Types of Business Risks and Ideas for Managing Them

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Companies of all sizes across every industry face a growing number of business risks that could disrupt their operations and impact profitability, from economic downturns and cybersecurity threats to supply chain disruptions and regulatory changes.

In fact, 65% of finance officials reported experiencing a dramatic increase in the volume and complexity of business risks in recent years, according to the 2023 State of Risk Oversight report by the Enterprise Risk Management Initiative at NC State University, in partnership with the American Institute of Certified Public Accountants (AICPA). (The report surveyed 454 members of AICPA’s Business and Industry group who serve in chief financial officer or equivalent senior executive positions.)

In a global business world wrestling with economic uncertainty, widespread ransomware attacks, extreme weather, and geopolitical conflicts, it’s crucial that leaders remain aware of potential risks that could shake the financial stability of their companies.

This article explores common types of risks and provides practical business risk management strategies that may help allow companies to boost their resilience, protect their assets, and prepare for mitigating any damage to their brands.

What Is Business Risk?

Business risk refers to potential threats that could disrupt a company’s operations or interfere with its ability to achieve its financial goals. Business risks can stem from internal issues, such as strategic mistakes or poor investments, as well as external factors, like changes in consumer preferences, supply chain disruptions, or natural disasters.

Business risks that can cause severe harm to companies regularly crop up in the news, from economic sanctions to cyber attacks to natural disasters. While businesses certainly can’t prevent all setbacks, they can prepare for a wide variety of challenges that may arise by remaining vigilant and flexible, proactively identifying potential vulnerabilities, and developing risk management strategies to protect the financial health and long-term stability of their companies.

The Types of Business Risks

Businesses regularly face a wide range of risks, including: 

• Reputational Risk: A company may suffer threats to its reputation as a result of negative publicity, corporate scandals, or other high-profile problems that erode the public’s trust in the organization. Reputational risk can affect a company’s relationships with its customers, investors, employees, and partners and can lead to decreased sales, difficulty retaining talent, and loss of market share.
• Financial Risk: Companies can face financial risks if they experience substantial losses and other threats to their financial health due to factors like market fluctuations, late payments from customers or partners, or a lack of liquid assets, creating an inability to meet short-term financial obligations. 

How to Identify Business Risks

Preventing damage to a brand starts with making a concerted effort to identify the kind of business risks before they occur by:

• Conducting a thorough review of every aspect of the company’s core business processes and relationships, from supply chain partnerships to customer delivery, to uncover vulnerabilities that could put the business at risk.
• Identifying risks that are common for a particular industry, for example, by attending industry conferences and networking with peers to stay informed of any factors that could impact a company. Business risk examples may include economic downturns, regulatory changes, technological advancements, and geopolitical conflicts.
• Making sure employees across all levels of the organization feel comfortable reporting problems that could spell risk for the company, either through anonymous surveys or by openly communicating with managers.
• Implementing a formal business risk management process, employing a structured approach to identifying risks, developing responses to potential threats, and evaluating the effectiveness of risk assessment strategies.

How to Use Risk Management

To navigate uncertainties and protect their operations, companies should consider developing effective business risk management strategies. To start, businesses may want to appoint a dedicated team to regularly monitor and oversee risk management. This team can take important steps toward building a comprehensive approach to business risk management that includes:

• Risk Assessment: Risk management teams can analyze internal processes and industry trends, as well as external factors, to identify potential risks. Prioritize those that are more likely to impact the business or cause serious damage. This helps a company steer resources toward preventing problems in the areas of the business that need the most protection.
• Mitigation Plans: Companies can evaluate the potential consequences of various risks and develop a detailed action plan to address issues that may arise to minimize any damage to the business. For example, if the risk management team determines that the business is vulnerable to a cybersecurity attack, it might recommend implementing strict access controls, such as multi-factor authentication, adopting advanced security technologies like firewalls and endpoint detection systems, and developing a security awareness training program for employees.
• Success Monitoring: The risk management team can continuously review its mitigation plans and measure their effectiveness in preventing threats, regularly reporting its findings to the leadership team.

Why Risk Management Is Important

The consequences of ignoring potential risks can be extremely costly for a business, leading to everything from financial losses and fines to high employee turnover, decreased sales, and even business failure. Effective risk management can be crucial to a company’s success, acting like an insurance policy that protects the business from risk-related harm and ensures its long-term survival.

To navigate uncertainties and protect their operations, companies should consider developing effective business risk management strategies. 

Developing comprehensive business risk management strategies can help safeguard a company’s assets, protect its reputation, enable sensible strategic decision-making, and increase resilience – all of which can help prepare the company to handle any unexpected setbacks that may come its way.

Understanding Risk Management Strategies

In the 2023 State of Risk Oversight report, only 29% of respondents described their organizations’ approach to risk management as “mature” or “robust,” while 36% said their risk management processes remained “very immature” or “developing.” Clearly, many businesses have more work to do to prepare for threats. To take steps toward implementing strong risk management strategies that can help minimize the impact of risks on their organizations, companies can consider:

• Appointing a dedicated risk management team: Business leaders can name a chief risk officer to oversee a cross-departmental team of representatives from different areas of the company. This group can develop a formal risk management plan that detects potential threats, creates response plans for high-priority risks, and monitors the effectiveness of risk management solutions. The company should provide the team with the resources and license it needs to put risk controls in place and accurately measure whether the business is meeting its risk management goals.
• Strategically controlling business growth: While many companies strive to expand their operations, sustainable growth is key. Prior to expanding into new geographic areas or markets, business leaders should consider carefully evaluating the potential risks involved, setting thresholds for withdrawing if new ventures are heading south. They may also want to maintain adequate cash reserves to weather any setbacks that may occur as the company explores new opportunities.
• Encouraging employees to speak up: Employees immersed in a company’s day-to-day operations may be the first to sense that the company is heading in the wrong direction and is putting itself at risk, yet they may not feel comfortable bringing their concerns to management. Businesses can help foster a risk-aware culture by training employees in risk management, encouraging an environment where reporting potential risks is applauded, and rewarding those who do call out impending problems.
• Limiting exposure to high-risk customers: Businesses are eager to acquire customers, but may not be able to afford multiple transactions with those who don’t pay their bills. Companies can help limit their exposure to high-risk customers by conducting thorough credit checks on new customers, setting conservative credit limits based on customers’ risk profiles, and requiring up-front deposits or even full payments before delivering products and services.
• Implementing sophisticated quality assurance programs: To help ensure that a company’s products and services are meeting customer needs, companies can adopt vigorous quality assurance programs by: training employees in quality control, regularly testing products and services, establishing quality control checkpoints, conducting periodic inspections of products, and promptly correcting any defects that are discovered.

How to Help Further Mitigate Damage to Your Brand

Business owners face a variety of different kinds of business risks. While it may be difficult to avoid all risks at all times, companies can develop strong risk assessment plans to help prepare for managing any serious issues that may occur.

Because let’s face it: a company’s reputation is everything. With that in mind, businesses will want to do everything in their power to avoid potential risks that could not only cause financial hardship and interrupt operations but could tarnish their reputation with customers, investors, employees, and other stakeholders. The key can be making risk management a high priority. Learn more about how to take a proactive approach to mitigating reputational damage to your brand.

A version of this article was originally published September 01, 2022.

Photo: Getty Images

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