Risk Management Amid Covid-19
Definition of Risk
Risk is an exposure to uncertainty where the outcome is unexpected. Risk can be defined as the potential that future outcomes will be different from what was planned, expected and anticipated. Risk at times can be anticipated and quantified, which can be pre-empted if the management is sensitive enough and implemented action. Uncertainty is a situation where lack of understanding, data and information that would cause difficulty to make reliable and sensible assessment of its impact and / or probability.
Terminology of risk → RISK = IMPACT X PROBABILITY
Risk can be categorised into (i) upside risk and (ii) downside risk. Upside risk refers to incidents turn out more favourable than it was planned, expected and anticipated, whereas Downside risk refers to incidents turn out worse than it was planned, expected and anticipated.
Types of Risk
1. Business Risk
1.1 Business Transformation, Reformation and Restructuring
Covid-19 has awakened a lot of SMEs in respect of the conduct of their businesses. Many of the SMEs conduct their businesses in conventional approach and some manage to raise through hard core ways from small to medium sizes over decade or decades. However, some are gradually introducing technologies and modern devices over their expansions, in short they have started gradual transformation and reformation. Unfortunately, many have not or refused to take the actions of transformation and reformation, and continue to expand without taking business risk into consideration in respect of the conduct of their businesses.
The authors acknowledge the challenges and practicality when SMEs decided to transform and reform their businesses. Because transformation and reformation requires full support and patience from all the stakeholders, i.e. employees, customers, suppliers and etc, which will involve meeting, communication, participation in order to achieve understanding and consensus from them! Reluctant to change is indeed a fact to most human beings. However, it appears most SMEs have no better option amid Covid-19 but to accept for change in order to sustain their businesses.
1.2 Market risk
Market risk refers to the risk underlying in the current market situation of the industry. The demand and supply of every business is very likely to be affected by the Movement Control Order (MCO) as consumers are not allowed to go out therefore the demand for goods may be lower and supply may be delayed due to transportation or the lack of manpower or low production at the supplier’s company. However, falling under the non-essential category, they will not be able to operate due to the restrictions and regulations.
Similar to competitive risk, companies will have to study the market demand during the MCO period before taking corrective measures. Besides, they should ensure that their inventory supplies are accessible and deliverable on time as there are road closures imposed that may affect its transportation.
1.3 Credit risk
Credit risk is the risk of default. Every business will have an increase of credit risk during Covid-19 and MCO period because everyone has its fixed costs and other expenses to pay for so clients may choose to delay the fees or payment if businesses are trading on credit basis. When clients default, it will then give rise to liquidity risk.
Since it is related to clients, companies may enter into a contract with their suppliers or customers on fees or price reduction for the period of time or it may trigger “force majeure” when both parties are unable to fulfil their obligations. This could reduce the risk of clients defaulting their payments, at least businesses still get paid for their products or services, which is a win-win situation for both parties.
1.4 Liquidity risk
Liquidity risk is also the risk of not having sufficient cash in hand to pay for their expenses. For instance, a company may have too much inventory in hand and in the event of Covid-19, stock turnover is low and yet the company needs to meet its expenses. Managing cash flow efficiently will be a challenge for companies during this time as they have to spend and plan wisely on their expenses. However, some expenses like rental and staff costs are fixed, although the Ministry of Human Resource issued the order to allow employers to have an agreement with employees on salary reduction and also their landlord to reduce the rental to relieve the burden of local businesses, it was still quite an amount to pay for.
To reduce liquidity risk, company may have to consider every transaction and effectively spend their money on only the necessary expenses. This means they may look into some expenses and think about cutting it off for a period of time if it is not necessary for the business. It could be as small as newspaper subscriptions since the office is not opened for the time. Besides, they should consult their tax agents on the capital allowance that could be claimed, expenses that are entitled for double deduction or if they are non-deductible. It would help them in managing their cash flow better to avoid having zero cash in hand or bank overdraft.
1.5 Technological risk
Technological risk is common for businesses that are struggling to keep up with the technology and the changes in the trend in consumers. As we live in this technological era, smartphones and the internet have become our necessity and everything is just one click away. During MCO, consumers are not allowed to go out, many businesses made their products and services available online and have collaborated with delivery services to ensure that sales is still ongoing.
