There is a saying that goes, “life is full of risk”. This generalises all areas of life, including business. However, as a business person, do you understand what risk is in business and how it can affect your business?
If you don’t, you don’t need to worry, as this discussion will enlighten you.
Keep reading to learn more.
Business Risk – What Is Risk in Business
Risk in business is the same as a business risk.
It is exposure organisations or companies are likely to face that will reduce their profits or lead to failure.
In other words, business risk is that thing that threatens companies’ ability to accomplish their goals.
Every organisation and company experiences risk regularly.
Starting and running a business is risky as you don’t know what will happen in the long run.
So, it is normal for a company to encounter risk, as it cannot entirely escape it.
However, businesses have to be conscious of those risks that affect their operation and work to mitigate them.
Although every business experience risk, no two businesses experience the same degree of risk.
In other words, companies’ and organisations’ risk depends on their business type and size.
For example, a business that sells fashion items will suffer a greater risk than a business that sells standardised goods.
Likewise, a small-scale business doesn’t bear as much risk as a large-scale business.
The catchphrase “no risk, no gain” applies to business, as business gets profit as a reward for the risk they bear.
A business’ profit size greatly depends on how significant the risk they bear is.
After all, entrepreneurs bear risks with the hope of profit.
Causes of Business Risk
Business risk occurs due to uncertainties.
Yes, every entrepreneur who starts a business knows they will encounter risks.
Nonetheless, some of the common factors that arise and bring about business risk include:
Natural Factors
Nature is a phenomenon that humans cannot control.
Yet, thanks to technology, you can predict natural events like rain, storm, earthquake, etc.
You cannot stop rain from falling or a hurricane or earthquake from happening.
When they happen, however, they can cause heavy losses to your business.
Natural factors are one uncertainty that we often fail to prepare for.
Economic Factors
Economic factors are financial changes in the economy of a given place, government policy changes, or market changes.
These factors directly impact a business’s earnings.
For example, if the demand for a company’s product should decrease due to an economic downturn, the company will have fewer sales, which will automatically affect its finances.
Physical Factors
These are factors that bring about harm to an organisation or company’s assets.
For example, old technology or defective mechanicals can result in asset damages such as employee injury, burning of a company’s building, etc.
Human Factors
Humans can make mistakes or take action and decisions that put companies at risk.
For example, an employee’s dishonesty can cause enormous losses for a business.
This factor is the most unpredictable, as you cannot predict human actions.
So, companies and organisations often bear the damages that people make.
Types of Business Risks and Ways to Manage Them
Businesses face different risks that affect their finances and chances of success and growth.
These risks are grouped as follows:
Financial Risk – What Is Risk in Business
Companies need to generate enough cash to manage their financial obligations and debts.
However, when a company struggles to do this, they are experiencing financial risks.
When companies do not have sufficient cash to pay their debts, they become neglectful about their loans.
Companies with high debt financing their business are said to be at greater financial risk.
Debt lenders see them at a higher chance of becoming bankrupt due to them not meeting their payment obligation.
Financial risk often arises as a result of instabilities, increases in interest rates, stock prices, currencies decline, market losses, etc.
The following are the common risks categorised under financial risk:
Credit Risk – What Is Risk in Business
This has to do with the risk of companies failing to pay their debt or another party, such as a supplier, at the agreed time.
It also applies when you extend credits to your customers and risk the chance of them defaulting on their payment.
This risk can consequently make your business experience lower profit and revenue generation.
Market Risk
This is the risk of experiencing a loss in your business due to factors like an increase in interest rate, foreign currency value fluctuation, market volatility, etc.
For instance, say a German business agrees to sell its product at an agreed amount in naira to a Nigerian company.
However, during the period of payment and delivery, the naira value suddenly rises, resulting in the German business losing money.
This is because they will have to use more euros to buy naira.
Liquidity Risk – What Is Risk in Business
This financial risk affects a company’s capacity to meet its daily financial obligations to execute business transactions.
The primary cause of liquidity risk is problems with potential cash flow due to seasonal revenue downturns, inefficient markets, etc.
Financial Risk Management – What Is Risk in Business
Financial risk can be managed in business irrespective of a business type or size.
