Inherent Risk, Residual Risk, and Risk Appetite: A Case Study of Kipang Kurnia Sari MSMEs in West Sumatra

Abstract

Risk management in Micro, Small, and Medium Enterprises (MSMEs) is often reactive and unstructured, making foreseeable losses a significant threat to business continuity. This study analyzes the application of the concepts of inherent risk, residual risk, and risk appetite in Kipang Kurnia Sari, an MSME producing kipang, a traditional snack from West Sumatra. A qualitative descriptive case study approach was employed, supported by a semi-quantitative risk assessment based on Likelihood (L) and Impact (I) scales. Six major risks were identified, with seasonal sales decline exhibiting the highest inherent risk score (9). Following the implementation of existing control measures, five of the six identified risks were successfully reduced to within the established Risk Tolerance Limit (RTL) (residual risk ≤ 4). The MSME's risk appetite was classified as conservative, reflecting its limited financial resources and strong dependence on the business owner. These findings highlight the need to formalize the risk management system through the development of written Standard Operating Procedures (SOPs) and the strengthening of the third line of defence within the Three Lines of Defence framework.