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Every business, regardless of size or industry, faces uncertainties that can impact its operations and bottom line. Therefore, it’s crucial that organizations identify and analyze risks so they can prevent and minimize their impact. To this end, a corporate consulting company can help.
What Are Business Risks?
A business risk is any uncertain event or condition that, if it occurs, affects an organization’s ability to achieve its objectives. It may be counterintuitive; however, risks are not only negative but positive, too.
Positive Risks
Positive risks are unexpected events that, if they happen, can benefit an organization.
Suppose you’re an exporter of agricultural products, and the political leadership in your export market changes to one that favors free trade. In this case, the change in leadership benefits your business, allowing you to reduce costs, enlarge your reach and expand your product offerings.
Negative Risks
Negative risks are what people commonly mean when they talk about risks. They are unexpected events that can adversely affect an organization if they are to arise or happen.
Using the above example, suppose your export market’s political leadership changes to one that favors a protectionist trade policy on agriculture. In this case, the change in political leadership negatively affects your business, as restrictive trade policies increase your costs and diminish your reach.
Types of Business Risks
Business risks may be classified according to source. The following are some of the most common business risk categories:
- Compliance Risk
Compliance risk pertains to a company’s potential violation of state laws, regulations or internal standards.
For instance, when a contractor ignores occupational safety and health regulations, it exposes itself to compliance risk. A company that does not inform its stakeholders about a data breach may also be incompliant.
- Legal Risk
A class-action suit is an example of a legal risk. It typically arises when a company fails to adhere to established rules, putting people in harm’s way or doing something that infringes on the rights of other parties.
Legal risks may be further classified into:
- Contractual risks: Party A sues Party B because the latter did not meet the obligations or liabilities stated in their contract
- Dispute risks: Stakeholders, customers or community members file a suit against a company, disrupting business operations.
- Regulatory risks: A government authority revokes the trade license of a company.
- Strategic Risk
These are risks that arise from faulty business strategies or wrong business decisions. For example, a retailer that sells high-quality but high-cost garments is vulnerable to the threat posed by fast fashion.
- Reputational Risk
Events that tarnish the public’s perception of a brand pose a reputational risk. An airline getting an overbooking complaint from a high-profile personality can lead to negative press on social media.
- Operational Risk
Challenges in daily operations can diminish profits. Specific instances include:
- Employee errors: A floor manager sleeping on the job causes a loss of production.
- Damage to assets: A hurricane destroys the company warehouse.
- External fraud: Outsiders steal company property.
- Human Risk
When employees fail in their primary duties, it can lead to profit losses.
For example, an employee making a discriminatory remark against a customer can lead to loss of reputation and monetary damages. A warehouse security that accepts bribes can lead to the loss of valuable company assets.
- Security Risk
Neglecting cybersecurity can jeopardize a company’s reputation and finances. Weak logical and physical security protocols can lead to a data breach.
- Financial Risk
Poor financial planning and market fluctuations can disrupt a company’s finances. A bank that puts its money in speculative investments can lose its capital. When interest rates soar, loan repayments become more expensive, and the value of bond investments declines.
Financial risks include:
- Currency risk, e.g., an unexpected devaluation in the business’ primary currency or some other currency it has in its reserves
- Default risk, e.g., inability to repay high-interest loans
- Liquidity risk, e.g., opportunity cost due to an inability to swiftly convert assets into cash
- Competition Risk
A company is at risk of losing market share to its competitors. A food delivery app faces this risk when a newer, better food delivery app enters the market.
- Physical Risk
An oil rig faces the physical risk of an explosion. Physical hazards can jeopardize both infrastructure and personnel.
Managing Business Risks
Businesses can manage risks by creating a risk management strategy.
Risk management is identifying, assessing, monitoring, and mitigating risks that could interfere with business operations, harm its reputation and flatten its revenue and profit. It also involves planning how to respond to risk events if or when they happen.
In this context, creating cybersecurity business continuity, disaster recovery, and incident response plans is a risk management function for IT-enabled businesses. Network operations center and data security outsourcing can be part of a technology company’s risk management strategy.
By understanding all its risks, businesses can minimize potential losses arising from risks. Theoretically, risk management should also plan for positive risks to ensure maximum benefits.
Risk Management: An Example
Toyota recalled 8.1 million vehicles in 2010 due to gas pedal issues. Company executives estimated the global recall cost Toyota $2 billion.
Two billion dollars is steep. However, it must still have been less than what it would have cost the company had it ignored the risk of problematic accelerators.
Without the recall, Toyota would have made itself liable to class-action lawsuits. It would have probably lost those, which would have meant paying much more than the $2 billion loss it willingly incurred.
Risks Are Inevitable But Manageable
Business risks are ever present and can come from anywhere. However, organizations can minimize their impact or even prevent them outright with a comprehensive and well-thought-out corporate risk management strategy.
