Do you want to know about business risks, risk management (i.e., how to manage risks in business), the causes, how to identify risk in business, examples of business risks, and the solution to business risks? Read on then.
What Is a Business Risk?
Business risk means the act of exposing dangers or harm to the business organization due to business changes in the internal parts(the business product) or external parts(the government, the economy) that will affect the business negatively and cause it to fail or lose its motive(profit), depending on the nature of the business and its production. They are risks that affect the business and cause it to not achieve its goals.
Business Risk Management
There are risks that every company needs to deal with. It is up to the organization to deal with the risk and manage it in such a way as to prevent the organization from suffering significant harm.
Business risk management is the act of identifying, assessing, and controlling risks facing the business organization without affecting them negatively. Business risk management is also known as enterprise risk management. Here are some steps management takes on how to tackle business risk as stated below;
#1. Identify the Risk in the Business
Risks in business can be many. Hence, there are different ways to identify the risks in business. Strategic business planning must be carried out when risks begin to arise in businesses, and this is done by an extensive analysis of the business-specific operations.
#2. Analyze the Likelihood Ones
These are the risks that have a greater impact on businesses than others. Depending on their nature, they can be either internal or external dangers. As a result, an analysis is used to identify the most pressing risks to the company’s survival and the management of less critical ones.
#3. Prioritize the Risk
The risks that can cause so much damage in business should be addressed in order of importance, starting with the most critical and working down to the least critical.
#4. Find a Remedy for the Risk Conditions
There is a saying that for every problem, there is a solution. There should be a plan in place to deal with any risk that is taken, especially with the help of risk management in the workplace.
#5. Check if the Result Is Successful and Adjust It if Necessary.
You may keep track of your company’s risk exposure by establishing a permanent record of the risks and checking them every month or year, depending on your company’s needs. If necessary, you can make changes quickly if necessary.
What Are the Business Risks?
These are risks that affect or threaten a business from achieving its goals. They can be internal or external risks. There are different types of risks that affect businesses in their day-to-day activities. Some main ones will be listed first before others. They are business risk examples as well.
#1. Financial Risk
This type of risk affects the inflow or outflow of money in businesses. This can be a loss of revenue, costs of tools, materials, and welfare of the business, and businesses with a high level of borrowed debt to pay can suffer financial risk.
#2. Compliance Risk
It deals with the rules and regulations that manage the products of your business. Any change in the rules can lead to compliance risk in businesses.
#3. Operational Risk
These risks in businesses can be internal or external. An uncertain failure occurs in the day-to-day activities of the business. These are risks such as technical failure, natural disasters, power outbreaks, human failures, e.t.c.
#4. Reputational Risk
This is the image of the business, which if destroyed, can lead to the failure of the business and will not achieve its goal. It can be a result of high-profile criticism of the business products or services, negative publicity about the business staff, e.t.c.
#5. Strategic Risk
These are the plans to make businesses ready when the risk becomes less effective due to outdated plans like an increase in the cost of the raw materials, new competitors entering the market with high standards, technological changes, changes in demand, e.t.c. This is when strategic risk comes up.
#6. Competition Risk
At this risk, your competitors have a greater standard of strategy or advantage over businesses they use to enter the market, and if your standard is low, you can’t compete with them. Therefore, you face competitive risk.
#7. Legal Risk
When new regulations for firms come into effect, it will be necessary to cover costs when a legal risk arises.
#8. Economic Risk
The economy can change the situations of businesses, thereby putting them at risk. Such as an increase in the cost of materials and a decrease in sales.
#9. Security and Fraud Risk
This affects businesses when they lack security in the system, especially those businesses that use networks, lack of security in the economy results in fraud, cyber theft, e.t.c.
#10. Exchange Rate Risk
This risk concerns how the exchange rate affects businesses by the value of their transactions, financial results, and assets due to high exposure to currencies, like operating margins.
#11. Quality Risk
It is when the business fails to adapt or upgrade the quality and quantity of its products to the demand of its customers that is when they will suffer the quality risk.
#12. Innovation Risk
This is one of the types of risks that apply in the innovation of business or product research.
#13. Interest Rate Risk
This risk makes the interest rate disrupt businesses in one way or the other, as it may increase their cost of capital.
#14. Political Risk
Depending on your business activities, political outcomes or events can impede your business.
