Business risk comes in five basic parts; however, they are very rarely independent of each other with an event creating risk in more than one category. The point is to identify what the risk is to your business then follow the risk management process, of firstly eliminating the risk, then reducing the effects of the risk and finally protecting yourself against any residual risk.
Below are listed the five elements, which should help to identify those risks that may apply to your business, from there you should be able to Eliminate, Reduce or Protect against that risk. It may help to talk to peers or other business owners, that may have already come across these risks and whose advice may save you time and may also be a source of future work or co-operation.
- Strategic Risk
It’s the risk that your company’s strategy becomes less effective and your company struggles to reach its goals as a result. It could be due to technological changes, a powerful new competitor entering the market, shifts in customer demand, spikes in the costs of raw materials, or any number of other large-scale changes.
Failure to adapt to a strategic risk can lead to bankruptcy, facing a strategic risk doesn’t have to be disastrous, however, if you are able to adapt to the new conditions and change your business model, the company can survive the strategic risk.
- Compliance Risk
Are you complying with all the necessary laws and regulations that apply to your business?
Of course you are (I hope!). But laws change all the time, and there’s always a risk that you’ll face additional regulations in the future. As your own business expands, you might find yourself needing to comply with new rules that didn’t apply to you before.
Finally, even if your business remains unchanged, you could get hit with new rules at any time. Perhaps a new data protection rule requires you to beef up your website’s security, for example, or employee safety regulations mean you need to invest in new, safer equipment in your factory, or perhaps you’ve unwittingly been breaking a rule, and have to pay a fine. All of these things involve costs, and present a compliance risk to your business.
- Operational Risk
Operational risk refers to an unexpected failure in your company’s day-to-day operations. It could be a technical failure, like a server outage, or it could be caused by your people or processes.
In some cases, operational risk has more than one cause. For example, consider the risk that one of your employees writes the wrong amount on a check, paying out £100,000 instead of £10,000 from your account.
That’s a “people” failure, but also a “process” failure. It could have been prevented by having a more secure payment process, for example having a second member of staff authorize every major payment, or using an electronic system that would flag unusual amounts for review.
In some cases, operational risk can also stem from events outside your control, such as a natural disaster, or a power cut, or a problem with your website host. Anything that interrupts your company’s core operations comes under the category of operational risk.
While the events themselves can seem quite small compared with the large strategic risks we talked about earlier, operational risks can still have a big impact on your company. Not only is there the cost of fixing the problem, but operational issues can also prevent customer orders from being delivered or make it impossible to contact you, resulting in a loss of revenue and damage to your reputation.
- Financial Risk
Most categories of risk have a financial impact, in terms of extra costs or lost revenue, but the category of financial risk refers specifically to the money flowing in and out of your business, and the possibility of a sudden financial loss.
For example, let’s say that a large proportion of your revenue comes from a single large client, and you extend 60 days’ credit to that client, in that case, you have a significant financial risk. If that customer is unable to pay, or delays payment for whatever reason, then your business is in big trouble.
Having a lot of debt also increases your financial risk, particularly if a lot of it is short-term debt that’s due in the near future and what if interest rates suddenly go up, and instead of paying 8% on the loan, you’re now paying 15%? That’s a big extra cost for your business, and so it’s counted as a financial risk.
Financial risk is increased when you do business internationally, exchange rates are always fluctuating, meaning that the amount the company receives in GBP will change. The company could make more sales next month, for example, but receive less money. That’s a big financial risk to take into account.
- Reputational Risk
There are many different kinds of business, but they all have one thing in common: no matter which industry you’re in, your reputation is everything.
If your reputation is damaged, you’ll see an immediate loss of revenue, as customers become wary of doing business with you, but there are other effects as well. Your employees may get demoralised and even decide to leave. You may find it hard to hire good replacements, as potential candidates have heard about your bad reputation and don’t want to join your firm. Suppliers may start to offer you less favourable terms. Advertisers, sponsors or other partners may decide that they no longer want to be associated with you.
Reputational risk can take the form of a major lawsuit, an embarrassing product recall, negative publicity about you or your staff, or high-profile criticism of your products or services and these days, it doesn’t even take a major event to cause reputational damage; it could be a slow death by a thousand negative tweets and online product reviews.
In conclusion it’s important to identify the risk, however it manifests itself, at which point you need to adapt your process or systems to enhance your risk protection, by adapting or diversifying you should be able to keep major risk at arm’s length, but don’t be complacent, you must keep your eyes open at all times for anything that may cause harm to your business and be ready to react as soon as possible, not all risks exist at this moment in time, they may appear tomorrow.