A business risk is a potential event or situation that could negatively impact an organization’s ability to achieve its objectives. These risks can arise from a variety of sources, including internal factors such as strategic decisions and external factors such as economic conditions. It is important for businesses to identify and assess the risks they face in order to develop strategies to mitigate or manage them.
There are many different types of business risks, including financial risks, operational risks, strategic risks, and compliance risks. Financial risks include the possibility of financial loss due to factors such as changes in market conditions, credit risk, or liquidity issues. Operational risks refer to the potential for disruptions or failures in business processes, such as supply chain disruptions or IT system failures. Strategic risks involve the potential for misalignment between an organization’s goals and its resources or capabilities. Compliance risks refer to the risk of non-compliance with laws, regulations, and other requirements that may result in fines, legal action, or damage to reputation.
Managing business risk is an ongoing process that involves identifying potential risks, assessing their likelihood and impact, and implementing strategies to mitigate or manage them. This may include implementing controls or procedures to prevent or minimize the occurrence of risky events, as well as developing contingency plans to address potential risks if they do occur. By proactively managing business risks, organizations can better position themselves to achieve their goals and navigate challenges that may arise. The following are common types of business risk.
Competitive Risk
The risk that your competition will gain advantages over you that prevent you from reaching your goals. For example, competitors that have a fundamentally cheaper cost base or a better product.
Economic Risk
The possibility that conditions in the economy will increase your costs or reduce your sales.
Operational Risk
The potential of failures related to the day-to-day operations of an organization such as a customer service process. Some definitions of operational risk claim that it is the result of insufficient or failed processes. However, operational processes that are deemed to be complete and successful also generate risk.
Legal Risk
The chance that new regulations will disrupt your business or that you will incur expenses and losses due to a legal dispute.
Compliance Risk
The chance that you will break laws or regulations. In many cases, a business may fully intend to follow the law but ends up violating regulations due to oversights or errors.
Strategy Risk
The risks associated with a particular strategy.
Reputational Risk
Reputational risk is the chance of losses due to a declining reputation as a result of practices or 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.
Program Risk
The risks associated with a particular business program or portfolio of projects.
Project Risk
The risks associated with a project. Risk management of projects is a relatively mature discipline that is enshrined in major project management methodologies.
Innovation Risk
Risk that applies to innovative areas of your business such as product research. Such areas may require adapting your risk management practices to fast paced and relatively high risk activities.
Country Risk
Exposure to the conditions in the countries in which you operate such as political events and the economy.
Quality Risk
The potential that you will fail to meet your quality goals for your products, services and business practices.
Credit Risk
The risk that those who owe you money to fail to pay. For the majority of businesses this is mostly related to accounts receivable risk.
Exchange Rate Risk
The risk that volatility in foreign exchange rates will impact the value of business transactions and assets. Many global businesses have high exposure to a basket of currencies that can add volatility to financial results such as operating margins.
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.
Taxation Risk
The potential for new tax laws or interpretations to result in higher than expected taxation. In some cases, new tax laws can completely disrupt the business model of an industry.
Process Risk
The business risks associated with a particular process. Processes tend to be a focus of risk management as reducing risks in core business processes can often yield cost reductions and improved revenue.
Resource Risk
The chance that you will fail to meet business goals due to a lack of resources such as financing or the labor of skilled workers.
Political Risk
The potential for political events and outcomes to impede your business.
Seasonal Risk
A business with revenue that’s concentrated in a single season such as a ski resort.
