ASSESSMENT OF RISK MANAGEMENT ON SMALL AND MICRO

ENTERPRISES: CASE STUDY ON SOME SELECTED SMALL AND

MICRO ENTERPRISES IN KEZIRA AREA.
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENT FOR BACHELOR OF ART DEGREE IN MANAGEMENT

BY

MEHDIYA GRAGN

ADVISOR

WUBSHET MENGESHA (MBA)

DIRE DAWA UNIVERSITY

SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT

DIRE DAWA, ETHIOPIA

JUNE, 2014
Table of Content

Table of Content……………………………………………………………………………….

Abstract………………………………………………………………………………………..

List of Tables and Figures.........................................................................................................

Acronyms...................................................................................................................................

Chapter One
1. Introduction……………………………………..………….…….………………………1

1.1 Background of the Study……………………..……………………………………….…. 1

1.2 Statement of the Problem…………………………………………….…………………... 3

1.3 Objectives of the Study…………………………………………………….…………….. 4

1.4 Significance of the Study………...…………………………………….……………….... 5

1.5 Scope of the Study…………………………………………………….………...…….… 6

1.6 Limitation of the Study……………………………………………………………….……. 6

Chapter Two
2 Review of Related Literature……….…………………………………………..…...……… 7

2.1 Definition of Risk………………………….………………………………….…..……….. 7

2.2 Risk Management……………………………………………………………………..…… 8

2.2.1 Identification of Risk (Exposures)………………………………….…………..…..…… 9

2.2.2 Measuring of the Risk………………………..…………………………….…..……… 9

2.2.3 Selecting The Tool To Be Used In Managing The Risk…………………………...….. 9

2.2.4 Implementing the Decision………………………………………………..……...….. 10

2.2.5 Evaluating the Result………………………………………..……………..…..….….. 10

2.3 Types of Risk…………………………………………………………………..……….10

2.3.1. Constitution of business entity…………………………………………………….…12

2.3.2 Tough competitions and in adequate margin…………………………..……………...12

2.3.3. In capacity to go for technological advancements......................................................12

2.3.4. High employee turnover............................................................................................13

2.3.5. Micro finance.............................................................................................................13

2.3.6. Bank lending to SMEs...............................................................................................13

2.3.7. Collateral security......................................................................................................14

2.3.8. Problems in marketing of products............................................................................14

2.5 What Are SMEs enterprises Businesses……………………………........................... 14

2.6 Risk Management in SMEs enterprises……………………………………………… 16

2.7 Special Contribution of SMEs Enterprises……………………………….……………

Chapter Three
3. Research Methodology……………………………………………………………..17

3.1 Study Area……………………………………………………………...………… 17

3.2 Data Type………………………………………………………………………….. 17

3.3 Sources of Data…………………………………………………….………………. 17

3.4 Methods of Data Collection…………………………………………..…………… 17

3.5 Sampling Techniques……………………………………………………………….. 17

3.6 Sample Size…………………………………………………………………………. 18

3.7 Methods of Data Analysis………………………………………………….………..18

Chapter Four
4. Data analysis and interpretation...................................................................................... 19

4. 1 Result and discussion……………………………………….……………………….…19

Chapter five
 5. Summary, conclusion and
recommendation....................................................................................................................28

5.1 Summary and

conclusions.............................................................................................................................28

5.2 Recommendation...................................................................................................................30

References………………………………………………………….………………………..…32

Appendices...............................................................................................................................33

List of Table

4.1 Sex Distribution of the respondent.............................................................................19

4.2 Age Distribution of the owners..................................................................................20

4.4 The administrator of the small business..................................................................23

4.5 accidents faced by small business enterprises............................................................23

4.6 method of risk handling tools used by small business................................................24

4.7 exposures of the owners of small business to any risk management training............25

4.8 The credit availability for SMEs in the town............................................................26

4.9 Whether the SMEs business have an intention to use any risk management tools in
future...............................................................................................................................26

4.1.0 The main factors that affect SMEs from managing risks efficiently.......................27

List of figures
Figure 1. Educational background of SMEs managers................................................
 ACKNOWLEDGMENT

First and most, I would like to praise Allah for his almighty and great support for helping me to
finish this paper.

