Exploring risk management practicesin SME’s and its impact on there

performance
Submitted by

Ahmed Yaqoob (208-FMS/BSAF/S18)

Mohsin Ali Yasin (209-FMS/BSAF/S18)

Moeen Sajjad (217-FMS/BSAF/S18)

Muhammad Hassam (222-FMS/BSAF/S18)

SUPERVISOR

Dr. Zaheer Abbas

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Abstract:

This study aims to study the impact of risk management practices on the performance of SME’s
in Pakistan. More than 90% of Businesses in Pakistan are Small and Medium enterprises. In
order to implement this study, data was collected through questionnaire from 60 employees who
have been working in Small medium enterprises in Pakistan Mainly targeting the companies
operating in Rawalpindi and Islamabad. For confirming the answer’s and reliability of the tools,
a descriptive analysis was performed and correlation was investigated. Data was analyzed by
using regression analysis in SPSS. The results suggest that risk management has positive impact
on SME’s. As Risk mitigation was most influencing the company’s performance.

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 Chapter No. 1

Introduction
Risk Management

In the financial world, risk management is the process of identification, analysis, and acceptance
or mitigation of uncertainty in investment decisions. Essentially, risk management occurs when
an investor or fund manager analyzes and attempts to quantify the potential for losses in an
investment, such as a moral hazard, and then takes the appropriate action (or inaction) given the
fund's investment objectives and risk tolerance.

SMES
Definitions of SMEs from various perspectives

The SME definitions applied from various perspectives are based upon various criteria such as
number of employees, value of assets, sales and volume of output. These definitions vary from
country to country and also within countries. For instance, France defines a SME as having less
than 500 employees; whereas Germany uses less than 100 employees. Moreover, within
countries, definitions may also vary by sector or type of business. For instance in Japan,
manufacturing, mining, and transportation and construction industries defines a SME as having
less than 300 employees or invested capitalization less than 100 million yen. While wholesale
businesses define a SME as an organization employing less than 100 employees or capitalization
less than 30 million yen. In retail it is defined as businesses employing less than 50 employees
or capitalization less than 10 million yen.

Defining SMEs from the Pakistani Context:

There are different definitions of SMEs in Pakistan. The SME Bank, SMEDA ,Pakistan Bureau
of Statistics (PBS) and State Bank of Pakistan (SBP)have defined SMEs in different ways.
Under fifth schedule to Companies Ordinance 2015, Securities and Exchange Commission of
Pakistan (SECP) also classified large, medium and small companies exclusively. For example,
SMEDA defines a SME based upon the number of employees and total number of
productive assets. The SME bank uses only total number of assets as the criterion. PBS takes
into consideration only the number of employees. Whereas, SBP’s definition of a SME is based

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on the nature of the business, number of employees, amount of capital employed and net sales
value per annum.

As the market place is witnessing rapid increase in the technological development and
globalization, the business environment is swiftly changing and companies are facing more
challenges and are prone to more risks. Therefore having a knowledge of identifying, analyzing
and responding to different types of risks is very essential for the survival of the company. SMEs
as compared to large organizations are more influenced by effects of different form of risks
because they have limited resources and structural features at their disposal. In contrast to larger
companies SMEs usually lack the required resources, with respect to manpower, databases and
field of knowledge to perform a standardized and structured risk management. This is
because many smaller companies do not perform sufficient analysis to identify their risk.

According to Farid (2016), “SMEs account for 99 per cent of over 3.2 million business
enterprises in Pakistan and have 35 per cent share in value addition. Since they have major
contribution in the human capital and value added creation. It is very important for SMEs to
adopt an effective risk management system.

Literature Review
The concept of risk has been widely discussed since it came in to the field of management
theory. It can be broadly defined as any issue that can impact the objective of any business,
which can affect its earning. Similarly, a situation where the outcome of any activity is likely to
change from what was forecasted is known as risk. Many authors have defined risk and have
given an idea about risk, but a common word found in all of these definitions is the word
“Uncertainty” about outcomes in situations. A firm may face internal and external risks.
Financial risks, operational risks are classified as internal risks because their sources are from
within the firm.

Financial risk is one of the biggest risk faced by most of the small organizations. Founders often
invest their lifesavings or they take loans from banks to get their business started. Therefore, they
face a lot of pressure from the beginning to be successful. As SMEs operate on a tight budget,
they have to heavily rely on ongoing operations to generate funds. They have to consider from
where the funds will come maintaining operations such as employee’s salaries and investing in
market for growth. While, operational risks may occur due to failure of structure, system, people
or process. External risks for a firm can be political, technological or economical which occur
outside the business structure and cannot be controlled by the firm.