#15. Seasonal Risk
This is when your business is on a seasonal occasion like umbrellas, ski resorts, fashions, e.t.c. Then your business faces seasonal risk.
#16. Resource Risk
This is when the business lacks resources to achieve its goal, like finances, the labor of skilled workers, raw materials, etc. And other types are listed below;
- Physical Risk
- Location risk.
- Human Risk
- Technological Risk
- Hazardous Material Risk, e.T.C.(and many more).
Causes of Business Risk
Let’s see the things that cause risk in a business area below.
#1. Change in Government Policies
If the government in the area where a company is based enacts new rules that negatively impact the operations of that business, that company might have to face an expensive risk.
#2. Use of Modern Technology
Some businesses face this risk if they don’t have modern facilities for work due to the high price of technology, thereby not producing enough products or services quantity for the customer or not meeting standards because they lack the technology.
#3. Change in the Demand for the Product
Some businesses face risk due to the low quantity or quality of their products or services. A high increase or low decrease in the price of the product may make customers order more and the business can not meet the demand. The remaining waste depends on the type of product the business produces.
#4. Natural Factors
In some states or countries, they have a natural disaster that could disturb them for a while. Like in the U.S.A., their natural disasters are winter storms, floods, e.t.c., which also affect businesses in that area of the incident.
#5. Human Causes of Business Risk
Yes, humans can also cause risk to the business by going on strike due to non-payment of workers’ salaries, health issues, fraud, etc. and it can cause the business to fail.
#6. Mismanagement
This occurs when a company lacks the resources necessary to effectively manage its facilities and the associated risks, such as a risk management team or management that is familiar with the company’s policies.
#7. Competition
Some businesses don’t have the criteria/standards to compete with other businesses due to low technology, government policies, quantity/quality of their products, e.t.c., or other risks they were not able to tackle due to mismanagement.
Business Risks and Solutions
For the listed risks above, here are some business risk solutions stated below that will help the business tackle the risk;
#1. Make a Risk Management Plan
To reduce risk in the workplace, businesses should begin planning for how they will handle or manage the risk as soon as they become aware of it.
#2. Break Potential Risks Into Smaller Risks
Risks that are too big to solve can be broken down into smaller risks to be able to solve.
#3. Look at Past Situations, if any
The type of risk and how you overcome it may help you determine if the same strategy would work for the current risk in your firm. It is a corporate strategy that can be used to mitigate risks.
#4. Make Rational Decisions
Think about multiple decisions you will make concerning the risk, as well as worst-case scenarios. It is also a way to find a solution to risks in business.
#5. Find a Solution
Find how to control other risks if the one you are about to solve will affect the rest if they were a failure in the test.
#6. Always Be Careful
Make research to assess the market for the decision you will make that will not affect the future when finding the solution to the business risks.
#7. Check if You Can Manage the Risk
Some risks can be managed by the business, while some can’t. If they can be managed, no problem. But if it can not be managed, find a quick solution to the business risks.
#8. Prioritize the Risk Plans
After calculating the risks in terms of their possibility, make plans according to the important ones first on the list.
#9. Accept Change if Plans Have Begun to Fulfill Their Purpose
The plans used to solve the risks should start to make changes in the business in a positive way. If not, check the plan and change it.
#10. Get Insurance
Depending on the type of business, you may be able to obtain insurance for it. Insurance should cover only those risks that can be reliably predicted.
#11. Control the Growth of the Business
As your business grows, don’t let it grow out of your hands. You should appoint qualified managers to run the business and make suitable strategies for your business. It’s also a way of finding solutions to business risks.
#12. Get or Appoint a Risk Management Team for Your Business
Every business organization should have a risk management consultant that helps find a solution for the business risks and tackle the risks.
What is Risk Prevention?
Preventing risks is the best risk insurance. The greatest way to prevent the numerous dangers in your company from happening is through personnel training, background checks, safety inspections, equipment maintenance, and property maintenance. Risk management duties should be assigned to a single, responsible employee with managerial authority. The formation of a risk management committee with members being given specified responsibilities and is required to report to the risk manager is another option.
How Do You Make a Risk Assessment?
Once the risks have been identified, they need to be ranked according to the likelihood that they will occur.
Create a probability scale for risk assessment purposes.