Likewise, I would not escape from expressing my special thanks to my advisor Mr. Wbshet
Mengesha supporting me in the process of preparing this research paper by giving important
idea, constructive suggestions and useful guidance.

Last but not least, I want to thank my families, friends and all those who have contributed with
their valuable aids for the successful completion of this research paper.
 ABSTRACT

Risk management has been identified as a vital process in the business institutions. It is further believed
that risk management is less developed within the small business sector where strong enterprise culture
can only help in managing risk in a professional and structured way. This study focuses to investigate the
risk management practices small and micro enterprises in DireDawa. The attitudes of the employees,
owner, managers and their knowledge towards risks play an essential role in how systematically risks are
handled. Therefore, this study stresses the need of improving current planning system within the SMEs
together with enhancing the employees, owner and manager knowledge and awareness regarding risks
management through proper training and development. Risk management highlights the fact that the
survival of a business entity depends heavily on its capabilities to anticipate and prepare for the change
rather than waiting for the change and then react to it. It should be clearly understood that the objective of
risk management is not to prevent or prohibit taking risk, but to ensure that the risks are consciously taken
with complete knowledge and clear understanding so that it can be measured to help in mitigation. The
study uses questionnaires as the dominant data collection tool along with unstructured interview. Also,
the study was adopted the census techniques from judgementally selected small businesses. The primary
data from the employees and owner of the business was replenished the data that needed by the researcher
for the completion of this paper. Conclusions and recommendations was reported and processed, analyzed
and carefully interpreted to arrive at feasible findings.
 CHAPTER ONE

1. INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The possible contribution of risk management to business can be divided into five major
categories. The contribution that the risk manager in a particular case depends up on the
objective set for the function and exerts to which these objectives are achieved. Firstly, because
profits can be improved by reducing expenses as well as increasing income. Risk management
can contributes directly or indirectly to business profits or in case of nonprofit-organizations to
operate efficiently. Secondly, risk management can contributes indirectly to business profits.
Risk management can reduce the fluctuations in annual profits and cash flows. Keeping these
fluctuations within bounds aid planning and are desirable goal in itself. Thirdly, risk
management may make differences between survival and failure, some losses such as large
liability suits or the destruction of firms manufacturing facilities may to cripple a firm that
without proper advance preparation for such events the firm must close its door. Even if, the risk
management did not contributes to the economic health of the business in any other way, this one
benefits will be make it a critical functions of the business management (Rejida George, 1998).

Fourthly, the peace of mind made possible by sound management of risks may itself be available
non-economic asset. It improves the physical and mental health of the managers and owners.

Fifthly, the risk management play an important role by helping others such as, employees, who
will be affected by losses of the firms. Risk management can also help to satisfy the firms’ sense
of social responsibilities or desire for good public images. (Arthur, 4th edition)

Risk management for small and micro enterprise businesses is designed to be easy to use
resources to help the firm. Small and micro enterprise businesses are incorporating the risk
management into their overall management process.

In economic terms small and micro enterprises (SMEs) are the firms that has relatively small
share of market and are managed by its owner or part owners in personalized way and not
through a medium of a formalized management structure.
Accordingly, one of the decisions areas that should be given attention by managers of small and
micro enterprises (SMEs) is that analyzing the potential losses facing the firm and deciding on
the best one or the combinations of two or more methods that most fit with the extent of the
company. (Dewhurst, 1996).

1.2 STATEMENT OF THE PROBLEM

This study attempts to find out the risk management techniques that most of the business
organizations in Dire Dawa use to their business against the possible occurrences of risk and
uncertainty. In previous days, the minimal regard was given for risk management in small and
micro enterprises. But these days these business environment is not promising to do so, rather
small scale and micro enterprises give due regard to manage various risks which they are
exposed to.

However, in the process of analyzing and managing the potential losses the owner or the
manager is very likely to face with different problem. The problem may be of the firm’s own
problems and problems originated from outside environment.

The business internal problem is due to their limited capacity or shortages of resources to be
surrendered for managing risks. Most of the time it is the owner full responsibility to manage all
the affairs of the business which usually ends up with unsuccessful risk management.

