Risk perception of SMEs: strategic, family-related & external risks

Summary of the study

Risk perception is crucial to understanding risk behavior. However, the risk perception of small and medium-sized enterprises (SMEs) remains largely unexplored. A study has analyzed the current business situation of around 1000 German companies to illustrate typical patterns of risk perception and close the gap in understanding the mechanisms by which companies identify and perceive risk.
The study was based on a survey of 1,005 German SMEs conducted in the fall of 2019. This timing before the COVID-19 pandemic prevents a possible distortion of risk perception due to the pandemic. As part of the survey, companies were asked about their perception of twelve specific risks. These risks were divided into three broader categories: family-related risks (e.g. loss of managing director, lack of succession), strategic risks (e.g. sharp fluctuations in sales and profits, increasing competition, digitalization) and external risks (e.g. climate change, regulatory changes, political uncertainties). The data collected was evaluated using descriptive analyses and logistic regressions in order to examine the distribution of risks and influencing factors.

A key finding of the study is that five of the twelve risks examined are perceived disproportionately frequently by SMEs. These include, in particular, strong fluctuations in profit and turnover, increasing competition, legal requirements, political changes and the loss of the managing director. Furthermore, all 4096 possible risk profiles were classified into eight ideal types of risk perception.
The study also investigated which factors influence the probability of risk perception. Data on company size, sector, current business situation, equity and status as a family business were used for this purpose. Among other things, it was found that a good business situation reduces the probability of perceiving certain strategic risks. In addition, the sudden loss of the CEO is a significantly greater problem for smaller companies.

The study strongly advocates paying greater attention to the risk perception of SMEs in future. This is essential in order to develop a better understanding of how SMEs take risks and deal with uncertainties.

Key findings of this study

The study fills an important research gap by analyzing the largely unexplored risk perception of small and medium-sized enterprises (SMEs). The most important key findings are:

• Dominant perceived risks: Five out of twelve risks examined are disproportionately often considered important by SMEs. These include, in particular, strong fluctuations in profit and turnover, increasing competition, legal requirements, political changes and the loss of the managing director. The latter is a major problem for smaller companies in particular.
• Classification of risk profiles: The study was able to classify all 4096 possible risk profiles into eight ideal types of risk perception. The most common profile is that of companies that do not perceive any risks.
• Factors influencing risk perception: Various factors influence the probability that risks are perceived. A good business situation reduces the probability of perceiving certain strategic risks. Even if companies are in a good situation, they can still perceive many risks, which indicates subjective components of risk perception. Smaller companies have a significantly higher probability of perceiving risks such as the loss of the CEO or an unclear succession. As expected, the status as a family business only influences the perception of family-related risks, but not strategic or external risks. The equity ratio and the industry sector had hardly any influence on risk perception.

The study strongly argues that greater attention should be paid to the risk perception of SMEs in the future, as it is crucial to better understanding risk behavior and the handling of uncertainties in these companies. Although risk perception has subjective components, it is largely based on a realistic assessment of the environment by the companies.