Technological risk can be reduced by consulting IT experts to make the necessary changes to improve their business to adapt to the technological environment. However, small or family businesses may not have the IT expertise or budget to make such changes to their current processes and distributions which would leave them one step behind the rest of their competitors.
1.6 Legal risk
Legal risk relates to the risk of not being in line with the law. During MCO, only essential businesses are allowed to operate within the regulations they have to adhere to. Essential companies will need to get approval from authorities to resume their business operation and the management shall issue a letter to employees and ensure they went through the medical check-up before they can resume work. Without the knowledge of the current law and regulations may cause the company a huge amount to bear with, adding to their costs. Force Majeure is a clause that appears to change the obligation and liabilities of both parties when an extraordinary event or unforeseen circumstance occurs that prevent them from fulfilling their obligations.
Similarly, legal risk cannot be avoided but it can be reduced with the help from professionals like lawyer or company secretary or business advisors. Companies shall get legal advice especially if they are involved in contracts with their landlord or employees.
1.7 Health, safety and environmental risk
Health, safety and environmental risk draws our attention especially during the MCO periods as everyone is exposed to the risk of the Covid-19 pandemic. Companies under essential category will need to arrange medical check-ups for staff if they are required to work. During the time where offices, factories and warehouses are not opened for operation, companies may also be exposed to risk of break-in. Also, it may be unsafe for business to operate if there are very few staff at work or if it is located in a remote area as robbery can take place. Other than that, companies should carry out preventive measures such as sufficient medical masks for every employee, sterilising and cleaning supplies to ensure that the company has a safe environment to operate and to protect their employees and etc.
To overcome the risk, a company may consider doing the above to reduce it and to transfer the risk to a third party by having insurance for the assets of the company in case of robbery, theft, loss in cash transit and also medical insurance for the key persons in the company provided the company has the budget to do so.
2. Operational Risk
Operational risk refers to the internal risks that occur from daily operation within the company. When MCO is implemented and extended, many businesses are given no choice but to change their processes and working methods. Essential goods and services providers are the ones who have the least impact as they are allowed to operate during the MCO period within the restricted hours and regulations. Other businesses that do not fall under the essential category will have to make their system accessible online so that employees can work from home and continue to liaise with clients. All manufacturing companies that are not under essential category were initially prohibited to continue operation in the first and second phase of MCO, only later that some selected industries are allowed to resume operation. Processes were on halt for at least a month for those companies. Most of the service providers have to supervise their employees via online platforms, calls and email which means monitoring is much lesser. Those staff of the companies who are not able to work from home are actually redundant for the time being because operations are paused.
Operational risks are generally not transferable or avoidable, hence, reducing it will be the only way to keep it minimal. For example, systems and processes going online, change of way of communication and supervision between staff and managers, enlarging employees’ job scope to reduce redundancy.
3. Competitive Risk
Competitive risk is literally the risk about the competitors in the same industry. When the MCO is enforced, businesses are forced to stop operation unless they are under the essential category.
Nowadays, many businesses are working closely with online platforms when it comes to distribution and retailing of their products, therefore their revenue is not severely affected. Competitors in the same industry may have enhanced their marketing strategy by launching new packages to sell their products, to maintain their stock turnover and revenue. Free delivery may also be another trick to attract more buyers since it is convenient for the consumers. Businesses rather absorb the delivery costs than to have more unsold stocks in their warehouses. During this MCO period, consumers are shopping smart, they compare prices, cashbacks, discounts and so on. Businesses may offer with reduction of prices or discounts to ensure their sales volume is still maintaining so they do not lose out a lot, which can possibly lead to a price war.
Competitive risk can be reduced if businesses promote their products and services with similar or new strategies to retain their customers and attract new consumers, business transformation for instance. However, it may take them extra cost to expand their distribution.