The external problem is almost due to insurances company's failures to accept coverage requests
of the small and micro enterprises. This study will be conducted to answer the following basic
questions:

i. What types of risk management techniques that are used by most small and micro
enterprises (SMEs) against the possible occurrences of risk and uncertainty?

ii. What are the basic reasons for small scale and micro enterprises not to manage risk
effectively?

iii. Do small and micro enterprises have separate risks management system?

iv. What seems like the attitudes of Small and micro enterprises [SMEs]employees and
managers towards to risk?

Generally, when the researcher reviews different studies conducted before this study, discovers
that most studies are tried to emancipate the basic problems related to small and micro
enterprises.

Different researchers mainly focused on how small and micro enterprises are financing, major
marketing constraints, factors that hinders the overall performance of the small scale and micro
enterprises in Dire Dawa. Therefore, this research paper tries to investigate financial related risks
and introduces basic measurement and methods to overcome these problems.

1.3 STUDY AREA

There are 105 small and micro enterprises, among them the researcher judgmentally takes only
four enterprises from different sectors within 03 kebele of kezira. The selected business have
total of 33 employees.

1.4 OBJECTIVES OF THE STUDY

The general objectives of the study is attempting to find out the risk management techniques
that most of the small businesses and enterprises in Dire Dawa uses to their business against
the possible occurrences of risk and uncertainty.

1.4.1 Specific objectives

 Assessing the attitudes of small scale and micro enterprisesemployees and owners
towards to risks and insurance.

 Determining and analyzing the most commonly used risk and handling alternative
tools.

 Identifying and analyzing the basic reason that keeps small and micro enterprises
away from effective risk management.

1. 5SIGNIFICANCE OF THE STUDY

The study is presumed to provide a vital information and awareness for various exposures and
consequently giving due regard for those exposures, potential and actual losses and operating
smoothly in the dynamic and uncertain business environment. This study will be a significant
endeavor in understanding the importance of accessing risk management in a certain business
organization.

1 Helpful to business administrators and management practitioners for this will

be guide for them when they employ effective marketing approaches to their
organizations.

2 It is helpful for insurance companies to approach and give regard in insuring

small and micro enterprises. This will be helping them in utilizing their idle
capacity.

3 To give basic regard for small business owners about the basic features and
influence of risk in small business.

It could also serve as an academic tool to fill literature gap and base for further references in
forming its reader about the business development and risk management in small and micro
enterprises. It is deemed useful for further researcher on marketing strategies and its application
to different small scale and micro enterprises.

1.6 SCOPE OF THE STUDY

This study is limited to small and micro enterprise businesses of Dire Dawa kezira 03 kebele
only. The time for this study was delimited up to June 2014. Also the study focuses only on
financial aspect of risk management techniques.

1.7 LIMITATIONS OF THE STUDY

 Reluctantness of respondents to fill the questionnaires.

 Lack of material in the sector seems an indication of signaled effort that was
exerted to improve and be able to benefit from the sector.

 Limited number of population include in the study.

  The finding may not be applicable for all small and micro enterprise
businesses in Dire Dawa and other towns.

1.8ORGANIZATION OF THE STUDY

This study is organized in to five parts. The first part deals with the introduction of the study.
The second part tries to show related literature review about risk management. The third chapter
discuss about methodology of the study. The fourth part of this study presents data analysis and
interpretation. Finally the last chapter gives summary, conclusion and recommendation.

CHAPTER TWO
 2 REVIEW OF RELATED LITERATURE

2.1 Definition and role of SMEs and risk

The small and micro Enterprises (SME) sector has been recognized as engine of growth all over
the world. Many countries of the world have established a SME Development Agency as the
nodal agency to coordinate and oversee all Government interventions in respect of the
development of this sector. There exist several definitions of the term small and micro
enterprises (SMEs), varying from country to country and varying between the sources reporting
SME statistics. The commonly used criteria at the international level to define SMEs are the
number of employees, total net assets, sales and investment level. If employment is the criterion
to define, then there exists variation in defining the upper and lower size limit of SMEs. (APJM,
volume 1(4), December, 2012)

