risk taking in sme's

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Brian Stevens

BA Business administration with

Accounting and finance

Dissertation report

Does operational and financial risk taking

lead to success in SME’s?

University of Greenwich Medway

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Abstract

Are small medium enterprises that are risk taking in the operational and financial risk areas more

successful than those that are adverse?

Introduction – The aims were to find the concepts of risk and what SME’s perceive as success, to find

if profit was influenced by the SME attitude to risk taking and to interpret research and data into a

conclusion that risk taking SME’s have higher success than risk adverse companies in the operational

and financial risk area.

Literature review – Risk reading and examination including perception, operational, financial, risk

taking and SME view of risk. Risk taking is down to personality type and situational variables;

Operational risk involves software, system and human interaction procedures whilst financial risk

involves investing into new products, hedge funds or change of business costs. The perception of

SME’s main objective is to survive which is most small firm success priority and risk taking is

restricted due to lower budgets, short-term financing and knowledge of risk.

Research methodology - A 15 questioned survey that was implementing with use of the literature to

capture SME perception of risk taking as well as profit against risk attitude. Likert scale method was

used in the survey from strongly agree ( risk taking) to strongly disagree (risk adverse), The profit

against attitude being analysed to discover if revenue was effected by risk attitude, Operational and

financial risk perception would be captured to determine the majority opinion of risk attitude to

indicate SME measure of success.

Data Analysis – Profit against risk attitude provided that a profit range was not because of the SME

risk taking as results showed that in each profit range had an equal scale of different opinion to risk

taking. The majority of SME’s resulted in having a mode disagree (adverse) in operational and

financing risk taking which indicated that most SME’s had this view.

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Conclusions – Due to the literature and data analysis that although risk taking can produce success

but SME’s main focus is survival which gives them to have a higher perception of risk that gives most

SME’s an adverse attitude and based on the profit against attitude results shows that success can be

made with different risk attitude to risk and wasn’t dependant on this and from this point as well as

majority SME perceive success mainly to survive rather than high reward concludes that SME’s that

operational and financial risk take over adverse companies do not have a greater chance of success.

Recommendations – for SME’s in view of risk taking to firstly evaluate what is success for them,

secondly to grasp as much risk knowledge from their resources available to have the better

understanding of risk taking and finally to those who have high profit that do not risk take to

experiment with partial profit in risk taking to see if they can gain success from the experiment.

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Contents

Abstract ............................................................................................................................................ 2

1. Introduction .................................................................................................................................. 5

2. Literature review ........................................................................................................................... 7

3. Research methodology ................................................................................................................ 18

4. Data collection............................................................................................................................. 20

5. Data Analysis ............................................................................................................................... 29

6. Discussion.................................................................................................................................... 37

7. Conclusion ................................................................................................................................... 43

8. Recommendations ....................................................................................................................... 45

9. Bibliography ................................................................................................................................ 46

10. Appendix ................................................................................................................................... 48

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1. Introduction

In this study I will be looking to find an outcome through research and literature to find if small

medium enterprises that take more risk in the operational and financial risk areas are more likely to

succeed than those who are risk adverse.

1.1 Aims

Identify through the literature the conception of risk and what SME’s perceive to be success

If risk taking affects the chances of success due to the profits of the SME

To approve or disapprove that risk taking in these areas gives a better chance of success to SME’s

1.2 Objectives

A thorough reading of literature in risk within the context of the study

Using knowledge of literature produce a survey to measure risk taking in SME’s

Send out to sample of small medium enterprises

Collect and then analyse the data obtained

Interpret data with literature to produce findings and conclusions

1.3 Significance of study

I believe this is worth investigating because first of all I am very interested in small business as I

aspire to one day perhaps start my own business and am keen to learn how these companies handle

their risk taking in the day to day running in the business world. Risk is a perception and it is key to

find out how the small medium enterprises attitude to risk is taken whether they deem being risk

taking is leading them to success or in fact not taking risk is actually being a successful criteria for

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them in having annual income. This topic is very capturing as it gives perspective on how smaller

firms take risk and how much their attitude can actually effect the progression or declining of a

business.

1.4 Plan of action

The research that is going to help validate if the thesis is true or false or in fact near one side with

other possible arguments is going to be crucial in this study. The research will be taken out in 6 key

steps first of all understand the objectives of the study, secondly research a wide range of literature

into risk, operational and financial risk and how risk affects small medium enterprises. Thirdly set out

a research methodology to get the view point from smaller firms. Step four is to then create a survey

and send to a sample of SME’s which is then followed by a data analysis and interpretation taking

into the account of knowledge obtained from the literature review. The final step is to find out

evidence of approving or disapproving the thesis and then to make recommendations on the

subject.

1.5 What should be expected from the results

What is hoped to be achieved is to find a significant attitude to risk from small medium enterprises

and whether this attitude can affect the chances of them being successful. A successful thorough

investigation into the literature review and a well-constructed survey and analysis must be

undertaken to help achieve this to give concluding evidence and recommendations.

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2. Literature review

2.1. Introduction

In this chapter I will be focusing on the literature of my study which my dissertation is looking at are

small medium enterprises succeeding more by taking risk than those who are risk adverse in the

operating and financial areas?. I will be evaluating the literature I find about risk, the perception of

risk and the financial and operating risk area keeping it relevant to my topic. I will be measuring and

arguing what different authors have said whether they agree or disagree on the same thing and I will

give my own thoughts on this. From this I will be able to discover evidence on how SME’s deal with

risk and I will use this when analysing my survey when measuring the companies risk choices against

their profit to see if risk has helped them in their success.

