What is a Business Risk?
Business risk refers to a threat to the company’s ability to achieve its financial goals. In business, risk means that a company’s plans may not turn out as intended or may not meet its target or reach its goals.
How to Identify Business Risks?
Risks are inherent to every business. They can't be avoided and therefore must be addressed head-on to reduce their impact. The first step in risk management is to identify the risks to develop a risk management strategy.
Different Types of Business Risks
Running a business takes hard work, which can reap the rewards of customers, revenue, and satisfaction. While success is the goal, business risk may stop you from achieving the goals you set.
But when it comes to risk management, there are steps you can take. Here are seven types of business risk you may want to address in your company.
1. Economic Risk
The economy is constantly changing as the markets fluctuate. Some positive changes are good for the economy, which lead to booming purchase environments, while negative events can reduce sales. It's important to watch changes and trends to identify and plan for an economic downturn.
To counteract economic risk, save as much money as possible to maintain a steady cash flow. Also, operate with a lean budget with low overhead through all economic cycles as part of your business plan.
2. Compliance Risk
Business owners face an abundance of laws and regulations with which they need to comply. For example, recent data protection and payment processing compliance could impact how you handle certain aspects of your operation. Staying well versed in applicable laws and state and local agencies can help minimise compliance risks.
Non-compliance may result in significant fines and penalties. Remain vigilant in tracking compliance by joining an industry organisation, regularly reviewing government agency information, and seeking assistance from consultants who specialise in compliance.
3. Security and Fraud Risk
As more customers use online and mobile channels to share personal data, there are also greater opportunities for hacking. News stories about data breaches, identity theft and payment fraud illustrate how this type of risk is growing for businesses.
To achieve effective enterprise risk management, focus on security solutions, fraud detection tools and employee and customer education about how to detect any potential issues.
4. Financial Risk
This business risk may involve credit extended to customers or your own company's debt load. Interest rate fluctuations can also be a threat.
Adjusting your business plan will help you avoid harming cash flow or creating an unexpected loss. Keep debt to a minimum and create a plan that will start lowering that debt load as soon as possible. If you rely on all your income from one or two clients, your financial risk could be significant if one or both no longer use your services. Start marketing your services to diversify your base so one loss won't devastate your bottom line.
5. Reputation Risk
There has always been the risk that an unhappy customer, product failure, negative press or lawsuit can adversely impact a company's brand reputation. However, social media has amplified the speed and scope of reputation risk.
To prepare for this risk, leverage reputation management strategies to regularly monitor what others are saying about the company online and offline. Be ready to respond to those comments and help address any concerns immediately.
6. Operational Risk
This business risk can happen internally, externally or involve a combination of factors. Something could unexpectedly happen that causes you to lose business continuity.
That unexpected event could be a natural disaster or fire that damages or destroys your physical business. Or, it might involve a server outage caused by technical problems, people, or a power cut. Many operational risks are also people related. An employee might make mistakes that cost time and money.
Whether it's a people or process failure, these operational risks can adversely impact your business in terms of money, time, and reputation. Address each of these potential operational risks through training and a business continuity plan. Both tactics provide a way to think about what could go wrong and establish a backup system or proactive measures to ensure operations aren't affected.
For example, more businesses use cloud storage to protect company data and rely on remote team members to maintain operations. Automating more processes also helps to reduce people failures.
7. Competition (or Comfort) Risk
While a business may be aware that there is always some competition in their industry, it's easy to miss out on what businesses are offering that may appeal to your customers.
In this case, the business risk involves a company leader becoming so comfortable with their success and the status quo that they don't look for ways to pivot or make continual improvements. Increasing competition combined with an unwillingness to change may result in a loss of customers.
Enterprise risk management means a company must continually reassess their performance, refine their strategy, and maintain strong, interactive relationships with their audience and customers. Additionally, it's important to keep an eye on the competition by regularly researching how they use online and social media channels.
Accept, But Plan
Although you will never be able to eliminate business risk, proactively planning for it can help. Awareness is key in helping you save money and time while protecting the trust, reputation, and customer base you've worked so hard to achieve.