It is one of the areas of discussion for many economists, statisticians, decision theorists,
insurance theorists and others for many years, even if they are unable to get into an agreement on
the definitions of risks. For the reasons that all of them are dealing with different areas of subject
matter, they are supposed to define risk in different ways for those who are engaged in the
insurance business risks, means a peril insured against. e.g. Fire, life, health...etc.
(Tekilegeorgis:2004)

Although insurance theorists are not agreed on universal definition. There are common elements
in all the definition given by many scholars, indeterminacy and losses. The notion of
indeterminate outcome is implicit in all definition of risks; the outcome must be in question.
When a risk is said to be existing there always must be at least two possible outcomes. If we
know that loss will occur there is no risk.Investement on capital asset.e.g usually involves
realization that the asset is subject to physical depreciation and its value will achieve. Here, the
outcome is undesirable. This may be loss in a general accepted sense in which the individual
possession passion is lost or it may be again smaller than the gain that was possible. On the other
hand risks must be future oriented and uncertain. (Vaughan: 1995)
For our purpose we define risk as a condition in which there is a possibility of an adverse
deviation from the desire outcome that is expected or hopped for and current situation.
(Vaughan, 1995)

2.2 Risk Management

Risk management is the logical processes used by business firms and individuals to deal with
their exposures to loss.

The process of risk management

The process of risk management is done by the following steps.

 Identifications of the exposures

 Measuring and control of the risk

 Selecting tools used to manage risks(plan action)

 Implementing the decisions

 Evaluating (assessing and analyze) the result. ( Ashok Kumar :2012

2.2.1 Identification of risks/exposures/

In this stage the risk manager or the owner of the business is to be involved in identifying the
exposure of his business to different risks. This task of the risk manager is supposed to be highly
difficult. In this stage inability to recognize the potential loss will bring about adverse results on
the business as the risk manager has lost his chance to deal with them.

2.2.2 Measuring the Risks

This is the area for the managers where he supposed to measure the risk in terms of the
probability it happens and the intensity or severity in case it happen or its financial impact on the
business and finally the ability to predict the loss that will actually occur during the budget
period. It is at this stage where the risk manager is expected to identify those exposures that are
capable of bringing about a real difficulty to the organization.

2.2.3 Selecting the tool to be used in managing the Risks

The identification and measurement of the loss would lead to this step where we are going to
select the best treating mechanisms to deal with them efficiently.

2.2.4 Implementing the Decision

The fourth step in the risk management process is implementing the decision made above in the
third step. Once the tool to be used is selected, the risk manager should furnish and make a
management in implementing the decision. (William and hens 1985, 17)

2.2.5 Evaluating the Result

The result of the decision made and implemented in the first four steps must to be monitored to
evaluate the wisdom of those decision and to determine whether changing conditions suggest
different solutions. (William: 1985)

2.3 Types of Risks

Risk can be classified in different ways. However, for our purpose we classify risk in four
different ways:

1. Financial and Non-financial risks

In this category our base is whether the risk involves some sort of financial loss or not. Those
types of risks that end up with financial losses are named financial risks while which do not
result in non-financial consequences is called non-financial risks.

2. Static and Dynamic Risks

When we say dynamic risks the risks are supposed to be resulted due to change into economy.
Such changed as changes in price level, income level and output, technology and others can be
causes of dynamic risks. On the hand static risks that occur even if there is no change in the
economy static loses tend to occur with degree of regularity over time and as a result are
generally predictable. Because they are predictable, static risks are more suited to treat by
insurance than are dynamic risks. (Vaughan: 1985)

3. Fundamental and Particular Risks

When we say fundamental risks, we are saying that the risk is not happening to individuals
rather than it is inflicting up on a group of people so that it affect many individuals at a time
being caused by economic , social and political condition. On the other hand particular risks are
those risks which are to be born by an individual not by group of people. (William: 1985)

4. Pure and Speculative risks

When we say speculative risks, the situation in evolved here is that there is a possibility of gain
and loss. In contrast the situation evolved in the pure risks is loss or no loss that means there are
no possibilities of gain. (Rejida: 1988)