2.2Risk and SME’s managing risk

Risk is what people take every day based on their decisions which can lead to certain events

happening to them but in the business context risk “the chance of something happening that will

have an impact upon objectives. It is measured in terms of consequences and likelihood” (Hodges,

2000). Businesses have to be very cautious when taking risk as it could lead to debt or even

bankruptcy and these decisions have to be assessed before being made.

In a journal article by Adrian Slywotzky he said that strategic risks are needed to be managed to

generate high returns (Slywotzky, 2004) this is important to keep the company profitable, these

strategic risks include:

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Technological risk – keeping up to date with the new technology out there to enhance the

company in their market.

Customer risk - prioritising customers come to them as a customer can switch quickly to new

products or services from competitors so it is important the company keeps up with the

demand.

New project risk – this is a massive risk as the project could fail to attract customers and

competitors could imitate it and there would be no market share gained.

Brand risk – any potential problem could cause damage to the brand and the possibility of

loss of customer loyalty so it is important the business keeps control of the threats that

could harm their image.

Competitor risk – A competitor could come up with something that is costly to imitate and

unique which could make them the market leader and take all the customer to them

instead.

Industry economics risk – when a company achieves extended growth it is hard for them to

increase their profit margins and by this point their customers can see competitive prices

and choose the lowest price available and the company has to try and keep competitive

price as well as high profit margins.

Market stagnation risk - It is important to get across to the company’s customers as they

have to show offer the products in the best method possible to keep revenue of their

business.

It’s about managing risk that keeps the company going as “business management has to be prepared

for the current risk environment. The corporation exposure to serious loss from risk is linked with

failure and this shows managing risk is a full time responsibility” (Boodman, 1987). Especially with

the current economic environment it is important that there is a risk manager to oversee the threats

that could harm the company.

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The role of a risk manager involves a wide range of tasks but the widest roles are providing a risk

management framework, building risk awareness into long term corporate communication

programmes and issuing guidelines and giving advice on risk (Ward, 2001). Risk taking has to be

done wisely and it shows that the importance of analysing risk will give me an idea of how much

companies analyse risk before making decisions and I can draw from this to use in relevance for my

topic and include in my survey.

SME’s main focus of concern is actually survival (Waring, 2002) this shows that Small medium

enterprises main ambition is to still be in business year by year which may restrict them from taking

such risks as they could face liquidation. I will have to find out in my survey if the SME’s companies

take risks and gain considerable profit because of this or if they are restrained by the fear of survival

and take no risks in their business approaches.

2.3Perception of risk

The perception of risk can determine a company’s attitude to how much risk they are willing to take

to make profit as the core competencies and management of the company have an impact on their

risk taking which could halt them from making the right risks or in fact harm them in taking too much

and making a loss.

One article suggest that risk preference is a stable personality trait and the effect of situational

variables affect their choice on risk perception (Weber & Milliman, 1997) this means depending on

the situation determines their decision on this risk action.

Another article suggests that being negative about risk perception is actually thinking about the

chance of risk in the first place is being negative (Sjoberg, 2007) what the writer is claiming is

thinking about the possibility of the risk being taken means they are already being negative which

would most likely give a signal of a company being risk adverse if they thought a lot about the

decision.

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It has also been said that the perception of risk is depending on manager/companies dimensions of

knowledge of risk is how well they manage this perception (Singh & Bhowal, 2011) what the two

authors are pointing out is that companies perception towards risk is dependent on their actual

knowledge of what it can lead to being positive or negative.

All the authors argue good points in relation to risk perception as they all claim to give evidence on

what effects decisions on risk taking. It is down to the company’s decision at the end and they have

to go on their knowledge and experience to whether they take the risks in order to expand and with

the more understanding of the risk environment the better for them.

Focusing on SME’s they are more likely to have a high perception of risk as they have less finances

and resources to be aware of the of potential risks compared to large companies who have the

sources to have the knowledge available (Durst & Edvardsson, 2012). As found in the literature

perception of risk is based on the personality trait of the manager of the SME company and it will be

interesting to find out in my proposed survey if there is a trend of adverse or taking in risk activities

which would give me evidence of a typical manager in a SME on their perception of risk and whether

this measures against their company turnover.

2.4 Financial risk

Financial risk is what is in the name it’s the financing of the company and whether there is not

enough capital to prevent debt for the company. Financial risk can be linked to business risk which is

“the risk of financial loss due to changes in the competitive environment or the extent the business

can adapt to these changes” (Doff, 2008) this means that they have not financed in the right areas to

keep up with the current market and to retain customer loyalty.

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Financial risks especially for SME’s

Example of financial risk Risk effect on company

Cash flow management Especially for SME’s lack of control of cash flow

knowing the ins and outs of your company and

being able to forecast the future is hazardous as

keeping control of the budget keeps the firm in

control

Investments Can be a hedge fund or funding into new

products it is a risk in having the company’s

capital into investments that could fail

Financing For SME’s getting financing is important and is

tough and being able to establish these funds is

important for survival

Business costs Increasing costs such as labour and fuel costs

have a marginal impact on a SME the higher

these costs are the more worry for the smaller

firm.