- For instance, risks could
- Be very likely to take place
- Possibility of happening
- Have a slim likelihood of happening
- Have a very slim possibility of happening
Other dangers need to be controlled and prioritized based on how likely they are to occur. Actuarial tables, which are statistical analyses of the likelihood that any risk would materialize and the possible financial harm resulting from those risks, can be accessible online and can offer advice on how to prioritize risk.
How to Identify Risk in Business.
Here are ways to identify risks in a business as stated below.
#1. Analyze
First, to identify risk in a business, you have to analyze the source of the risk, whether internal or external and learn about the risk.
#2. Risks Management
To identify risk in business, you have to create a management team or consult an expert on the risk in your business. Seek employee feedback regularly.
#3. Prioritize
To know the most pressing risk and how to control it, one must create a chance for each risk. Breaking down the risks is also a way to identify the business risk.
#4. Being Prompt
Any solution to any risk must be carried out immediately and efficiently.
#5. Analyze Customer Compliance
When clients express dissatisfaction with the results of your business, investigate the issue and find a solution to avoid losing them finally.
#6. Make Rational Decisions
Make a list of common risks that will affect your business at any time. Examine the different scenarios that may occur in your business and find a solution to reduce the risks. It is also a way to identify risk in business.
#7. Make Records
Make a permanent record of the risk. A register to do a checklist review of the risk annually and ensure the solution to the risk is good and not making it worse. It is also a way to identify risk in a business.
What are Business Risk Examples?
Examples of business risks include:
- One of business risk examples is the change in the taste of the business product.
- Another example of risk in business is the change in government policy.
- Increased competition is also an addition to the examples of business risk.
- Strikes of business workers due to non-payment of salaries for workers, sickness, etc.
- Changes in the demand of customers.
- Obsolescence is also one of business risk examples.
- Damages by natural disasters like floods, e.t.c., are risk examples found in the business.
- Unexpected financial loss due to the bankruptcy of other businesses that own your money.
- Also, cybercrime risk, embezzlement, taxation, the market, currency, credit risks, etc. are examples of business risks.
How to Manage Business Risk
The following are ways of managing business risks. It can be applied to all facets of an individual’s life and work in both long-term and short-term business organizations.
#1. Transferring
Risks that are difficult to solve can be transferred to other companies or individuals to get solutions.
#2. Loss Prevention and Reduction
They should always be about the prevention of risk, that is, to prevent the risk from causing much damage to the business or to reduce the effect of the risk.
#3. Avoidance
What makes a business fail is the risks that it faces. So businesses should be eager to avoid the risks from happening.
#4. Retention
Some risks actually help grow the business if properly cared for. They can be internal or external risks. Some risks can’t be removed but managed to help in making the business grow or for future purposes.
#5. Sharing
Businesses that are experiencing risks can share their concerns to get solutions, either from their peers in business or from their employees to get ideas for the risk.
What are the Seven key Business Risks?
Risks in the business world have historically been broken down into several broad classes that each address a specific facet of company administration. Since the meaning of each risk will vary from company to company, it is essential to develop a strategy for identifying, analyzing, and mitigating risks that are unique to your business. Knowing how these threats change over time, interact, and affect one another is also crucial. The local, national, and global environment in which businesses operate can all play a role in shaping the risks they face.
- Physical risk
- Strategic risk
- Compliance (Regulatory) risk
- Operational (Human) risk
- Technology (Cybersecurity) risk
- Financial risk
- Reputational risk
Conclusion
Business managers must solve growth-related issues before it affects the company. All of the risks might not vanish just immediately but it is important to start working on the ones that are already playing out as a threat to the company’s growth and success.
If it’s not managed properly, the business might just fail before they realize it. Therefore managers should be aware. When plans are ready, risks should be addressed as quickly as possible.
BUSINESS RISK FAQs
What is business risk and its causes?
These are risks that affect or threaten a business’s ability to achieve its goals. Its causes can be internal or external risks like government policies, natural disasters, a lack of modern technology, etc.
What are the 5 major business risks?
Security and fraud risk, compliance risk, economic risk, operational risk, and reputational risk.
How do you identify/control business risk?
Analyze the risk by having risk management, prioritizing the risk, analyzing customer compliance, always being prompt in tackling risk, being rational in making decisions on the risk, and finally, making records of the risks.
what is a business risk management?
Business risk management is the act of identifying, assessing, and controlling risks facing the business organization without affecting them negatively. It can also be an enterprise risk management tool.
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