2.3.1 Risks Specific to Small Scale and Micro Enterprises

No doubt any business entity needs robust risk management system. But SMEs need much more
than that as they may not have wherewithal to manage and control risks due to their very size and
limitations. This is not true in the case of large corporate entities where professional personnel
take care of many aspects pertaining to risks. All risk taking units must operate within approved
procedures, limits and control. There is no specific definitions for SMEs, which normally cover
closely held or unlisted companies, partnerships firms, proprietor concern etc.There exists
fundamental difference between the way they function and the way they will be served in the
financial market, as the character and integrity of the promoter/owner are the key and critical
credit indicator and hence play a large role.Hence, both the business and professional
relationships are rolled into one. Therefore, credit rating or for that matter risk rating may not
make material differences to SMEs sectors. Certain misconceptions such as SMEs may get low
rating , provide unreliable information, may not afford the fees for getting them rated etc,will
have to be dispelled first. However, rating agencies with specialized teams with analytical tools
customized to SMEs sector will go a long way in putting in place proper mechanisms in this
regard. (Ashok Kumar: 2012)

Small and Micro Enterprises (SMEs) businesses are exposed to risk all the time. Such risks can
directly affect day-to-day operations, decrease revenue or increases expenses. Their impact may
be serious enough for the business to fail. Most businesses managers know instinctively that they
should have insurance policies to cover risks to life and property. However, there are many other
risks that all businesses, some of which are over looked or ignored. (Ashok Kumar: 2012)

Every business is subject to possible losses from unmanaged risks. Some risk management
should reduces the chance that a particular event will take place and, and if it does take place,
sound risk management system should reduces its impact. Risk management starts by identifying
possible treats and then implements processes to minimize or negate them.

The SMEs sectors are exposed to some specific risks, some of which are discussed below:

1) Constitutions of the business entities

The business entities under SMEs sectors are mostly proprietorship and partnerships’ concerns.
Few in the joint stock companies are private limited or closely held public limited companies.
Thus their vary constitutions itself may prove to be risky due to lack of professionalism and
overdependence on one or two key persons for running the business. Lenders and other
stakeholders in SMEs sector cannot afford to forget this fact. (Mohammed Alkali: 2012)
2) Tough competitions and inadequate margins

By the virtue of the fact, most of the entities in SMEs sectors are small players in their field, they
may have to encounter tough competitions from the bigger players. They face the pressure on the
margins they cannot raise their price but have to absorb the high input cost. (Mohammed Alkali:
2012)

3) Incapacity to go for technological advancement

With very little financial resources and poor ability for leveraging the financial structure, the
SME sectors may not have the wherewithal to go for highly sophisticated technological
advancement which would help them optimize their available resources in the best way.
(IJCRB.webs.com)

