Risks faced by SMEs

The number of SMEs has increased in Kuwait since the establishment of the National Fund for SME Development (the “SME Fund”) in 2013. The SME Fund accepted 245 project applications in 2017, 44% of which were commercial business ideas. The amount of financing approved that year was KD 50,125,458 and resulted in the creation of 850 jobs for Kuwaitis. Since its establishment until the end of 2018, the SME Fund spent a total of KD 167 million.

There are certain risks that SMEs are exposed to in Kuwait’s market, and to manage them and mitigate their outcomes, firms need to be able to identify, analyze, treat, and monitor these risks. For the sustainability of a project, it is helpful to know what the kind of risks an SME might face, which is further discussed in this article.

One of the main risks to monitor for is Operating Risk, which is uncertainty from associated core operations of a business and is linked with the variability of product demand and prices of supplies. There is also the risk of changes in human resources or the hiring of incompetent or fraudulent employees and failed processes for the internal operations of the business.

Another key aspect of Operating Risk is spending over budget, which a lot of new business may face if there was a deficiency in the planning and financial forecasting phases of the business plan. One way to mitigate what this risk is by ensuring the right staff for the job is hired, and this can be done through running a background check on applicants. Another recommendation would be to test out several scenarios during the financial planning phase and to plan according to the one that presents the highest possible amount of costs while still delivering the expected Return on Investment (ROI) for the business type.

Inventory Risk is another common risk for a small business, and this involves the potential loss that results from inventory planning. SMEs tend to hold more inventory than the market demands, which increases storage costs, and this is because there is a belief that the business should have all the products in-stock all the time. Additionally, poor vendor selection escalates other risks as a business may choose to prioritize paying vendors whose supplies are generating higher sales; however, this causes the company’s accounts payable to increase. This risk can be lessened by knowing the demand in the market for each inventory item and maintaining good supplier relationships to ensure that the product can be supplied to the company on a schedule. Therefore inventory management can be done in a timely fashion and reduces the additional costs of storage.

Knowing the consumer is necessary so that the product can be designed to attract them, and entering the market with a Minimum Viable Product (MVP) and a unique selling point will streamline targeting the business’s market segment. Sales Risk arises when you are unable to sell your product, and that is why the business needs good sales and business development team to help the products penetrate the market. A good marketing strategy also helps push the business forward, and this includes advertising, videography, and maintaining a social media presence.

By considering these SME risks, the founders will be able to identify and rate them according to the likelihood of their occurrence and rank them based on the size of the impact they might have on their business. They will enable business owners to consider mitigating factors to treat any threats to the startup’s development and growth.

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