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5 Types of Business Risks

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Ask any management consultant and they will probably tell you that no business is truly safe from risk. The issue then is not risk itself, but how you manage risks to prevent them from becoming problematic.

It’s the uncertain and sometimes uncontrollable aspects of a business and its environment that can pose a risk to the bottom line, or in extreme cases, the survival of a business.

Being aware of the types of risks you could encounter is the first step in avoiding them or minimising their impact. While every enterprise has its own risk factors and means of mitigating damage, these are the generic, overarching risks often encountered.


Strategic Risks

Strategic risks are the results of decisions made by management on strategy, lines of play, positioning and operational control. Every business move has its consequence, and it’s a matter of weighing the risks against the payoff in pushing through with it.

For instance, if a competitor suddenly appears in the market, a company has to make adjustments that would either minimise the impact of a competitor or hunker down and weather out the storm. In this case, both decisions have consequences that can make or break the business. To reduce this type of risk, detecting the warning signs, plan your actions and develop contingencies.


Compliance Risks

Businesses are subject to rules and regulations of other powerful bodies such as the government (or governments for international businesses), partner companies or business guilds and associations. Failure to comply to these bureaucratic and legislative rules can lead to sanctions and punishments.

In reducing this type of risk, work with a lawyer and find out what regulations and rules apply to your company. For starters, environmental, labor, occupational health and safety restrictions are typically enforced. Minimise exposure by staying on the right side of the law.


Financial Risks

Cash flow issues, problems in liquidity, debts and credits all fall under the financial risk classification. Numerous factors affect financial risk and addressing them isn’t as simple as it might seem. Unlike the other risks, this requires more than attention and decision-making.

Strategies and financial structures must be put into place to address and minimise these risks. To get you started, work with an accountant, virtual CFO or business consultant in minimising financial risks and understanding the processes behind them.


Operational Risks

Operational risks are some of the most obvious risks your business can encounter as they involve your  internal processes, systems and the people involved in them.

What can go wrong in your day-to-day activities? Is a key piece of equipment broken? Are your employees overworked? Are your supply deliveries delayed?

Micromanaging to avoid operational risks won’t solve the problem. This approach  generally results in quick fixes that bandage the problem until something else goes wrong. To build a business you can work on and not work in, you need to develop an effective operational infrastructure that ensures processes run smoothly. This means creating internal systems for communication channels, goals and metrics, rewards, training and development.


Reputational Risks

Bad publicity can lead to significant financial loss. Lawsuits from bad products/services could spiral out of control and damage your company’s reputation. Even minor scandals and mishaps could go viral and escalate. Deal with these risks by sticking to facts, addressing the problem and explaining how your company intends to resolve it.

Knowing is half the battle. Minimise risks by knowing their nature, finding out how to address them and planning ahead to reduce their impact.

 

Wary of risks and how to minimise them? Take a free TRUST Assessment and evaluate your business needs now.

 

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Topics: Five Key Areas of Business, business management