High risks cost small businesses a fortune


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Some small and medium enterprises (SMEs) spend more than Sh500,000 a year on mitigating risks including loss of assets, a new research shows.

Local research firm Viffa Consult found that while five percent of SMEs spent more than half a million shillings on covering risks, another 34 per cent spent between Sh51,000 and Sh500,000.

However, most of the SMEs (61 percent) spent Sh50,000 and below — indicating that the bulk of the small firms take only minimal risk cover.

“[In terms of] value spent on mitigating risks annually, 61 percent of respondents spent Sh50,000 and below, 34 percent spent between Sh51,000 and 500,000 while five per cent spent over Sh500,000,” said Viffa Consult in its results report.

The spending on mitigation had come after the firms lost value with 27 percent of the SMEs saying that they had lost more than Sh500,000 worth of assets and 20 percent reporting having lost between Sh251,000 and Sh500,000.

“[For] value lost due to risk exposure in the last one year, 27 percent of respondents lost Sh50,000 and below, 26 percent lost between Sh51,000 and Sh250,000, 20 percent lost between Sh251,000 and Sh500,000 while 27 percent lost over Sh500,000,” said the report.

As a result of the risks faced, most of the firms also tended to go for cash reserves to deal with any risks they may experience in the course of their business.

The research found that biggest measure that most SMEs took to mitigate against risks were keeping of cash reserves. The second most important strategy adopted was a hold onto assets such as land, buildings and motor vehicles.

The third most popular way of handling risks was in savings with cooperatives for businesses in the same sector and/or location.

Other measures were employment of security guards, diversifying markets in terms of having multiples locations as well as installing security software.

Viffa Consult chief executive Victor Agolla said the survey was based on a sample of 110 SMEs, with a purposive sampling technique to ensure the majority of industries were represented with each subset of SMEs undergoing random sampling.

It had confidence level of 90 per cent (meaning that only 10 percent of the results could have been achieved due to chance) and a margin of error of 7.8 percent.