In a journal article the author has said that financial risk management activities can reduce risk and

value adding if it reduces the cost of financial distress (Fairchild, 2002) and what Fairchild is saying is

that if there is tasks to reduce financial risk then it gives the organisation a lot more value other than

for example brand or customer service.

SME’s generally have low budgets and rely on short term finance because of constant cash flow

problems (Paul & Boden, 2011) this makes it more important to take financial risk cautiously as

investing company finances into new areas or a project to take the company forward could damage

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the business. Linking back to my thesis it is important that I now use my survey to question the

SME’s on how they have used finances in development and how they would use financial risk in

certain situations.

2.5 Operational risk

Operational risk is defined as non- financial risks and the failure of internal processes, people and

systems (Kuritzkes, 2002). It is the risk that mainly human interaction affects the state of the

businesses day to day running of the firm.

An organization has to manage all of the operation aspects in order to prevent the risk of it having

an impact on the firm’s process. Some of the operation risks that need to be controlled are dealing

with fraud issues, processing errors, business discontinuity, legal ability, reputation and strategic risk

management (Power, 2005).

Operational risks

Example of operational risk Risk effect on company

fraud This can be tax evasion or theft of hacking

information for which the company would be

heavily penalised

Reputation Not handling their business dealings in the right

way such as improper trade and manipulation

which then customers loyalty would be damaged

Employee dissatisfaction Employees are not being treated how they want

and this is a risk as they may not function to their

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maximum

Business disruption Can be system or software failure which the

company has to control to avoid disrupting the

business operating

Processing errors Such as data entry and errors in accounting and

reporting which can cause hassle and a lot of the

firms time

From this literature I have to use the operational functions in the survey to measure how much the

SME uses operation risk in my survey and whether their risks in their operations helps them achieve

success and it is important the questions are worded correctly to make sure responses are valid uses

of data to my study.

2.6 Risk taking and Companies performance

Risk taking is normally down to the manager of the company and they lay their own reputation on

the line when making the decisions. Risk taking is valued and essential to innovation and success. A

good manager is seen as taking risks and not gambling (March & Shapira, 1987) this paper shows

that risk is taken in order to move on as a company to seek new innovation and success in their

market.

Risk taking can be divided into three main areas

Risk Taking – a risk taker is someone who seeks to desire sensation and is willing to do

what’s possible to reach the top (MacCrimmon & Wehrung, 1990) this is someone or

business decisions that are always very risky to what they currently own

Risk Neutral – This is where someone is neither risk taking nor risk adverse they are stuck in

the middle when taking risk.

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Risk adverse – tends to be less likely to take risk and with risk expect low return. Risk-averse

will see threats and continue to use the methods that give them success (Reed & Storrud-

Barnes, 2010) this will be someone who will keep to what’s going well for them and think

there will be no need to take risk to change.

The level or risk you take measures you the amount of reward you receive as taking risk is an

investment and that will suit the company’s needs and this can impact on the readiness of the

decision to accept risk in pursuit of expected high reward (Rosenberg, 1979). It is what the business

wants to get out of the risk they go into as if they want to keep their finances tight the return will be

profitable but only low but high risk is dangerous but can achieve outstanding return.

The traditional way of measuring performance just includes an accounting figure on the return but

does not actually include the perspective of the variation in risk taking itself (Jemison, 1987) this

shows that some firms may not actually measure their performance by the amount of risk they have

undertaken during the accounting period and will not know how well it has worked out for them. A

firm having a review of their risk performance can learn from mistakes and take experience in

regarding how to take risk in the future.

One article argues two points about risk taking in company performance firstly declining firms that

reduce risk taking go on to further decline whilst in the paper it has also been said that firms that are

low performing take more risks and therefore reduce performance more (Wiseman & Bromiley,

1996) with these two theories they both have credibility but I would agree more with the second

point that companies who are declining take risks because they are trying to get themselves moving

forward and taking risk is innovation and one high risk can pull off a high return and the firm will be

on the rise again.

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A paper suggests that SME’s have to finance in new products and services to meet customer needs

to have growth and success in performance and to sell most of their current products/services (Oke,

et al., 2007) and this is reliant on financing and these smaller firms have to take risk in getting the

finance to have the products ready for their target market.

Focusing on SME’s and there risk taking towards their performance I have to in my survey ask the

SME’s on activities that they take in risk to achieve their success and it is important that the question

measures and captures the correct data for my study.

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2.7 Discussion

In review of the literature I have researched I must now use this to create a methodology for the

survey to find out and to change and improve the questions I have created in the sample

questionnaire in the proposal.

From the literature I was able to find key points to give me vital knowledge in order to carry out my

survey and study:

SME’s main aim is to survive and risk management is the key to stability and to taking risk to go

forward, I agree that the main aim of smaller firms is to survive but without taking risks they are

neglecting to expand in growth.

Risk perception is going to be what is measured in the survey and I found in the literature it is what

the company has knowledge of and that perhaps thinking of the implications of risk is being negative

which can been seen as being risk adverse and t will interesting to see the results as I am going to

ask questions about their risk activity and also scenario type situations which will give me the firms

perception of risk and whether it’s taking or adverse.

Operation and financial risk in SME’s is more crucial than larger companies as they have more to lose

and from the literature I have to make sure that the questions in my survey are measuring these two

types of risk so I will evenly split operational asking questions about human interaction and the

everyday functions of the company and financial risk with how much money they invest and how

they would deal in scenarios.

