MSMEs Need Risk Management Tools To Weather COVID-19
The coronavirus pandemic is a complex, multifaceted crisis. In addition to the devastating human toll, the pandemic has quickly put many businesses at risk of permanent closure. As government stimulus funding around the world has shored up the balance sheets of large and well-connected businesses, micro-, small- and medium-sized enterprises (MSMEs) have remained especially vulnerable. However, MSMEs can use risk management tools to pave a path forward and build resiliency.
MSMEs are essential contributors to the global economy and account for a huge share of global employment. There are currently 162.8 million formal MSMEs that employ over 808 million people and account for 50-70 percent of all jobs in the world economy. Almost 60 percent of these MSMEs are in emerging markets, where seven out of ten formal jobs are created by MSMEs.
Consequently, the threats faced by MSMEs are a global challenge. Most MSMEs had no strategies in place to match the overwhelming business risks stemming from the pandemic, which include liquidity shortages, plunging demand—especially in tourism and retail—and supply chain disruptions. As individual employees lose their jobs and companies go out of business, national economies that rely on MSMEs are threatened. Currently, the OECD estimates that half of the world’s SMEs will close as a result of the pandemic.
The threat of closure comes from the seemingly endless list of challenges facing small firms during the COVID-19 pandemic. All businesses are being forced to navigate continuing or restarting operations while providing for the health and safety of employees and customers. Meanwhile, pre-existing risks in areas like cyber security, supply chain, and fraud must still be managed and monitored. With the limited resources and reduced economies of scale afforded to MSMEs, the sheer number of risks that must be addressed represents a daunting challenge.
From Risk To Resiliency
These challenges call for new tools and thinking about risk management. A sustainable, systematic approach to risk management will help MSMEs weather the economic and health challenges of the COVID-19 pandemic. Unfortunately, most MSMEs today have little experience or expertise in implementing risk management in a systematic way.
However, many small firms do engage in risk management behaviors. In a survey of 325 MSMEs in Senegal and Kenya, researchers found that 45.2 percent of the businesses had “sustainable adaptation” measures in place to mitigate the impacts of climate risks. For example, farmers mentioned switching to different crops or commodities and/or purchasing insurance. Twenty-five percent of the surveyed MSMEs engage in “unsustainable adaptation” such as renting out assets, selling assets (for profit or at a loss), and letting go of employees. Both sustainable and unsustainable adaptation measures are examples of identifying possible risks and implementing mitigation measures.
MSMEs need more than just one-off reactions to events that create a strain on the business. New and unexpected sources of risk are inevitable, especially during a pandemic. Businesses that regularly use risk frameworks and procedures can respond to new and heightened risk by quickly triggering mitigation measures. Furthermore, continuous risk management processes that identify and assess risks and outline mitigating actions will strengthen MSME operations during and after times of crisis. Recent research by Gartner shows that companies that had clear processes and policies in place before the pandemic were more likely to respond with agility and mitigate some of the harms of the crisis.
As the COVID-19 pandemic has multiplied the risks facing MSMEs around the world, the need for better resiliency through better risk management practices has never been higher. Some small businesses facing immediate liquidity challenges may argue that implementing risk management practices now is a waste of valuable resources. At the same time, even small steps toward better risk management can pay large dividends. Businesses should proceed strategically and scale procedures to their needs. A scaled, systematic approach to risk will enable more MSMEs to navigate crises without shuttering completely and deepening economic fallout.
To this end, MSMEs must be supported to develop risk management frameworks and develop a risk mindset. The tools that companies use to implement risk management should not be changed but they should be simplified to enable small companies to develop their own policies and procedures. Companies that do invest in these processes will gradually develop clear and agile responses to an increasingly unpredictable business landscape.
Proper tools and sufficient resources can help companies use risk management to efficiently achieve business objectives and implement measures that build organizational resiliency. Through its regulatory and anti-corruption compliance programs, the Center for International Private Enterprise (CIPE) is working to develop these kinds of scaled risk management tools for MSMEs across the world.
Image: Creative Commons via Unsplash