Some of the things you can do to manage financial risks in your business include:
- Function on a low sustainable budget for your business and save money as much as you can to sustain cash flow
- Seek loans with low-interest rates
- Make your debt payments at the agreed time
- Pay close attention to the market and its changes
Operational Risk
This is the risk of company operations failing due to breakdown or inefficiencies in your system, people, and internal processes.
Some of the factors of these risks are external events such as natural disasters and human error.
The following are examples of operational risks and how they are categorised:
- Fraud – e.g. tax evasion, assets misuse, and bribery
- Poor workplace safety and policies – e.g. staff safety and health, discrimination
- Wrong business practices – e.g. market manipulation, product defects
- Issues affecting physical assets – e.g. poor equipment maintenance, natural disasters, vandalism
- Business disruption – e.g. IT system failure, utility downtimes, etc
- Other criminal activities – e.g. hacking, data theft
- Process management – examples; accounting errors, wrong data entry.
These operational risks bring about different threats to businesses ranging from a slight inconvenience to jeopardy of the existence of a business.
So, it would be best if you didn’t underestimate the potential impact of operational risks on your business.
Operational Risk Management – What Is Risk in Business
Unlike other business risk types, operational risks are not willing to be incurred or are typically driven by revenue.
They are often considered to be the unavoidable price for conducting business.
Nonetheless, you can work to reduce your business exposure to operational risk by developing workable management strategies for them.
However, before doing this, you will need first to understand the nature of your business and the related risks.
Doing this will make it easy to identify, monitor, assess, and mitigate operational risks.
This will enable you to prevent a sudden operational loss, cut auditing and compliance costs, identify unlawful activities, and minimise future exposure to risks.
Below are some ideas helpful in managing operational risks:
- Invest in employee training and improvement to lessen internal errors.
- Have in place different contingency plans for external factors that can impact operations.
Legal Risks
These refer to any loss or damage a business can face due to violation or negligence of business laws.
A business can face legal risk at any level of its operation.
The following are types of legal risks in business:
Regulatory Risk
These risks arise from changes in regulations and laws that greatly affect security, business, sector, or market.
Changes in regulations or laws made by regulatory bodies or the government can increase businesses’ operation costs or change the competitive landscape.
It can even diminish the attractiveness of the investment.
In such cases, an organisation’s business models can be destroyed by the changes.
Compliance Risk – What Is Risk in Business
Compliance risk arises when companies fail to follow their industry’s regulations and laws.
As a result, they are exposed to material loss, legal penalties, and financial forfeiture.
Integrity risk is another term for compliance risk.
Regardless of the type of entity an organisation is, it can still be exposed to compliance risk when they fail to comply with regulations and laws.
So, federal and state organisations are not excluded.
Compliance risks can lead to poor revenue, bad reputation, and devaluation of businesses.
Compliance risk can often result from poor training, human error, flawed control system, and poor diligence.
Contractual Risk – What Is Risk in Business
Businesses make different contracts with other businesses, organisations, and individuals.
These contracts provide a framework for businesses to develop profitable relationships.
However, there are risks attached to every contract a business enters.
Therefore, contractual risks are the problems or issues that arise due to contracts business enters.
This risk hurts the outcomes and operation of contracts.
When a business faces contractual risk, it will not enjoy the benefits of the signed contract.
Contractual risk can arise due to failure to follow the terms and conditions of the contract signed.
Non-contractual Obligation – What Is Risk in Business
These risks arise when a company infringes on another company’s trademark or copyright.
It can arise from other damages such as misrepresentation, unjust enrichment claims during an interstate business transaction, and tortious claims.
Dispute Risk
This is the risk of organisations or companies disrupting business due to disagreements with customers, employees, partners, or stakeholders.
The term “dispute” is known as disagreements that lead to litigation.
It is highly recommended that disputes in business are settled before they become litigation because it can cost a business to incur a significant loss.
Things to Do To Manage Legal Risks – What Is Risk in Business
Like every other business risk, legal risk can be managed too.
Below are some ideas on how to do that:
Have a Legal Team
You cannot effectively manage legal risks without a legal practitioner.
