The objective of this article is to define, in theoretical and practical terms, the business and financial risks of small and medium-sized enterprises. At theoretical level, it is pointed to the possibility of risk reduction through planning. This work deals witha practical assessment of the current state of planning in small and medium-sized enterprises. The first section focuses on defining and characterising basic concepts from the primary functions of the enterprise, entrepreneurship, planning and financial-economic analysis. The second part in the theoretical plane points to existing business and financial risks. It presents theoptions of risk management processes with a pointing to the deployment of corporate risk management systems as a management tool.The third part assesses practical insights from the small and medium-sized enterprises in Ireland focusing on the level of planning and risk awareness in business.
Enterprise, entrepreneurship, financial-economic analysis, finance, planning, risk, SME
What are the most common risks involved insmall and medium-sized enterprises?
Appropriate personality characteristics, adequate assumptions, correct location and correct time are the lapidary factors of a successful entrepreneur. The absence or loss of any of these facts means the end of the business. Therefore, a person who does not plan to have its progress towards a given objective will never achieve this, because it will progress chaotically. The unawareness of this danger is a mindless approach to the goal of relying on fate, Happy Star, happiness… Therefore, the vision that transforms the primary objective of the entrepreneur is presented only to the entrepreneur of the knowledgeable environment.
These factors are a threat to business, not only to the entrepreneur itself, but also to the partners and associates who influence him/herself. It is questionable what leads an entrepreneur to face the risk of fatal failure. The decision itself is not a victory, it is only a choice and a representation of a journey that does not recoil affect his entire life. Such a decision shall include the scope of the business at the level of quantitative and qualitative. It is possible to do business as a self-employed person, as a family business or to take responsibility for other people. Each such business has the same basic features – the activity itself and the financial resources. Business can only be done with sufficient funds and they only grow through business. The two phenomena are associated containers. Any influence on these values of risk will be reflected in each of them. The risk is a material uncertainty from the unknown, unrecognized, erratic.
In this article we explore some aspects of the business in direct connection with risk. We treat it necessary to consider the topic regardless of the nature of the risks, whether it is business or financial risks. In view of the extent of work, we consider it productive to focus its attention on a group of entrepreneurs with a small and medium-sized enterprise characteristic.
This group also includes a number of risks that can significantly influence the results and even threaten the actual existence of the enterprise.
We divide them into four groups:
- Commercial (market) risks,
- Operational (operational) risks,
- The risk of loss of goodwill,
- Political risks.
1.The Business Risks are mainly triggered by changes in market conditions. Changes in supply and demand sessions, prices of business inputs (materials, raw materials, energy, wages and others) and business outputs (businesses produced by products and services) are reflected.
In this context, he talks about the so-called. Commodity risks. They affect not only the current revenues and costs of the enterprise, but also the actual effectiveness of the projects already implemented. However, the intensity of the business risks also affects the conduct of the enterprise itself, more precisely its trading strategy-to which markets and with which product, qualitative and price structure the production is directed.
2. Operational risks shall be linked to the application of measures and instruments to which the undertaking ensures implementation of its strategy. These are marketing measures in the field of production (logistical, technical and technological risks), human resources and others.
Operational risk is a risk arising from operational failures, including procedural or systemic or technological failures, intentional errors, or omissions of certain employee workflows, legal or documentary failures, or adverse changes in regulatory requirements affecting relevant transactions
3. The risk of loss of goodwill is linked to how the enterprise assesses its economic surroundings (suppliers, subscribers, banks, tax authorities and other bodies, as well as the inhabitants of the region). It is therefore an image of an enterprise that builds on a long-term basis, not only economic results, by consolidating market position, but also in social and environmental behaviour. However, it is also possible to damage it significantly in a very short time. The reputation of the enterprise is very significant in its customer-supplier relations, in negotiating the acquisition of capital by deposits of owners or credit forms and in other relations of the firm with the environment. Therefore, the factors that may interfere with the company’s good name need to be addressed.
4. Political risks are mainly taken into account in foreign trade transactions. They are also important when deciding on investing abroad. They are caused by external or internal instability of the region to which the economic activities of the undertaking are directed.
To clarify how to challenge in the right tactic in risk management is a case of study (Ireland-SBA-Fact Sheet 2019), which I chose to demonstrate the correctness of the risk management OF entrepreneurship in SMEs. (please see Fig.1 and Fig.2)
SMES in Ireland are very important for the overall labour market in Ireland. Total employment is 70.1% of total employment, which exceeds the EU average of 66.6%. In the second place, the SME contribution to the total value added is only 41.5%, which is 15% below the EU average, mainly because of the strong presence of foreign conglomerates. For four years, between 2014 and 2018, the added value of SMES increased by 58.5% and the SME’s employment increased by 16.4%. Later in the years 2017 – 2018 increased the added value of SMES and, of course, employment increased by 3.1%.
