What is 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 or an organization’s plans may not turn out as originally planned or that it may not meet its target or achieve its goals.
Such risks cannot always be blamed on the owner of the company, as risk can be influenced by various external factors, which may include rising prices of raw materials for production, growing competition, or changes or additions to existing government regulations.
How to Identify Business Risks
Risks are inherent to every environment and business. They cannot be avoided and, therefore, must be addressed head-on to minimize their impact. The first step in risk management is to identify the risks in order to come up with a risk management strategy.
1. Analyze the sources that may trigger problems
It is important to identify and analyze the sources that can cause a problem. Risk triggers can be internal or external.
2. Act now
Managers shouldn’t wait for potential problems to become actual problems before they start doing something. The moment a problem is deemed to be a threat, it should immediately be dealt with by the company’s executives by devising a plan of action in the event that the risk becomes an actual full-blown concern facing the company.
3. Involve employees
Identifying risks is not the sole responsibility of the managers and top-ranking officials. Management should involve their employees in identifying the risks that they see in their respective departments and train them to handle such risks at their level.
4. Make a list of industry-specific risks
By looking into the industry where the company operates, managers will be able to identify the possible risks that the business may face. If the same risks happen to other companies in the same industry, there is a likely chance that it will happen to your company as well. Therefore, businesses should be ready with a list of solutions or steps to address the risks.
5. Create a record of risks
Sometimes, the same risks arise over and over. By creating a record of all the risks experienced by the company since it started, management will be able to do a regular review of past events in order to detect patterns that may better prepare the company for future risks.
Types of Risks in Business
Risks come in different forms. Below are the different types of business risks:
1. Strategic risk
Strategic risks can occur at any time. For example, a company manufacturing an anti-mosquito lotion may suddenly see a decline in its sales because people’s preferences have changed, and they now want a spray mosquito repellent rather than a lotion. To deal with such risks, companies need to implement a real-time feedback system to know what its customers want.
2. Compliance risk
Compliance risk involves companies having to comply with new rules that are set by the government or by a regulatory body. For example, there may be a new minimum wage that must be implemented immediately.
3. Financial risk
Financial risk is about the financial health of the company. Can the company afford to offer installment payments to its customers? How many customers can it offer such an installment scheme? Can it handle business operations when two or three of these customers are not able to make their payments on time?
4. Operational risk
Operational risk occurs within the business’ system or processes. For example, one of its production machines may break down when the target output is still unmet. What will the company do if one of its machine operators has an accident during work hours?
Causes of Business Risks
There are basically three causes of business risk:
1. Natural causes
Natural causes of risk include flooding, earthquakes, cyclones, and other natural disasters that can lead to the loss of lives and property. For example, a delivery truck is on its way to deliver the order of a customer but is met with a cyclone along the way, causing an accident. In order to counter such causes, businesses need to take out comprehensive insurance coverage.
2. Human causes
Human causes of risk refer to negligence at work, strikes, work stoppages, and mismanagement.
3. Economic causes
Economic causes involve things such as rising prices of raw materials or labor costs, rising interest rates for borrowing, and competition.
How to Manage Business Risks
Business risks may be inevitable, but there are several ways to minimize their impact, such as:
1. Avoid the risk
It may sound ironic to suggest avoiding the risk when we say that it is inevitable. But what is meant here is that companies should avoid specific risks when possible. Managers should think of alternatives in order to not have to face the risk.
2. Prevent the risk
In the example of the delivery truck above, it would help prevent the risk if companies check on the weather prior to sending out deliveries in order to make sure they reach their destination safely. If there is a deemed risk, then they should act to prevent it from happening – for example, by halting deliveries during severe weather.
3. Contain the risk
Sometimes, there are risks that cannot be avoided or prevented. Companies can choose to contain said risks while putting up safety nets. For example, since all businesses need to access the internet, where hackers abound, they may put stronger firewalls and other protective measures in place to ensure their company’s safety.