4) High employees turn over

As growth prospects are very limited in SME sector, it is prone to high degree of employee
turnover and this may involve lot of wastage of manpower and additional cost in the form of
training and knowledge updating, affecting continuity besides lowering the productivity.
Qualified and experienced personnel may not stay long as they may gain some experience and
change employment.
Majority of SME loans are backed by residential property and standard home loan margins
apply. Where SMEs are backed by other forms of collateral the margins do not appear to be
excessively above those available for large business. It may be noted that the two biggest
problems faced by the SMEs are relating to Regulatory issues and unskilled employees, which
collectively constitute nearly 45 to 50 per cent of the problems encountered by them. (Ashok
Kumar: 2012)
5) Micro finance
Micro Finance can be defined as providing credit, thrift and financial related services and
products of very small amount so as to improve the standard of living. In Ethiopian context
Loans up to 30,000 birr are covered under Micro Finance. Number of small enterprises could be
covered under these social oriented entrepreneurial activities. There can be no doubt that lenders
spread their risk when they lend to this particular sector. It is under the premise that poor are
bankable and micro enterprise finance through repayment incentive structure, streamlined
administration and market based pricing adopting profit center approach is sustainable. This
approach leads to profound changes in a cumulative causation triggered by credit to rural mass,
as well as SMEs. (IJCRB.webs.com)
6) Bank lending to small scale and micro enterprises
SMEs are an important part of economic growth in the country and bank lending is the primary
source of external finance to them. Therefore, it is essential that banking sector responds not only
effectively but also efficiently to the just needs of SMEs. When the business owners or managers
know more about prospects of venture and risks facing their business than lenders, information
asymmetry sets in. Where information asymmetry exists, lenders may respond by increasing
lending margins to levels in excess of that which the inherent risks would require. Besides, banks
may also curtail the extent of lending and resort to what is known as Credit Rationing,
notwithstanding the fact that SMEs would be willing to pay a fair Risk Adjusted Cost of Capital .
(Ashok Kumar: 2012)
7) Collateral security
The existence of collateral means that banks do not have to rely as much as they otherwise would
on detailed investigation and analysis of borrowers business. It serves as insurance to lenders and
for the borrowers. It is a reflection of credit-worthiness to lenders. Extending the logic further,
where the promoter/owner of SME is willing to offer the family home as security against the
amount borrowed, it serves as a catalyst to avoid default. That is to say the incentive to avoid the
risk of default is likely to be stronger where the family home is used to obtain business finance.
(IJCRB.webs.com)
8) Problems in marketing of products
Next to finance, marketing is the big problem area for small and micro enterprises. The survival
of small and micro enterprises very much depends on sound marketing techniques. One of the
most important tools in the hands of SMEs for promoting their sales is low prices coupled with
credit to buyers, which give rise to number of problems at a later stage. Marketing as a
profession has not yet developed in the SMEs sector. Professional agencies are not engaged by
SMEs on account of paucity of funds. The concept of marketing is not known to the majority of
SMEs. For majority, marketing means advertisement or personal contacts. There are many ad-
hoc initiatives taken by the Government to promote marketing of products/services of small units
but no concrete action plan has been chalked out or targets made.( Ashok Kumar:2012)
 2.4 What are Small Scale and Micro Enterprise Businesses?

It is a common ground identifying businesses as small and large completely from individual
viewpoints. There are two approaches to define small businesses and micro enterprises:

 By some measures of size and

 By using economic control criteria

Size criteria: - Even the criteria used to measure the size of the business vary. Some criteria’s are
applicable to all industrial areas. While others are relevant only to certain types of business.
Some of the measures include:

 Number of employees
 Sales volume
 Asset size
 Insurance enforce
 Volume of deposit etc.
 Economic control criteria: This criteria includes:
 Market share
 Independence etc.

Therefore, to classified businesses as small scale and micro enterprise and large businesses must
fulfill the above criteria.

2.5 Risk Management in Small Scale and Micro Enterprises

Risk management in small scale and micro enterprises is different from large firms in several
ways. Insurance companies are not always eager to insure small firms and may even turndown in
some cases. Also in large firms the responsibilities of the risk manager are assigned to
specialized staff manager. It is more difficult for small and micro enterprise businesses to
address risk management. Because the firms risk manager is usually the owner. And the owners
wear so many hats. Furthermore, risk management is not something that requires immediate
attention until something happened in most small businesses. The prudent manager of the firm
will take time to identify the different types of risks facing the business and find ways to cope up
with them. (Hailey: 2003)

CHAPTER THREE

3 METHODOLOGIES
 3.1 DESIGN OF THE STUDY

The study was conducted through descriptive type of study. The main purpose of this type of
study is to describe the problem.

3.2 POPULATION AND SAMPLES

The selected business have a total of thirty three employees. The study was used census method
after selecting sample businesses was selected in stratified sampling method. The selected
businesses have a total of only 33 employees.

3.3 SOURCE AND METHOD OF DATA COLLECTION

In this paper researcher was used primary data. The primary sources of those data were collected
from business sectors by distributing questionnaire and conducting interview s to the managers
of the business. Secondary data was collected in order to develop conceptual skills by referring
different books,internet sources and documents.

3.4 Methods of data analysis

After data was collected through questionnaire and interview the data must classified into
homogeneous group according to the content of the responses in the questionnaire. Then the data
will analyzed by using descriptive method analysis in the form of table, graph and percentages.
The interpretation of the data will be doing by relating the data with the general theories on the
study area.