The biggest priority of the Irish Government was to help Irish SMES mitigate their position on the potential impact of Brexit; The Government has taken measures to facilitate trade so that it can be usefully useful. SMES ‘ attitudes to bank credit still hamper high interest rates and their personal guarantees. There is a need to make efforts to improve the transparency of funding and, in particular, reduce the high cost of legal services for smaller companies. In the implementation of the overall national rural development, the attention of SMES in all sectors could be effectively addressed. The decreasing positive trend of indicators on SME innovation and the attractiveness of Irish SMES, particularly in the field of employment, should be prioritization in the SME strategy at the stage of preparation. It will also be important to carry out an SME test as well as an assessment of the impact of measures taken on SMES, where these should be integrated into national administration procedures.
Fig.1.Number of persons employed in SME in Ireland in the years 2008-2019 and Value added of SME’s in the years 2008-2019 in Ireland
Ireland as such is set significantly above the EU average in five areas of the SBA:
- Second Chance,
- Responsive administration,
- single market
- Skills and innovation.
In general, Ireland is in line with the EU average in four other areas of the SBA:
- State aid and public procurement,
- Access to finance,
Fig. 2. Ireland set significantly above the EU average in 9 areas of the SBAin the years 2008-2019
The profile of Ireland’s SBA remains broadly competitive. The great presence of foreign companies in Ireland is likely to affect several indicators. (Those related to value added, productivity, innovation, exports, etc.).
We consider the objective of the research question to be fulfilled, since the theoretical-practical approach to the issue has shown that risks to small and medium-sized enterprises exist. This concerns in particular business risks, operational risks, political risks, but also currency risk, liquidity risk, market risk or interest rate change risk.
We have focused on the fact that risk awareness is the first step towards reducing and eliminating risk. It is satisfactory that our survey has shown awareness of the existing risks in practice. This is a weak law enforcement, corruption and clientelism, poorly set of legislation, inappropriate interventions in the free market by the European Community and, last but not least, state support for foreign investment. Entrepreneurs realize that only awareness is not sufficient enough for successful market action. The risks themselves are seeking to break down the broad-spectrum effects on the market.
The risk can be considered as a variable value in the business equation. As such, it cannot be disqualified. It is also not possible to fully protect the risk in business, but it can be reduced to an acceptable level. The ground level of all is a risk awareness and planning. In these limits, most businesses are moving if we accept only the initial forms of planning. However, by reducing all potential risks, by planning in quality-required forms, only a small number of enterprises are dealt with for objective reasons.
For the application in practice, the theory brings various methods to manage the risks. These are collectively referred to as risk management. Based on the theory, but also the practice of developing new forms of risk, the procedures and principles of managerial decision-making in risk elimination are updated. A system is hereby established which provides the form of protection for implementation in the management structures of the undertaking. In view of the fact that it is a system, the decision-making process is divided into several degrees and is not only at individual level.
Risk assessment is worth something. It is necessary to navigate and synthetically compile from economic-managerial knowledge in the issue. The entrepreneur in such a way can achieve a system of entrepreneurial management that draws attention to risks and protects against them.
The small and medium-sized enterprise, considering the costs, considers the risk assessment to be non-priority and therefore not evaluated in order to gain risk-saving. An important factor is the temporal aspect that encourages the establishment of elementary priorities in the physical management of the enterprise. This procedure will sooner or later be disbanded and will eventually be much more expensive as if the costs were spent on its early detection and elimination. Similarly, respondents perceive and assess the financial risks in their own company based on data in accounting and according to the rate of return, which is also only from accounting documents, after implementation. We consider this attitude to the risks as the most serious internal factor in the development of society.
It is the personal property of the manager, the risk of which is willing to enter, regardless of the amount of possible interest. Economic and financial management is the subject of an enterprise risk management system. The operation of such a system is only possible where a requirement for the functionality of such a system has already arisen. It is naturally necessary to achieve a certain degree of business development and the maturity of management. Implementation and focus are influenced by the previous development of the enterprise and the experience of management. The level in which a business is achieved need is in an expansive stage of development, after critical periods of recession business. From this point of view, the recession period can be perceived positively, as a period of the acquisition of experience.
The implementation of the corporate risk management system will ensure that the management is partially repealed from the company itself. Management in the new dimension applies other competencies in the form of comprehensive planning. It is questionable whether a small and medium-sized enterprise has a development opportunity to achieve a system deployment requirement. Any business, in our opinion, predicts the existence of a system of protection against risks. Conscious and systematic dimensions will only take effect after the fulfilment of baseline factors such as the high level of business development, experienced management and the value of the enterprise on the market.
Bibliography (standard format of citations according to international standards):
1. Kráľovič, J. and Vlachynský, K. (2002) “Finančný manažment”, Bratislava, Iura Edition, 415 strán., ISBN 8089047173.).
2. SivákRudolf, GertlerĽubomíra, KováčUrban, 2009, ‘‘Rizika vo financiách a v bankovníctve ‘‘, Sprint Dva vydavateľstvo, 345 strán, ISBN9788089393039
Ing. Zdenko Kyselica, MBA
prof. RNDr. Michal Greguš, PhD.
Univerzita Komenského, Fakulta managementu
Ing. Jaroslav Vojtechovský, PhD.
Univerzita Komenského, Fakulta managementu
Digital Science Magazine, Číslo 1, Ročník VII. ISSN: 1339-3782