In the literature about risk taking and performance I am raising a few points I found that risk is taken

is valued as innovation to succeed and this gives me more evidence for risk takers as I can measure

the small firms by success if they are risk taking as they are already making a movement to go

forward to grow.

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Another aspect of literature I have found is that risk is not often calculated in a company’s

performance which means most companies don’t know how risk has impacted on their business.

This makes it important that I focus on capturing information about the firms risk activity and the

survey should be 100% based on their attitude towards risk.

There is a set of authors which highlighted two points about risk taking and how it affects their

performance and they were companies taking no risk tend to decline but companies who also take

risk decline. As I highlighted earlier I believe that the second point of taking risk despite decline is a

SME in the right set up to be successful as they want to go up in their market and although it might

not mean they get success they are in my view considered more successful as they are taking risks to

expand. This gives me more meaning to my methodology as I can consider that the SME’s I get that

have shown they are risk takers but have not got considerable profit I can still value them as being

successful as they are looking to improve for the future.

2.8 Conclusion

With my sample survey already in place in the proposal the literature I have reviewed has given me

more credibility in the type of questions I have included as they will measure the companies

operation and financial risk with questions about the way they run in their firm and how they will

deal in possible situations regarding risk. I will ask for the SME’s operating turnover and I will

measure this figure against their risk type. I have set the survey to be a Likert scale and will have five

responses but ultimately after the data analysis I will find out if the company is a risk taker, risk

neutral or risk adverse. I will also consider those who are risk taking but not having successful

turnover to be successful as they are willing to succeed I think this is a point to refer to in my analysis

but ultimately to find out if SME’s that take risk are more successful than those who are adverse and

this statement would be true if the more companies in my survey have financial success against their

risk taking.

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3. Research methodology

3.1 Introduction

The research methodology I used in my study was first of all the evidence I obtained from the

literature of my study and secondly how I developed the knowledge from the literature into a 15

question survey which was sent out to a sample of small/medium enterprises. The survey included

5 demographic questions which included their estimated profit turnover. The next 5 was their view

on taking operational risks and the concluding 5 was their view on financial risk taking. For these risk

taking questions I used a Likert scale which the respondent answers were strongly agree, agree,

neutral, disagree and strongly disagree. Strongly agree being 1 and strongly disagree being 5. On the

basis of their profit turnover against their response to risk taking, the overall perception to risk, as

well as referring to the literature review and my own opinion I will interpret if their risk taking has

given them success.

3.2 Sampling

In distributing my survey (see appendix) I used the website survey monkey to create my

questionnaire into three sets of questions demographics, operational and financial. Using the

website (Surveymonkey, 2013) I created a data collector which was a web link for the respondent to

easily gain access to the survey. It is important that the businesses were small medium enterprises

and that they were in the United Kingdom. I then located a UK small business directory (UKSBD,

2013) well as knowing a few business owners to then send out the survey .I used the method of

email by creating a letter explaining the thesis, what the survey was about and data protection being

used for academic purposes. Over 200 emails had been sent to multiple businesses in a range of

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counties and different professions to get a fair response. The response was limited but enough

sample was collected to start analysing and interpreting the data.

3.3 How the data will be analysed

As indicated already in this chapter the data will be analysed using Likert scale with risk taking

relating to strongly agree and risk adverse to strongly disagree. This would be 5 scale with the

middle being risk neutral. The profit of the small medium enterprise will be linked to the company’s

original opinion of risk attitude to interpret if the attitude can have an impact on profit. In analysing

the operational and financial risk questions being 5 on each descriptive statistics will be used in

analysing each individual question and a total of each category. It is important that the mean and

standard deviation is not used using this function as this is a false interpretation as using this tool the

results will be focused on the median, mode and range as this gives the result in most powerful

response and can showcase a trend a more powerful side of the Likert scale with more respondents

for example answering the strongly agree side of the scale to the strongly disagree side.

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4. Data collection

The respondents answered to a Likert scale with 1 being strongly agree and 5 being strongly

disagree. The lower the number the more risk they perceive to take. Below is a showcase of the data

in chart form

4.1Demographic data

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The two graphs shows the demographic data from the survey which resulted in the number of

employees that the small medium enterprises had which showed 92% of the companies had over 20

employee whilst 8% had less than 5 members of staff suggesting some of these were sole traders.

The second graph shows the profit estimated profit that the SME currently has which had a diverse

percentage of profit with the SME’s sampled.

23.1%

30.8%

7.7%

7.7%

30.8%

SME annual turnover

<50k

51K-100K

101K-150K

151K-200K

201K>

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4.2 SME perception of risk taking to succeed

This graph shows the company’s original risk attitude to risk taking to success which resulted in a

diverse and split opinion into risk taking can help generate success.

23.1%

23.1%

15.4%

30.8%

7.7%

Our company believes that taking risk is important for success

Strongly agree

Agree

Neutral

Disagree

Strongly disagree

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4.3 Operation risk responses

Below will show the response of the data to the operation risk questions in graph form

The response for the best deal being more important than customer reputation showed that the

most response was strongly disagree with 46.2%.