This is because even if you know the law related to your business, you might not be allowed to represent yourself.
So, you need to hire professional lawyers and human resources personnel aware of the laws related to your business.
They should also be able to defend your business against any lawsuit filed against it, including disputes that might arise in your company.
Make Use of Technology
Certain technologies can help you to comply automatically with some regulations.
An example is the timekeeping software application that ensures employees are adequately paid for their assigned working hours.
So, all you need to do is seek technological solutions related to your business and invest in them.
Cybersecurity Risks
Several businesses now operate online, marketing, making sales and storing customers’ and clients’ details on their databases.
Hence, the risk of business data being exposed through hacking and other cyber crimes.
In other words, cybersecurity risk is when a breach on companies’ database results in security risks.
Every employee, customer, and stakeholder wants their financial and personal information to be protected by companies.
However, companies still experience identity theft, data breaches, fraud, and payment incident despite their effort to keep their information safe.
When this happens, customers or clients often lose their trust and confidence in companies.
In cases where security breaches do not threaten a business’s reputation, it is still often financially accountable for damages.
Some examples of cybersecurity risks include:
- Password theft
- Phishing attack
- Traffic interception
- Social engineering
- Trojan virus
Cybersecurity Risk Management – What Is Risk in Business
If cybersecurity risk is unchecked and not handled, it can lead to several damages to a business.
So, you need to take steps to manage cybersecurity risk.
Below are some ideas:
- If you can afford it, hire a tech team
- Invest in software solutions for security and fraud detection tools
- Educate your employees to protect the company’s data
Strategic Risks
Risks that arise from directors’ decisions on the company’s objectives are referred to as strategic risks.
In business, you make decisions and create strategies for the betterment of your company.
However, these decisions and strategies sometimes come back to cause harm to the business.
In other words, strategic risks arise in an organisation when a decision or strategy fails to achieve its objective.
Strategic Risk Management – What Is Risk in Business
Strategic risk can arise at any period of a business operation.
Therefore, you need to know how to manage it.
Below are some ideas on how to do so:
- Understand the different strategies of your organisation
- Have plans to counter a decision or strategy that goes wrong
- If you can, employ a strategy management team
Competition Risks – What Is Risk in Business
Many companies are competing for the same market share.
So, most take measures to prevent other companies from reaching customers or entering a new market.
As a result, competition risks often arise.
Competition risk is the possibility of a rival business thwarting the success and growth of another business.
The following can uncover your business to competition risks if it has:
- Inexperienced management
- Poor use of technology
- Insufficient and unreliable customer service.
- The constant change in customer tastes and expectations
- Ineffective distributors
- Ineffective or inadequate PR and marketing
Other companies will find it easier to thwart your business growth if you don’t work to improve these factors.
Management for Competition Risks
There are many ways a rival company can prevent your business’ success and growth.
Therefore, you need to be watchful.
Nonetheless, your business can still experience competition risk even with you being careful.
When this happens, you need to quickly and effectively work to manage that risk.
Below are some ideas on how to do so:
- Be ready to make proactive changes against competitors’ threats, such as creating new marketing campaigns or launching new services or product lines.
- Have a legal team that can sue competitors who legally defame your business image or brand.
- Develop trust relationships with customers
Reputational Risks
Reputation risks are dangers or threats to an organisation or company’s good standing or name.
A company or organisation’s reputation is vital because a taint to their reputation can make them incur financial costs or, even worst, lose their business.
So, several things are at stake when a company faces reputational risk.
A company can experience reputational risk due to their actions, the actions of their employees, or a third party, such as suppliers.
Ways to Manage Reputational Risk
You can work to manage reputational risks with the following ideas:
- Make plans and strategies to protect your business reputation
- Have a control process in place
- Understand your stakeholder expectations
- Create contingency and response plans
- Develop good communication with the public and a positive image
Conclusion on What Is Risk in Business
Risk is a characteristic of businesses.
It happens regardless of how careful you are while conducting business.
However, you need to learn to mitigate business risks to avoid business failure.
This article highlights the different business risks and how to manage them.
So, use the information to protect your business from falling apart due to risks.
