Enterprise risk management: How MSMEs can prepare for even smallest tremors of business instability

• By Hersh Shah and Sandeep Bhatnagar

Ease of Doing Business for MSMEs: After agriculture, the Indian Micro, Small, and Medium Enterprises, or MSME, sector is the second-largest employment generator in the country. It is viewed as the backbone of the Indian economy, driving its socio-economic development. According to government figures in 2019, it employed more than 110 million people and accounted for 31.8 per cent share in national Gross Value Added (GVA) and almost half of total national exports. However, due to resource limitations, these enterprises are typically very fragile, with high-risk liability, which makes them vulnerable even to the smallest tremors of instability in the business ecosystem. The only way to counter these threats is to develop a risk-resilient organisation, by leveraging Enterprise Risk Management, or ERM, to safeguard against economic instability, natural disasters, and cyber risks.

ERM should be a mandatory process for MSMEs, in order to improve their chances of sustained and successful longevity. However, it is often perceived simply as an added cost. The survival of a business depends heavily on its capabilities to anticipate threats and mitigate their impact. ERM equips companies, whether small or large, to prepare for changes that are inevitable rather than waiting and then reacting to them. As risk-taking is a key aspect of running businesses, it should be clearly understood that the objective here is not to prevent or prohibit risks, which is impossible, but to ensure that all risks are being taken in an informed and conscious manner. Suitable measures, taken proactively, can help in mitigating any harmful fallout, and ERM plays a key role in protecting the assets and resources of an organisation, ensuring that risks are reduced to an acceptable, reasonable, and manageable level.

Challenges in Implementing ERM in MSMEs

Most micro-entrepreneurs fall in the informal sector. They can be viewed from two dimensions as a consumer and as entrepreneurs. As consumers, they have extremely limited financial resources and often rely on aid. As entrepreneurs, they can be producers, service providers, retailers, and/or traders. Because of lack of awareness, limited resources, and a low capital base, most micro-entrepreneurs fail to exploit government support. These enterprises are generally ‘overlooked’ when it comes to benefitting from incentives under authorised policies, schemes, and initiatives.

Also read: 3-month old Flipkart’s B2B store for MSMEs see 75% monthly jump in customer base, 90% in transactions

This situation improves when we move to the small and medium sector. However, the awareness of ERM strategies seems to be just as dismal with most enterprises shutting down within a few months of their inception. The lack of financial leverage is further complicated by a shortage of skilled professionals, insufficient profits, intense competition, and a lack of professional approach. The biggest challenge appears to be a lack of planning for ERM. Even where entrepreneurs are aware of its importance, its integration within the organisation and implementation is inadequate.

Importance of ERM Strategies for MSMEs

To design an ERM strategy for MSMEs, we have to start with increasing its awareness. Not just business leaders, everyone involved in the ERM process within the organisation must be educated and updated regularly to ensure that the strategies remain relevant. It must be treated as a continuous and integral part of the organisation. ERM planning should include an organisation-wide implementation and not just be limited to a few functions. This would mitigate the possibility of ‘blind spots’ that could threaten the entire business. Lastly, ownership and responsibility for risk management should be fixed with some key personnel who are experts in the area so that commitment to risk management is ensured.

In conclusion, MSMEs should not see ERM processes as optional, contingent on surplus resources when available. Risk mitigation efforts should start at the planning stage where adequate capital can be allocated for a robust risk management system. It can help businesses prepare for sudden drastic changes and operational risks. Well-planned ERM strategies are critical for long-term survival.

Hersh Shah is CEO of India Affiliate of Institute of Risk Management, UK, and Sandeep Bhatnagar is Director – Marketing and Business Development at National Institute for Micro, Small and Medium Enterprises, Ministry of MSME.