0.0% 0.0%

23.1%

30.8%

46.2%

The best deal for the company is more important than building reputation for our

customers

Strongly agree

Agree

Neutral

Disagree

Strongly Disagree

7.7%

15.4%

0.0%

38.5%

38.5%

Preventing data entry and accounting errors is not one of our main concerns

Strongly agree

Agree

Neutral

Disagree

Strongly disagree

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The opinion of the operational risk of preventing data entry and accounting errors showed that the

most powerful answer was joint strongly disagree and disagree with 38.5% each.

The response that was must selected was strongly disagreeing with 69.2% on the opinion the SME’s

view of decision making effect on employees.

0.0% 0.0% 7.7%

23.1%

69.2%

Taking important decisions we do not consider the impacts this will have on our employees

Strongly agree

Agree

Neutral

Disagree

Strongly Disagree

0.0%

30.8%

0.0%

46.2%

23.1%

Fixing system and software problems is not our main priority

Strongly agree

Agree

Neutral

Disagree

Strongly Disagree

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The majority response for fixing systems and software problems was disagree with 46.2%

This operational risk question was a more direct risk taking perspective on relying on employee

performance with 69.2% strongly agreeing with this statement.

69.2%

23.1%

7.7% 0.0% 0.0%

We heavily rely on our employee performance

Strongly agree

Agree

Neutral

Disagree

Strongly Disagree

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4.4 Financial risk responses

The showcase on the questions based on financial risk in graph form is below

This financial risk question showed the response to the statement of company not using cashflow

management with the most answer being 46.2% disagrees.

0.0%

30.8%

7.7%

46.2%

15.4%

Our company does not use cashflow management to forecast the future

Strongly agree

Agree

Neutral

Disagree

Strongly Disagree

0.0% 7.7%

15.4%

61.5%

15.4%

If there is a new product or service beneficial to the company we would spend beyond are

means to offer it to our customers

Strongly agree

Agree

Neutral

Disagree

Strongly Disagree

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61.5% was the most response to disagreeing with this statement on spending more than the

companies means to offer a beneficial new product/service to customers.

High investment being important to improve was more split opinion in response with the highest

answer being 38.5% neutral.

7.7%

15.4%

38.5%

15.4%

23.1%

High investment is important for any company to improve

Strongly agree

Agree

Neutral

Disagree

Strongly disagree

0.0% 15.4%

15.4%

38.5%

30.8%

With our finances we believe in taking high risk for high reward

Strongly agree

Agree

Neutral

Disagree

Strongly disagree

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This financial risk statement of believing in taking high risk for high reward was very most

respondent to the disagree side of the scale with 38.5 % the highest disagree and then 30.8%

strongly disagree.

The final financial risk statement had the highest response from the sample of 61.5% to select

disagree in regards to a company spending more than their budget to progress.

0.0% 15.4%

7.7%

61.5%

15.4%

A company can survive spending more than their budget to progress

Strongly agree

Agree

Neutral

Disagree

Strongly disagree

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5. Data Analysis

5.1 Profit against attitude to risk

With the respondent’s stating their profits they then answered a question stating their attitude to

risk and the link between the two didn’t interpret any real outcome as the profit differed with the

companies attitude to risk on an equal scale for example the respondent’s with a high profit of 201k

or over the strongly agree, agree, strongly disagree and disagree were practically 25% each. Also

with companies profit of 50k or less was split 33% over strongly agree, agree and disagree. This again

shows very equal results but more of an indication for companies earning less have to take risk to

succeed and this gives a thought that risk is actually a situational choice of perception. This gives

reasoning that the success from risk taking is a perception of the business or manager. This being

linked to points made in literature review and will be commented on in discussion.

Profit 201k> Operational risk answer

percentage

Financial risk answer percentage

Strongly disagree 45% 15%

Disagree 15% 35%

Neutral 10% 20%

Agree 15% 25%

Strongly agree 15% 0%

Profit 50k< Operational risk answer

percentage

Financial risk answer

percentage

Strongly disagree 40% 13.3%

Disagree 13.3% 53.3%

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Neutral 6.6% 26.6%

Agree 6.6% 0%

Strongly agree 26.6% 6.6%

Above shows the highest and lowest profit groups in terms of answer percentage and from these

two profit groups you can see that there is also not much difference in opinion when it comes to

how the small medium enterprises perceive risk taking as both of the profit groups have mainly

answered in the two risk adverse categories in strongly disagree and disagree. This gives more

reasoning that attitude to risk taking does not affect the success of a small medium enterprise in

terms of profits.

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5.2 Operational risk analysis

Question ! Question 2 Question 3

Mean 4.230769 Mean 4.076923 Mean 4.615385

Median 4 Median 4 Median 5

Mode 5 Mode 4 Mode 5

Standard

Deviation 0.83205

Standard

Deviation 1.037749

Standard

Deviation 0.650444

Question 4 Question 5 Operation Total

Mean 3.615385 Mean 1.384615 Mean 3.584615


Mode 4 Mode 1 Mode 5

Standard

Deviation 1.192928

Standard

Deviation 0.650444

Standard

Deviation 1.413023

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Using descriptive statistics I have analysed each question from the operational risk category and the

total to give me the impression on how the SME’s will take risk in the category.

Question 1 – The best deal for the company is more important than customer reputation

The results shown from this question that the maximum answer was 5 strongly disagree and the

minimum was 3 neutral with the mode being 5 strongly disagree. This is showing that in response to

taking operation risk based on this scenario that the overall judgement is that businesses do not

believe they have to take this risk with no respondents agreeing with the statement to some degree

at all.

