity prices,
and equities.
 RISK MANAGEMENT TECHNIQUES

1. Avoiding the risk

2. Retaining the risk
3. Spreading the risk
4. Preventing or reducing loss
5. Transferring the risk
 RISK MANAGEMENT DECISIONS

• Once the risk(s) have been successfully identified and

measured whenever possible, the owner of a business will
need to decide on the appropriate risk management
technique and strategies that should be employed to
counter/manage the risk(s).

• Though, the decision made is supposed to be based on the

business capabilities and resources.
 PERSONAL CONFLICT RISKS
 Personal conflicts are external risks for both business owners
and employees.

 Families and homes do not cease to exist at the start of a

workday.

 Children become ill. Medical emergencies, emergency leave

or worse, may happen.

 Repairs and maintenance will be required at home.

 For a small business owner, involvement in the community
creates visibility.

 However, the visibility comes with a cost, mainly time.

 Employees are involved in outside activities as well. We don’t

usually think of outside activities as a risk but consider how
you would handle this situation: your most reliable manager
wants to join an out-of-town golf tournament on the busiest
day of the month.
 Even complacency is a risk. Complacency comes from being
comfortable.

 Your business may be successful and has been for a while.

 You may be comfortable with the hours you are working, but
you may miss opportunities for growth because you do not
want to expend the extra effort.

 Now, multiply the effect of complacency because

complacency also happens to employees.
 RISK MANAGEMENT WITHIN THE MALAYSIAN
BUSINESS CONTEXT
 Malaysian business owners are also facing various kind of
risks.

 Some of the risks could be controlled and measured.

 Some are beyond the business owners’ controlling capabilities
 Sabotage, black magic, dirty business strategies are among
the common risks/threats faced by many Malaysian business
owners regardless their ethnic and business locations.
From the Islamic perspective, black magic is forbidden and is
considered as SYIRIK.

It will deviate us from the right path.

“O you who have believed, indeed, intoxicants, gambling,

[sacrificing on] stone alters [to other than Allah ], and divining
arrows are but defilement from the work of Satan, so avoid it
that you may be successful.”
(Surah Al-Maidah, 90)
 Spiritual strength and hardened mental are needed to combat
the threats coming from the usage of black magic by those
who have bad intention towards our business.

 Businesses that using foreign immigrants need to understand

the psychological aspect of their workers.

 Workers from different countries may possess different set of

attitude and working style.

 Therefore, it is good for business owners to not mix their

workers from different countries within the same hostel.
 Try your best to delight your customers.
 Your unhappy customers tend to viral their bad experience
thru various social media platforms, and this may ruin your
business reputation in the long run.

 And yet, people in various social media platforms tend to

believe whatever someone’s wrote there to be true (even
though it is not).

 This is typical attitude by many Malaysian.

 Believe first, verify later. Though, damage already happened.
 No matter how successful you are, don’t share your success
stories in the net too often.
 Always maintain a humble and low-profile life.
 Do not show off. You have rights to buy a luxury car/house
should your business succeed BUT do not share your story or
pictures on the net (if not necessary) as some people may not
like it. Besides, it will only lead you to become RIPPLE!

 Always involve in charity and social activities especially

around the place where your business is located. This will help
you to gain respect and support from the locals.
 Be nice to others. Others will also be nice to you.

 Support other businesses around you whenever possible. This may help
you to create ALLY instead of enemy.

 Always try to expand your business and social network.

 No matter how good and perfect you are, there will be a day where you
will be needing other people helps.

 Pray (dua) and tawakkal.

 Do our best for our business and to ourselves. Be happy 

 Leave the rest to Allah and pray that He will give us the best outcomes
and results.
Q&A