The correlation between various demographic variables and risk management : the case of SMEs in the Sedibeng district

Abstract: Background: When observing Small Medium Enterprises (SMEs), key relationships present themselves between SME owners' demographics and their likelihood to apply Risk Management (RM) within their businesses. These relationships were the focus of this study. Purpose of study: The study aimed to explore those relationships through correlation analysis of the demographics and the various risk management components representing small businesses and risk management activities. This was done to answer the research question: How do SMEs' demographics affect their risk management in practice. Design/Methodology/Approach: To gather primary data the study applied a quantitative survey using 332 SMEs, within the Sedibeng District Municipal Area (SDMA). An exploratory factor analysis was used to establish the relevant risk management components used by the sample. The factors generated were then analysed statistically and the correlative relationships between the factors and SME demographics were analysed. Results/Findings: What was found is that an implicit degree of progression towards risk management practices is in progress. Moreover, the identified risk management processes have strong intercorrelations showing that the risk management components that SMEs identified are being applied in their businesses cumulatively across the sample. Another notable finding was that the relationship between risk appetite and availability of liquidity is profound. Liquidity frames the considerations of SMEs firmly and may serve as a theoretical point from which to model their decision-making behaviours. Finally, it was found that although some risk management practices were in place, they are applied differently in practice than in theory, and SMEs have limited awareness of the risks they are exposed to. Recommendations: It is first recommended that the findings of this study be used to construct a theoretical starting point for risk management development interventions at an SME level. Secondly, it is recommended that the role of liquidity regarding risk-taking be explored in terms of behavioural finance to determine if there are subconscious biases that result in inappropriate risk-taking behaviours. Managerial implication: In using the understanding of how risk manifests in SMEs, managers can develop meaningful interventions that empower SMEs to bring risks in line with their ability to manage them. A positive secondary effect is the improvement of resource utilisation and solvency support. Future implications from such actions could refine how risks manifest in small businesses, identify which risks are the primary risks to focus on at their various stages, and explain how best to approach and manage them