2. Preventing data entry and accounting errors is not one of our main concerns

In analysis of this operational risk question the median and mode is both 4 being disagree and with

the range being 3 this yet shows SME’s tend to not want to take risk in this scenario with the most

common answer being disagree.

3. When taking important decisions we do not consider the effects on our employees

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In analysis of this statement this was out of the five operation risk questions was the most risk

averse response from the SME’s with the median and mode both being 5 strongly disagree with the

minimum answer being 3 neutral.

4. Fixing system and software problems is not our main priority

This question responses has a median and mode of 4 disagree this shows that the assumption of

SME’s is mainly risk averse I response to this statement.

5. We heavily rely on employee performance

This question surprisingly has an opposite outcome in comparison to the other 4 questions as the

median and mode was 1 strongly agree and the maximum answer was 3 neutral and this says that

the majority of SME’s take risk in relying operationally on their employee performance. Whether the

significant difference in risk taking is based on the statement or possibly on the situation as linking

back to the literature review suggests certain variables can have the impact of attitude to risk

Operational risk as a whole the median was 4 disagree and the mode was 5 strongly disagree and

this shows that the view on the senior management from the SME’s that responded is that they are

risk averse on taking operational risks. As one question from the 5 was strongly risk taking this gives

some thought that the success of risk taking is merely situational or down to the actual perception of

risk by the company.

5.3 Financial risk analysis

Question 6 Question 7 Question 8

Mean 3.461538 Mean 3.846154 Mean 3.307692


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Mode 4 Mode 4 Mode 3 Standard Deviation 1.126601

Standard Deviation 0.800641


Question 9 Question 10 Financial total

Mean 3.769231 Mean 3.846154 Mean 3.646154


Mode 4 Mode 4 Mode 4 Standard Deviation 0.926809



Again using descriptive statistics each financial risk question has been analysed to view the SME’s

opinion on how much risk they would take on the following statements.

Question 6 – Our Company does not use cash flow management to forecast the future

This statement the response was the median and mode was 4 disagree and this shows that the

SME’s are risk averse as they use cash flow management to forecast the future so they do not take

risk on not relying on using the financial statement.

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Question 7 – If there is a new product or service that is beneficial to the company we would spend

beyond are means

The analysis from this question is very similar to question 6 with the median and mode both being 4

disagree and this yet again shows the SME’s view would be averse as they wouldn’t be encouraged

to take the risk on new ventures if it could give them high reward.

Question 8 – high investment is important for any company to improve

The response to this question seemed to be a very neutral response as the median and mode being

3 neutral. This question is the most debatable out of the five financial risk statements with different

opinions on investment. Yet again this can give an impression that the success of risk is a perception

by the company.

Question 9 – A company can survive spending more than their budget to progress

This question yet again shows a median and mode of 4 which is telling that companies will not take

financial risk to improve as they do not want to face the complications. The risk adverse approach is

showing that they do not think taking these risks creates success.

Question 10 = with our finances we believe in taking high risk for high reward

This is a more direct statement for financial risk taking and the response shows that the median and

most disagree with this statement and that they do not perceive getting high award for a high

investment risk.

Overall the financial risk responses are showing to be risk averse with the median and mode being 4

disagree. From these results it seems that financial risks for small medium enterprises are not risk

taking with the main result disagreeing that they take risk financially. On a thought back to the

literature review there was a point that SME’s take less risk as they have more to lose and this will

bring up an interesting debate in the discussion and conclusion.

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5.4 Operational vs. Financial risk

Comparing the data results from the operational risk questions and financial risk questions Using the

descriptive statistics there is not a significant difference between the two risk categories which

shows both types of risk are deemed in the same perspective, The financial risk results are only

slightly more risk adverse which is most likely logical because of the actual investment of the small

medium enterprises money.

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6. Discussion

6.1 What the data analysis told us

The data analysis showed that the profit of the small medium enterprises wasn’t dependant on the

companies attitude to risk taking as the SME’s with high profits had different opinion of attitude

towards risk as well as companies with low profits also having different attitudes to risk. This part of

the analysis shows an equal attitude to risk to profit. This indicates that the success of risk taking is

down to the perception by the small medium enterprises senior management.

Looking at the results from the operational and financial risk questions they were set out to measure

the small medium enterprises attitude to a risk scenario that might be an opportunity for them to

get success from although it could cause a risk to the companies’ existence. First of all comparing

both risk scales they were fairly similar in the results of how they would take attitude to risk in both

risk categories. This suggests that all risk is considered by the SME’s whether it being an operational

function or putting capital from finances into an investment. Both categories were mean averaged

between neutral and disagree with mainly disagree being the most chosen response which seems to

show that the small medium enterprises are risk averse into taking risk but does this credit that

actually taking risk is actually not being successful.

These results may not actually give the true reflection that small medium enterprises taking risk

gives them success but what the results do show is that these companies do have a perception of

mainly being risk averse to take chances to expand and grow profit for their businesses. For some

questions the results were different in some capacity for example one operational risk question was

strongly agree as the mode which could suggest that it was down to the question or the fact that risk

taking is acted upon on the situation with the variables being looked up at the time to determine

whether risk should be taken. Interestingly enough that question was the most direct statement to

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taking operational risk with the statement being “we heavily rely on employee performance “. Also

the most directive financial risk question being “we believe in taking high risk for high reward with

our finances £ differed from the other financial risk statements with a more debatable result with

the other statements being all risk averse majority responses. It will be key to link these results back

to the literature review on whether the thesis will be approved to be right or disapproved. Overall

from the data suggest that the larger scale of SME’s attitude to risk is averse but does this mean they

are not taking risk to give them a better chance of success.