Risk management is a major concern for SME’s as they are more insecure to risks and
competitions. The main principle of risk management is that the management’s focus should be
on recognizing future risks, and its impact on their operations and to find their possible solutions
in order to reduce or mitigate such uncertainties and its impact on their firm. According to Smith
(1998), New businesses often under-estimate the risks or sometimes completely ignore them,

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which end up being catastrophic for them. New businesses face a higher degree of risks
therefore, are needed to make quick decisions. Studies show that the attitude of SME’s in dealing
with risk is poor as compared to larger firms. Henchel (2008) states that risk management is a
much bigger challenge for SME’s than large firms because SME’s often lack resources and
knowledge to perform a structured risk management.

Literature relating to risk management is quite limited and is still in its early stage of
development. and very little studies have been focused on risk and risk managements. From
previous studies it was noted that risk management practices in SME’s are in relation with the
beliefs and expertize of the owner. They don’t use any special techniques to decrease risks. Even
though the owner might have done some form of risk identification process he still might
completely ignore the risk faced by the firm.

Most business decisions are about sacrificing current resources in order to gain uncertain future
returns. It was noted that, risk management creates and also protects wealth. Risk management
also helps in achieving objectives of the firm and also improving the performance of the firm.
For example, security, public acceptance, environment protection, improving product quality,
governance and reputation of the firm. Triantis (2000) states that it is the responsibility of all the
firms to understand the source of risk that the company is facing. And how can the firm manage
the approaching risk effectively. These phases are represented in detail below

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Researchers found out that the importance of positive risk management approach is very
important for the survival of SME’s .In order to achieve more satisfactory results with low costs
it is important for an SME to formulate a structured risk management approach. Most risk
evaluations are connected to a discipline which is not well known by the owner. And a structured
risk management approach allows owners to assess their actions more objectively.

In conclusions, various researchers and authors concluded that risk management helps in
providing an effective risk approach because it prioritizes risks, which result in reducing the

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chances of any surprises or uncertainties. And directs the focus on more important risks than
others. This result in possible reducing the over management of insignificant risks.

Problem statement
In this research article we are going to answer “How risk management practices effect SMEs
performance? As mentioned above, we have defined SME’s from different perspectives. SME’s
have limited funds to finance their business activities, sluggish management as compared to large
corporations. So, the effect of risk management practices of SME’s will be different from large
corporation performances.

Significance of the study

The scope of this project is to analyze the relationship between risk management practices and
performance of SMEs. Usually SMEs are unable to implement risk management techniques
effectively. The basis of this study is to facilitate SMEs to enhance their techniques to improve
their performance with the help of risk management practices.

Research question
 Does risk management practices have an impact on SME’s performance

Research objective
 To investigate the effect of risk management practices on SME’s performance.
 To propose certain remedies for SME’s to reduce risks.

Model of the study

The model of this study consists of the Independent variable ( Risk Management) and dependent
variable (SME’s performance). Through this model we will analyze how risk management
effects the performance of SME’s.

HYPOTHESIS
Risk management has a positive effect on SMEs performance

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 Chapter 2

Methodology
The study was carried out by collecting data from 62 firms in Rawalpindi and Islamabad. The
data was collected from the firms by using a self-prepared questionnaire. Since the owner is
having the main responsibility regarding risk management in SME, the data was collected by
sending questionnaire to the owner/ manager of the firm.

 Research design
The research design in this study will be quantitative. The nature of the data will be primary,
collected through a structured questionnaire.

 Sample
Small and medium enterprises of Islamabad and Rawalpindi

 Data type
Primary data

 Data collection tool/technique

Structured questionnaire

Time horizon
Cross-section

Scale
5 Likert scale

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 Chapter 3

Results and Analysis

 Profiles of SMES
The SME’s which participated in the study. Among them 20% are registered as private firms.
35% are operating in partnerships. And 45% are un-registered sole proprietor firms.

 Reliability Analysis
Table No.1 represents the alpha reliability of Risk Management (Independent variable) and
SMEs (Dependent variable). The alpha reliability value is in the acceptable range of 0.70

Table No.1

Reliability Statistics
Cronbach's Alpha N of Items
.872 2

The alpha reliability value is 0.872 which indicates that the data used for the research is
acceptable.

 Profile of the Participants

Table No 2( Gender, Age, Designation, Experience) shows the profile of the participants who
were engaged in the research.

Frequencies

GENDER

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 Cumulative
Frequency Percent Valid Percent Percent
Valid Female 16 25.8 25.8 25.8
Male 45 72.6 72.6 98.4
Prefer not to say 1 1.6 1.6 100.0
Total 62 100.0 100.0

The number of participants who take part in our research is 62. Out of 62, 16 participants were
female and 45 were male and 1 participants prefer not to tell gender.

AGE
Cumulative
Frequency Percent Valid Percent Percent
Valid below 20 13 21.0 21.0 21.0
20-25 42 67.7 67.7 88.7
25-30 7 11.3 11.3 100.0
Total 62 100.0 100.0

The above table shows the age of the participants of the research. The frequency shows that out
of 62 participants 13 were below 20, another 42 participants were between 20-25 and 7
participants lies between 25-35.

