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Business Risks, Types and How to Manage a Business Risk

Business is usually a specific commercial enterprise or establishment, i.e. a person’s occupation, work or trade. On the other hand, Risk is the potential negative outcome or effect of an event. Business risk means that there is a chance that you won’t receive a return on your investment. When you are in business, you need to consider the kinds of events that could pose a risk to your business and take steps to mitigate them.

There is a strong relationship between risk and reward. It’s generally impossible to achieve business gains without taking on at least some risk. Therefore, the purpose of risk management isn’t to completely eliminate risk, risk management seeks to optimize the risk-reward ratio.

TYPES OF BUSINESS RISK

Not all risks can be managed or treated the same way, so it is very important for one to understand the type of risk they are dealing with before considering how to deal with it.

Innovation Risk

Put simply that innovation risk is a function of probability and impact. What’s the chance of something happening, and what is the likely impact should it occur? This risk surfaces in a business when one is trying to do something new or even rebrand a business.

Reputation Risk

Reputation risk occurs as a result of losses due to a declining reputation. Incidents that are perceived as dishonest, disrespectful or incompetent. The term tends to be used to describe the risk of a serious loss of confidence in an organization rather than a minor decline in reputation.

Exchange Rate Risk

Many global businesses have high exposure to a basket of currencies that can add volatility to financial results such as operating margins. The risk that volatility in foreign exchange rates will impact the value of business transactions and assets.

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Physical Risk

The physical damage results in repair or replacement costs and can also lead to legal costs if you are found liable in some way. This includes risks to employees, buildings or assets. Common risks that could affect your business are fires, water damage and theft or vandalism.

Strategic Risk

This risk leads to loss of profit, poor cash flow, missed deadlines or low sales. Strategic risk occurs when decisions are designed to lead you to your business objectives. But then, there’s always a risk that the decisions would backfire, because the decision itself was the wrong one or the strategy to be applied, had poor execution strategy.

This poor execution strategy could be due to changes in the business environment resource requirement which were unavailable.

Compliance Risk

Businesses are governed by some form of legislation and regulation. The possibility of failing to adhere to rules and guidelines is compliance risk and it leads to prosecution, fines and reputational damage.

Human Risk

Employees create a risk to your business through a number of ways, which could either be; their behavior in the workplace. Having a high level of non-compliancy or incompetency from employees could pose a great risk.

This competency also comes down to their behavior outside the workplace, which also plays a huge role in your business. For instance, if there are employees who embezzle money, or is popularly known for particular misconduct that’s a huge risk for the business.

Technological Risk

One of the greatest risks in business is the “Technological Risks”. This risk can come from anything as basic as hardware or software failure, power outage, malware and cyber-attacks. Such risks can lead to loss of time through systems and equipment not being in working order, loss or corruption of data and in some cases data breach hereby compromising the database systems.

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Financial Risk

This is one of the fastest increasing business risks. It may either be as a result of internal or external factors such as fluctuations in the financial markets. Poor financial planning and projection are types of financial risks that can lead to loss of income and to a negative cash flow, which if serious enough, can mean an end to your business.

Interest Rate Risk

The risk that changes to interest rates will disrupt your business. For example, interest rates may increase your cost of capital thus impacting your business model and profitability.

Credit Risk

In a business, an occurrence of credit risk is the point whereby there is an outstanding debt. This debt tends to affects the flow of business. Majority of businesses are related to accounts receivable risk.

Quality Risk

This risk takes place when there is a potential threat that you won’t be able to meet your quality standard for your products, services and business practices.

CAUSES OF BUSINESS RISK

  • Mismanagement
  • Change in demand for the product
  • Modern technology use
  • Natural Factors
  • Competition
  • Human Inflicted causes ( Forgery, theft)
  • Change in government policies

How To Manage Business Risk

In a risk-filled business world, businesses can progress in confidence by putting the following measures in place. They are:

Assigning of Responsibility

Every risk that has been identified should be delegated to an expert or a senior member of the Business Enterprise. Usually, the owner will work on whichever area the risk most relates to and the delegates will be accountable for ensuring any processes laid out in the risk management plan are carried out.

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They will also be responsible for maintaining records and analysis that can be used to regularly review the risk and its priority in the plan.

Conduct of Risk Analysis

Once business risks have been identified, there will be an urgent need to analyze their potential impact and their likelihood of occurrence. This will help classify and prioritize which risks to treat as urgent when it comes to planning any preventative measures.

Identification of  Potential Risks

While some risks are universal, others may only apply to certain sectors or demographics. Spend time identifying the specific risks faced by your own business. Involve key stakeholders from each area of your business to ensure that every aspect is covered.

Take Note of Preventative Measures

A risk management plan would not be complete without identifying measures that you and your business will take in order to prevent the risks that you’ve highlighted. After the analysis has been completed there is a need to actually plan how and when you will put preventative measures in place.

Look out for Warning Signs

Topping and being at alert for any business risk warning signs is very important. It helps in ensuring that they are documented, which is a key part of preventing risks from occurring.  As once documented, it means it would be worked on. Also being able to spot when they’re about to happen. When these warning signs are identified, further action is required in order to prevent any form of Risk.

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