6.2 Linking back to the literature review

After the results from the survey undertaken showed that most small medium enterprises have a

more risk adverse attitude to risk taking. Now looking back at what was found in the literature

review I will be able to relate if this risk averse attitude is actually stopping them gaining success or

really is the approach giving them success by not taking chances and keeping their businesses going

and with the profit they have.

Linking with the data showing powerful attitude to being more risk adverse than risk taking it relates

to the literature where SME’s actually have a higher perception of risk than larger companies as they

have more to lose than larger companies as the owners actual living is actually dependent from

money made from their businesses. This gives most SME’s opinion that actually being more cautious

with their risk taking gives them success as they are being cautious and want to generate profit

without high risk of being liquidised. This is not saying that taking risk does not get success as any

risk can be pulled off by a business that can give them significant reward and revenue which

showcases it is more of a roll of a dice by the manager of the company, it gives credit that risk is

purely a perception and just down to the individual of the company but the trend in most SME’s is to

have a perception of being safe and not taking much risk in order to generate profit.

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On to the actual perception of risk itself it’s all down to the company as in the literature it is

mentioned that perception of risk is down to the personality traits of the manager and the actual

knowledge of the managers risk implications as if they know more about what the risk can cause and

the best approach to take the risks they are going to be more confident about the risks that put their

companies in. This is why all companies not just small medium enterprises have different attitudes

to risk as its down to the values and culture of the management and business this is why in the data

some SME’s have answered with different attitudes to risk and have put different responses to the

scenarios that was presented before them.

Also the surveys strength to get results is showed as the statements on occasions had a different

outcome of result to attitude to other statements because in the literature risk can be taken due to

the variables in the current situation which merits that risk is a perception of the scenario that arises

and that down to the managers personality it’s how important they value the opportunity to take

the risk at that time and what effect it will have on their business.

Looking at financial risk specifically the data feedback from the small medium enterprises ties in with

the literature that SME’s operate on small budgets and focus on short term financing and this is why

they are more cautious with risk taking which the results from the survey credit the literature with

the main attitude being risk adverse.

With operational risk the results in small medium enterprises being mostly risk adverse in the

functions of the everyday business including software, system and employee control is that they

have to ensure that all processes that keep the business running and the employees work ethic is

important for them to operate. This means that the running of the company is important and any

issues regarding operational problems are attending immediately as they won’t take the risk of these

factors harming the company’s everyday business.

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One article in the literature had 2 points about risk taking which suggested reducing risk is actually

declining as well as taking risk and declining but it is interpreted that actually taking risk is being

successful rather than reducing as taking risk shows ambition in becoming a more successful

company. This gives a good argument about the results that the majority of the small medium

enterprises are not aiming to be successful by taking risk to gain a higher reward.

Also from the literature there was a journal article by Alan Warring that SME’s main focus is actually

survival which in theory means risk taking is not a success to smaller firms because simply making

sure they have enough funds to operate in the next 12 months and forward is actually success to

them and being cautious in risk is how they aim to survive in their respective industries.

From the link between the survey results and the literature it interprets that small medium

enterprises view is that being risk adverse is success to them as their main aim is actually survival.

There is a strong argument from the literature that taking risk is showing the intent to be successful.

The main point is that SME’s perception is that not taking risk is successful. This could be just the

actual perception and not that fact as there are some cases of risk taking that leads to success.

6.3 Final thoughts

My interpretation is that firstly I with the results and literature I think that small medium enterprises

view risk taking as not being successful because their main focus is staying afloat and minimising the

risk they take is the best way they can achieve this as it is staying safe and ensuring there will be a

tomorrow for them. This is not meaning to say that taking risk is not successful as it just depends on

the company and to see if the potential risk actually pays off to give them high reward.

The data shows strong and similar risk adverse results in both financial and operational areas but I

believe that taking financial risk is more of a concern to these smaller firms than operational risk as

finances are more important to these firms and they will take more cautious approach with these

risks as they will cause more damage with a financial investment going wrong other a system failure

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for example. Risk is all the same and it is important that it is well managed and strategic approaches

are in place when taking risk as the more prepared the better positioned the business is in taking

risk.

I believe that risk taking is just a perception by the smaller firms and each company is different

depending on the character of the manager at the business. The perception of most of these firms is

that risk is too harmful to them and is why being adverse is staying successful. Yet again one

personality from an SME may think being risk taking is the key to success whilst another may think

that staying adverse is the key to success it’s just down to the personality and perception of the

company.

Yet the point of the article about reducing risk and taking risk but decreasing performance but both

eventually ending in the result of declining is a really strong argument as in my view taking the risk is

being successful as your always looking to improve whilst aiming to reduce risk is maybe keeping

safe but there is no ambition to strive and expand the business into higher revenues. It’s a very

strong case for SME’s to perceive but yet that is the point it is what that firm perceives that risk will

bring them in their attempt to succeed.

