Contemporary Financial Risk Management Perceptions and Practices of Small-Sized Chinese Businesses

Concepts of Risk and Financial Risk

The concept of risk has been used to refer to a wide range of phenomena. The Oxford Dictionary provides the definition of risk as ‘...possibility or chance of meeting danger, suffering loss or injury, etc...’. Risk can be defined as the volatility of unexpected outcomes, usually the value of assets or liabilities of interest (Jorion & Khoury, 1996, p.2). Risk management has been defined as ‘the identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise.’ (Dickson et al., 1995, p.1, 2). Financial risk management is “the controlling of the possibility or chance of suffering a monetary loss” (Eales, 1995, p.1). Financial risk management has become a tool essential to the survival of all business activity (Jorion & Khoury, 1996). Risk management, a systematic approach to identifying, measuring, monitoring and managing various risks faced by an organization, is seen increasingly as a key attribute to the success of small business (Alquier & Tignol, 2006; Gao et al., 2013; ICAEW, 2005; Vickery, 2008). In general, small business managers face two broad types of risks: business (or operating) risk and financial risk.

Risk management is a complex area involving the interactions of various sources of capital and input, along with technology, regulation, governance and communication (Blome & Schoenherr, 2012; Gao et al., 2013). Financial risk was often seen as a product of mismanagement of financial activities. For example, companies arranged borrowings off balance sheet to conceal their true position from investors, shareholders and analysts. They managed a myriad of ways to create sets of accounts which told a different story to the real underlying truth.