Understanding business risk

Every business has risks attached to it and they come in different forms.

There are the risks associated with strategy, such as new products and growth phases, the risks to your business location such as natural disasters, and human risks including staff selection and their habits.

While those risks might be present, they can also be managed, which involves identifying the risk, developing strategies to mitigate it and outlining these in your business plan.

So, let’s look at the different types of business risks that might need to be addressed.

What is business risk?

By definition, business risk is any factor that might threaten an enterprise’s ability to achieve its financial goals.

In other words, it is anything that will lower a business’ profits or cause it to fail. And this risk can come in many forms.

Types of business risk

Business risk can come down to strategy, operations, or compliance, with experts identifying four common types of risk that need to be found in any business.

Strategic risk

Strategic risk is all about whether the business has its finger on the pulse of what their customer needs and wants.

And this type of risk can occur at any time. For example, what happens if the product you produce suddenly falls out of favour, or the new line of services you offer doesn’t attract the attention you anticipated?

Operational risk

Operational risk is about the systems and procedures within a business. It’s part workplace health and safety and also general operations, including cybersecurity.

For example, what happens if machinery breaks down and orders can’t be fulfilled, or if someone gets sick and cannot complete required tasks? It’s also about mitigating workplace accidents.

Compliance risk

Compliance risk is arguably one of the easiest to manage.

It’s about ensuring your business dots all the Is and crosses all the Ts of business, including registering your business name, paying required taxes, ensuring staff are properly accredited and licensed, and that your staff wages and entitlements are being accounted for and paid correctly.

Financial risk

Financial risk is pure economics. It relates to knowing your bottom line, effectively managing cashflow and ensuring you can meet any loan or rent payments, along with wages and other costs.

It also relates to external factors including economic downturns.

Risk causes

Behind each type of risk, there are likely to be three common causes – human behaviour, natural disaster, and economic causes.

So let’s expand further…

Human behaviour

Human causes of risk are one of the trickiest to navigate. It can relate to anything from staff drug and alcohol abuse, to strikes, poor work performance, error, and mismanagement.

Natural disaster

This cause of risk relates to extreme or unexpected events that can be challenging to foresee, such as floods, fire, cyclones, and yes, even global pandemics.

Economic causes

Economic risk tends to happen outside a business, but impacts it directly, whether that’s rising interest rates, inflation, increased material prices, or increased labour costs.

The final word

Like it or not, risk is associated with every business, but it’s how you understand then manage that risk that counts the most.

If you’re looking to identify and plan for risk in your business, I’m available to assist. You can book a discovery call with me here, or learn more about mitigating risk here.