4. Financial Risk
Financial risk is always a main concern when it comes to strategic planning of a company as it relates with the financing source of the company. When Covid-19 cases grow gradually, businesses’ revenue may be affected which leads them to worry about their loan repayment, whether they are still capable of servicing their instalments, whether the interest rates will be increased or whether the loan credit amount will be reduced as their profits decline or if they are in the high risk industry. Worst yet, companies who are dealing with international suppliers that involve currency and price hedging. Malaysian Ringgit (MYR) currency dropped tremendously ever since the economy has been affected by Covid-19, companies may face some difficulty overcoming this. Many companies may start to worry that their source of financing will be reduced or withdrawn as this prolongs. When financial risk is probable, the going concern of a company in the near future is questionable. Will they be able to pay their rent and staff and to sustain this crisis with their reserves and the remaining source of finance they have?
Companies may try to transfer financial risk by sharing it with another party, such as merging with another company in the same industry for a joint venture or look for new shareholders or investors to try to survive the crisis, although it could be a challenge to look for investor at the moment. Also, companies should avoid and reduce unnecessary investments for the time being. Last resort, companies consider to do extreme measures like downsizing for going concern.
5. Governance Risk
Governance risk refers to the compliance of a company, a risk arising from the company itself. It is vital for companies to have proper governance to oversee the entire company’s functions and to ensure basic compliance with laws is in place. As Covid-19 strikes, compliance issues such as submission of audited financial statements, secretarial matters and taxes will give rise to governance risk. Things get more complicated with every update from the government and authorities which brings about the professionals to structure and sort out the information of extensions and changes in deadlines and the methods of applications for the subsidies to provide advice for their clients on the changes they have to adapt to during the period.
Governance risk can be shared and reduced by working closely with the auditors, company secretary, tax agent and lawyer so that proper guidance and advice are given to companies as they are the professionals to provide the latest updated information and advice to the clients. Because there are of updates and extension of times from the respective authorities, i.e. Companies Commission of Malaysia, Inland Revenue Board of Malaysia, Employees Provident Fund, Social Security Organisation, MITI, for instances.
Type of Risk and Solutions
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Types of Risk | Problems | Solution |
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Governanace Risk |
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Take advantage of the deferment of payment to Inland Revenue Board of Malaysia and submissions of return to the Companies Commission of Malaysia and etc. Risk sharing & reducing with advice from auditors, company secretary, tax agents and lawyer |
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Competitive Risk |
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Reduce risk by launching new or comparable strategies to maintain the sales and inquiry increase potential buyers. Offer attractive packages that will attract for repetition of order |
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Financial Risk |
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Take advantage of the moratorium period of 6 months in repayment of loan and to consider government supported financing scheme. Reduce and withdraw investments, sharing risk by joint venture with another company or getting new investors, downsizing |
| Operational Risk |
| Reduce risk by making processes and systems online, enlarging job scopes of employees, changing methods of communication and supervision. Consider to train employees by preparing them to face the changes and challenges post Covid-19 | |
| Market Risk |
| Reduce risk by studying the market demand and supply, monitor the inventory level | |
| Credit Risk | Clients default | Offer clients with cash discount in order for prompt payment to encourage clients to pay | |
| Liquidity Risk |
| Avoid risk by spend wisely and plan according to budget, consult tax experts and business advisors | |
| Technological Risk |
| Reduce risk by hiring IT experts to implement and improve the system and process | |
| Legal |
| Risk sharing & reducing with consultation from company secretary and lawyer | |
| Health, safety & environmental |
| Reduce risk by ensuring a clean and safe working environment with preventive measures.
Transfer risk to insurance company for the assets and key person of the compan |
Conclusion
SMEs are advised to deal with the risk management rationally and patiently by adopting the following approaches because many large companies are already practising the followings :-
- Identify the risk
- Categorise the type of the identified risk
- Evaluate the identified risk
- Prepare action / approach to response to the identified risk
- Manage the identified risk associated with cash flow of the company
- Constant review to the responded and identified risk
Disclaimer
The contents of this article intends to share on a general understanding basis and are not intended to suit any particular individuals and/or organisation without further consulted professional advice. The writer shall not be held and accepts no liability or responsibility on whatsoever loss, damage, expense or cost to any party resulting directly and/or indirectly from the use, application and /or referral of this materials and /or contents and/or the reliance by any party, either in part or in whole.