SMEs growth in Tanzania among other causes can be contributed by different factors such as economic, financial, managerial factor as well as probability factor once mixed together (Bentley, 2001). In addition, probability factor involves a lot of uncertainty and risks (Sparrow, 2000). Probability factor is a result of SMEs owner’s not operating separately from the business which is caused by lack of management skills which leads to poor decision making (Lyles et al., 1994). Hence, the majority of SMEs have the tendency of totally neglecting risks while only a few do pay the slightest attention to risks and uncertainty during their initial operation stages (Smiths, 1999).
Small and medium enterprises’ risks management practices level totally differs with the large-scale enterprises due to lack of managerial skills (Hill, 1988). Therefore, SMEs practicing risk management is often contributed to the belief and attitude of the owner (Bentley and Sparrow, 2000). Without the qualified personnel who operates SMEs’ the rate of failure is going to be higher than that of growing which will be like a lucky (Aylin, 2014).
Risk or uncertainty must be known prior to having ways of managing it (Dey, 2007). No one can manage risk before knowing it. Risk has got many definitions. Where there is a chance of incurring or suffering from a loss there are risks (Mullins, 1998). Risk simply refers to unexpected result from the original scenario (Kabala, 2015). Therefore, the risk is a coming event which has not happened yet on a cause of operating a business.
Classification and Argument for Pure Risks
Risks are classified into financial and non-financial risks, static and dynamic risks, fundamental and particular risks, and finally pure risk as well as speculative risks (Rejda, 2006 and Dorfman, 2008). But, this study focuses only on the type which is insurable. Pure risks are the ones which are generally insured while the speculative risks are not insured since they occur upon person’s willingness on the cause of making gaining or losing (Rejda, 2006). Therefore, basing on this reason only pure risks components are going to be highlighted and defined with few examples in order to be clearly understood.
Pure risks involve personal risks, property risks and liability risks (Rejda, 2006). Personal risk refers to risks which have a straight influence on a person for instance being unemployed, get disability, and premature death (Rejda, 2006). Liability risk refers to risk which makes someone legally indebted to compensate a party which is damaged as a result of being a cause of the suffered loss or losses (Rejda, 2006). Property risk these are risks which may damage properties through various causes such as fire, theft, accident, natural disaster causes and riots (Rejda, 2006). The loss may be ofassets example, buildings, products, machinery, and plant.
Risk management can be traced back to its origin from the insurance industry for more than four decades. Risk management in SMEs is the systematic technique of identifying, analysing and controlling the associated risks concerning the enterprise (Halman and Weiden, 1998). Risk management is a continuous action for amending as well as advancing various aspects of business resources, legal, operation, and performance, as a result, manage damages to the firm (Dickinsons, 2001). Risk management involves a process of risk identification, risk quantification as well as evaluation, and risk control (Vaughan, 2001). SMEs can achieve their targets, goals, and objectives by proper and systematic practicing of risk management. Hence, enterprise risk management is simply an inbuilt answer to risk management (CIMA, 2005).
Risk Management Process and Practices
Various studies show different stages of dealing with risks (Rejda, 2006 and Dorfman, 2008). The process of managing risks is divided into several parts which are risk identification, risk assessment, risk control, risk monitoring and risk communication (Rejda, 2006).
Risk assessment is used for identification of both qualitative as well as quantitative measures which are in connection with a circumstance posing as a potential hazard. Here risks are identified, analysed and evaluated thoroughly (Alexander and Sheedy, 2006). SMEs may opt for taking the risk since it involves high price on handling it. Also, they can ensure risk by transferring to a third party. Managing risks involves using various ways and techniques in a systematic form to achieve the objective (Dorfman, 2008). Also, a frequently risk monitoring and communicating is needed in this to ensure that control measures can be taken whenever the need arises (Dorfman, 2008). Therefore, through risk processes, one can know which way to adopt in case exposed to risks.
Risk Management Techniques
Modern risk management theory came up with two general suggestions relating to risks handling such as risk control and risk financing (Dorfman, 2008). Risk control tends to have severe impacts as well as often occurrences (Rejda, 2006 and Dorfman, 2008). Example of this is avoidance method and loss control, loss prevention for frequency while loss reduction for severity (Rejda, 2006).
Risk financing deals with ways of compensating for damages since some damage are inevitable from happening. Hence, this is done by shifting amount of cost to third parties. It involves risk retention, noninsurance transfer and insurance (Dorfman, 2008). Therefore, techniques used for managing risks can be said are avoidance, loss control, retention, noninsurance transfer, and insurance.