DESIGNATION
Cumulative
Frequency Percent Valid Percent Percent
Valid CEO 11 17.7 17.7 17.7
General manager 17 27.4 27.4 45.2
Operation manager 25 40.3 40.3 85.5
Otbers 9 14.5 14.5 100.0
Total 62 100.0 100.0

The above table shows the designation of the participant in their company. Out of 62 participants
11 were CEOs, 17 were General managers, 25 were operation managers and 9 were others.

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 EXPERIENCE
Cumulative
Frequency Percent Valid Percent Percent
Valid 0-5 49 79.0 79.0 79.0
5-10 7 11.3 11.3 90.3
10-15 4 6.5 6.5 96.8
Avove 15 2 3.2 3.2 100.0
Total 62 100.0 100.0

The above table shows the experience of the participants. Out of 62, 49 participants have
experience between 0-5 years, 7 participants have 5-10 years, 4 participants have 10-15 years
and 2 participants have experience more than 15 years.

 Descriptive Statistics

Table No.3

Descriptive Statistics
N Minimum Maximum Mean Std. Deviation Skewness K
Statistic Statistic Statistic Statistic Statistic Statistic Std. Error Statistic
DV 62 1.00 5.00 2.9763 1.03372 -.230 .304 -.6
ID 62 1.00 4.63 3.0645 .91436 -.352 .304 -.5
Valid N (listwise) 62

The above table shows the mean and standard deviation of the variables. The dependent variable
have mean value of 2.9763 and standard deviation 1.03372.
The independent variable have mean value of 3.0645 and standard deviation of 0.91436 along
with skewness and kurtosis

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  Correlation Analysis

To check the correlation between the variables of the study Pearson correlation coefficient is
being used.

Table No.4
Correlations
DV ID
DV Pearson Correlation 1 .780**
Sig. (2-tailed) .000
N 62 62
**
ID Pearson Correlation .780 1
Sig. (2-tailed) .000
N 62 62
**. Correlation is significant at the 0.01 level (2-tailed).

The above table shows the correlation between dependent and independent variable. There is a
positive correlation 0.780 between dependent and independent variable.

 Regression Analysis

Table No.5
Regression analysis
B p-value R-square
Constant 0.275
Independent variable 0.881 .0000 0.780

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The above table shows that Risk management strategies have significantly positive impact on the
SMEs performance. These values strongly support the hypothesis of the study. The coefficient of
determination R-square describes the 78% variance in the SMEs performance which is brought
by the risk management strategies.

Chapter 4

Conclusions and Recommendations

This study is able to confirm the effect of risk management on SME’s performance. And also
show the importance to implement risk management practices in SME’s. It also revealed that
even though most operators of SME’s consider risk management vital and should be used in their
operations, risk management is still at the lower levels because of various reasons such as, lack
of experienced employees who can effectively identify potential risks and manage them to limit
their effects. They also lack of resources to outsource experience persons from the outside to
minimize the impact of risk. Risk management in SME’s revolves around the beliefs of the
owner which can seriously hurt the firm when facing risks because if the owner does not believe
that a particular risk is a threat to them he may completely end up ignoring the risk. This could
prove deadly for a Small and Medium enterprise. Therefore, business planning of SME needs
improvement and the owner and managers knowledge and awareness regarding risk management
must be enhanced, and this can be achieved by proper training.

Recommendations
SME’s should develop a culture of managing their risks to improve their performance. The
owners should apply risk management practices from the start of their business or planning
stage. Governments should provide SME’s with insurance packages that cover their losses due to
fire, flood, earthquake, theft etc. Seminars and workshops should be held to raise awareness in
the owners and managers about risk management. Training manuals should be created and
distributed among the SME’S about how to apply risk management in their firms, and why risk
management is important for them.

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Benefits of Risk Management
The benefits of risk management are as under

a) It helps managers and the decision makers to make good choices, enables them to
understand and choose important actions. And if the situation requires to undertake
alternative actions, they will be quick to find a different course.
b) It crystal clears any uncertainties faced by the firm, its nature and how can it be addressed
affectively.
c) A systematic approach to risk management contributes to firms efficiency, and reliable
results.
d) It recognizes the capabilities and the intentions of the people who can either facilitate or
harm their firms operations.

Limitations of the Study

Despite having some contributions this study have many limitations, which can be eliminated in
future studies. Only firms from Rawalpindi and Islamabad were targeted for sample results, and
due to lack of resources, and covid-19 issue we were unable to collect primary data by arranging
interviews with managers and owners of SME’s. So we had to rely only on data collected from
structured questionnaire.

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 Manuscript received February 20, 2017; revised April 7, 2017.
 F. Soleimani Zoghi is with SRH University of Applied Sciences Berlin,

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