Overall I agree with the results that have been researched that the majority of small medium

enterprises are risk adverse attitude to risk in financial and operating areas because their main aim is

to survive and taking less risk is a fundamental in ensuring this. Although some points in the

literature review can say this is being a success to them other points say that being risk adverse is

not being successful. This causes a good debate but in my view the main interest of the SME is to

survive so taking less risk to do so is considered from their perspective a success to them. This does

not mean I don’t believe that taking risk in SME’s can create success but the majority being risk

adverse would say success is to survive and minimising this is vital.

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6.4 key points

Majority of SME’s from the data analysis attitude to risk in operational and financial risk attitude to

risk is adverse

All SME’s are different based on their attitude and perception of risk

Company’s dimension of knowledge of risk could be affecting their attitude to risk taking

The argument of being risk taking but a reduction in performance is more successful than reducing

risk and still declining

Survival is the main priority to the small medium enterprises

Risk taking is a general perception

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7. Conclusion

7.1 Findings

The key things that have been discovered from the study is that the perception of these operational

and financial risks are very much down to the manager and firm perception as each small medium

enterprises aim with dealing with risk taking can be different from each other.

The data collected from research into actual small medium enterprises gave a strong result that

most of the companies are in fact risk adverse when it comes to risk management.

Regarding the literature and the survey results it suggests that most small medium enterprises see

being successful by surviving which does not include gambling trying to make high fortune taking

risks as they would prefer to stick to their strategy and stay safe but earn profit.

Results also concluded that risk attitude didn’t really affect if a SME made higher profits than others

from risk taking as from the sample gathered there was an almost equal response to profit and

original risk attitude.

Literature examination found that SME’s rely on small budgets and short term financing as well as

not having the resources to fully have knowledge of how to approach risk and the true implications

that can bring to a smaller firm. These factors are the most logical reasons why the majority of small

medium enterprises have a risk adverse attitude in the two risk categories. The literature also

brought up an interesting point about firms reducing risk can decline as much as firms risk taking but

the interpretation is that being risk taking over risk reduction is showing business innovation to

succeed but yet again is the perception on how the firm will view this argument.

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7.2 Does Financial and operational risk taking lead to success in SME’s?

The findings that have been discovered in this study gives an overall assessment that although risk

taking can lead to success the general perspective from a high percentage of small medium

enterprises are risk adverse in the operational and financial areas, which given the literature

examined gives the assumption based on the study that risk taking in these areas for SME’s does not

give them success as they do not perceive success as high reward and extraordinary financial

revenues because most SME’s aim and objectives is to survive. Another key factor in this conclusion

is based on the company’s original opinion to risk taking there was no major difference in this

affected profit as many SME’s had similar profit range but different attitudes to risk taking opinion.

Therefore the conclusion of the equal scale of attitude to profit shows risk taking doesn’t seem to

make a difference to give more success over a risk adverse SME. The earlier point of the small

medium enterprise main focus is survivals deems that they value this as more important than

tasking high volume of risk that gives them high reward but could cost them the business itself due

to lower budgets and short term financing which give them disadvantage to large firms. Yet again

reiterating the point that risk taking can gain success but not to the perception of most managers in

small medium enterprises.

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8. Recommendations

After the conclusions of the study there are some recommendations that small medium enterprises

can take from this research topic and results to actually help them in risk taking to help some of

these firms with adverse attitude:

Firstly to evaluate their business aim and how they see their firm hitting the success criteria. Is it to

reach high revenue, to aim to survive each year with profit or to give great value to their customers.

This study has brought up a lot on perception and not just in risk and it is important for these small

medium enterprises to keep evaluating their strategy and what they want to achieve from their

business.

Another recommendation is for the SME’s to really focus on how much they know about risk, as the

literature stated these firms can lack resources in this area which will in confident them about their

security in risk taking. The point is for the mangers to get as much resource and knowledge with

what they can get to make them confident that they can go forward and take risks as business is

about trial and error there will be bad decisions but you will learn and one risk could pull off a

massive reward. A stronger knowledge dimension in risk will give confidence and better

understanding in decision making as the manager will know more about risk strategy, the

implications of risk and how to control the level of risk they take whether it being financial or

operational.

A final recommendation is if the small medium enterprise has made a high volume of profit is if they

are normally quite risk adverse is to take some risk with a small proportion of their profit to simply

test taking some risk in some capacity whether it being an investment into a new product or a hedge

fund just to see if they can get some reward from the risk. This can give them a change in attitude if

the risk pulls off and more confident in taking risk to try and expand innovation for higher success.

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10. Appendix

Appendix 1 Online survey sent to small medium enterprises

1. Name (please state)

2. Organisation (please state)

3. How many employees does your company have? (Please circle)

≤5 6-10 11-15 16>

4. What is your annual turnover? (Please circle)

<50K 51-100K 101-150K 151-200k 201k>

5. Our company believes that taking risk is important for success (please circle)

Strongly agree agree Neutral disagree strongly disagree

6. The best deal for the company is more important than customer reputation (Please circle)


7. Preventing data entry and accounting errors is not one of our main concerns (please circle)


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8. When taking important decisions we do not consider the effects on our employees (please circle)


9. Fixing system and software problems is not our main priority (please circle)


10. We rely on employee performance (please circle)


11. Our company does not use cash flow management to forecast the future (please circle)


12. If there is a new product or service beneficial to the company we would spend beyond our

means (please circle)


13. High investment is important for any company to improve (please circle)


14. A company can survive spending more than there budget to progress (please circle)

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15. With our finances we believe in taking high risk for high reward (Please circle)


risk taking in sme's

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