STATEMENT OF THE PROBLEM
PURPOSE OF THE STUDY
KIND OF RISK CONNECTED WITH SMES
Risk management focuses on adopting a systematic and consistent approach to manage all of the risks confronting organization. Risks distinctiveness applicable to SMEs in Kenya include: uncertain risk, a chance of loss, normally accidental, sudden and unforeseen. This uniqueness makes entrepreneurs to seriously think about risk, its impact on their businesses and how risk can be managed. It is therefore important to investigate the influence of risk management practices on performance of small micro enterprises. Five specific research objectives guided the study i.e. to identified the Components of risk in small and medium enterprises (SMEs, to examine the various kind of risk connected with SMEs, to identified risk management methods and techniques used to determine and monitor risks within SMEs, to determine the effect of risk management practices on SMEs performance and to identify impediment associated with risk management of SMEs in Eldoret. The descriptive research was employed in the study. The target population comprises of SME operators mainly drawn manufacturing, services and processing within Eldoret CBD. The sample for the study was selected using stratified random and simple random sampling methods. The research instruments were questionnaire, observation and interview. The data was analyzed using descriptive statistics (frequency tables), while correlation and regression analysis were used to test the hypotheses. The finding of the showed that very few SME owners, managers, entrepreneurs or key designated employees make use of risk management tools and techniques within their businesses, to achieve growth and sustainability. However, the majority agreed to the high importance of risk management in the success of a business enterprise. The findings of the study furthered revealed that leverage on financial structure, issue of collateral security, incapacity to go for technological advancement; tough competition and inadequate margin are among the risk associated with SMEs. The findings of the study furthered suggest that the risk management practice has a lot of effect on SMES performance. This study is significant since it is hoped the findings and recommendations of the study will assist the policy makers in the Ministry of Trade and Industry in making appropriate decisions.
Key words: Risk, Management, Performance, Small Micro Enterprises
List of Abbreviations: SME - Small Micro Enterprises, CBD – Central Business District
Risk is omnipresent and all pervasive in any walk of life. It is more so in the business sectors, particularly in Small and Medium Enterprises (SMEs) (Gould, 2008). The etymology of the word “Risk” may be traced to the Latin word Rescum, which means Risk at Sea. In business, risk is always measured against capital and therefore the Capital to Risk-weighted Assets Ratio (CRAR) is much in vogue (Bowden et al. , 2001). Risk is the potentiality that both expected and unexpected events may have an adverse impact on the capital and earnings. When we use the term “Risk”, we all mean financial risk or uncertainty of financial loss (Crouhy et al. , 2006). . If we consider risk in terms of occurrence frequency, we measure risk on a scale, with certainty of occurrence at one and certainty of non-occurrence at the other end. When the probability of occurrence or non-occurrence is equal, risk is the greatest.
Risk management is defined as the ‘process of understanding and managing risks that the entity is inevitably subject to in attempting to achieve its corporate objectives’ (CIMA Official Terminology, 2005). For an organization, risks are potential events that could influence the achievement of the organization’s objectives. Risk management is about understanding the nature of such events and, where they represent threats, making positive plans to mitigate them.
Risk and risk management is a major concern for all companies, especially small and medium sized enterprises which are particularly sensitive to business risk and competition (Alquier and Lagasse, 2006). In SMEs, the risk management function usually resides with the owner’s assessment of threats and opportunities pertaining to the enterprise (Watt, 2007).
One of the skills required of entrepreneurs is the ability to taken of calculated risks (Watson, 2004). According to Watt (2007), SME owner-managers should take regard of the following steps in their risk management process: establishing the SMEs risk strategy, determining the SMEs risk appetite, identification and assessment of risk, prioritizing and managing risks. The fact that a risk is beyond the control of the owner manager, does not risk occurrence to achieve organizational goals.
In addition, owner managers should furthermore take cognizance of managerial risks that arise as a result of the owner managers own actions when planning and executing business strategies (Berkeley et al., 1991). There is need for Kenyan and particularly Eldoret municipality SMEs owner managers should be educated in risk management principles, risk handling techniques available and risk control programmes that can be used, but care should be taken in the application of risk management principles, as although risk principles are common to all types of enterprises, the application thereof differs substantially between small and larger enterprises. However, many SMEs practice intuitive risk management when they assess the risk involved in decisions.
It is against this backdrop that this paper was considered timely to identify likely relationship between risk management practices and performance of small micro enterprises in Eldoret town and suggest solutions to enable the policy makers and other stakeholders in the implementation guideline discharge their roles effectively. The thrust of this paper is, therefore, to articulate the challenges posed to the development of a dynamic SME sub-sector arising from some lingering risk management constraints. These are the prevailing conditions that form the background to the study.
STATEMENT OF THE PROBLEM
SMEs owner managers, managers and entrepreneurs are perceived to not make use of risk management methods, to control the risk within their organization. Research has shown that the absence of a structured risk management approach within SME’s, ultimately lead to the demise of many SMEs. In today’s changing business environment, it is not sufficient to have just the technical understanding of how to start a business venture (Mahadea, 2008). As a result, the focus of SMEs owner managers, managers and entrepreneurs should be orientated on enhancing their results through risk management, to adequately use the financial support infrastructures provided to them, as well as to enable their businesses to enjoy sustainable growth.
Moreover, all these objectives could be best approached if a proper introduction; execution and monitoring of risk management principles and strategies are well understood and applied by SMEs owner managers, managers and entrepreneurs. Much of the research discussed on programmatic risk management focuses on behaviour rather than ideas, perceptions or attitudes. More specifically, the study focuses on the behaviour of the entrepreneur who is responsible for risk management of the agency. It is therefore important to examine the influence of risk management practices on performance of SMEs.
PURPOSE OF THE STUDY
The main objective of this study, therefore, is to investigate the relationship between risk management practices and performance of small micro enterprises in Eldoret town.
MATERIALS AND METHODS
The study was conducted in Eldoret Municipality of Kenya. This study adopted a descriptive survey design study analyzes the cause - effect relationship between two or more variables (Ordho, 2005). The study population comprised 170 respondents that cut across SMEs Eldoret Municipality. The instrument used to collect data for the study was both questionnaire and personal interview based on research objectives. The content validity was determined by multiple sources of information, chain of evidence and key informants review the report. The reliability of instrument was determined using the test-retest reliability techniques. The data collected from were analyzed using mean, Standard Deviation, frequency and percentages.
This section discusses the results of the data analysis. The findings were discussed below: