Risks in Business

Understanding Business Risks

A business risk is anything that threatens the continued success and existence of an organisation.
Risks in business can be categorised as strategic, compliance, operational, and financial risks.
Being aware of these risks allows businesses to prepare and mitigate them in advance.

Strategic Risks

Strategic risks arise from direct actions taken by the company. This could be releasing a new product or entering a new market.
An incorrect strategic decision can potentially lead to financial loss and damage to the company’s reputation.
Scenario planning and market research are strategies used to identify and reduce strategic risks.

Compliance Risks

Compliance risks include the potential for laws, rules, and regulations to impact a business’s operations or its industry.
Failure to follow regulations can lead to legal penalties or damaged reputation.
Businesses often employ legal and compliance teams to ensure all company policies and activities adhere to relevant laws and regulations.

Operational Risks

Operational risks relate to everyday running of a business. These could include failed processes, systems, or human errors.
Bad management, poor training, and outdated equipment are all sources of operational risk.
Businesses can mitigate these risks through good governance, regular training for staff, and continual updating of production systems.

Financial Risks

Financial risks are associated with a company’s financial structure and transactions. These risks could occur due to changes in stock prices, interest rates, and currencies.
Poor financial management can lead to insolvency, which is why financial risks need to be carefully managed.
Strategies such as adopting sound financial management practices and using financial instruments like forwards, futures, options, and swaps can help businesses manage financial risks.

Managing Business Risks

Businesses manage risk using several strategies, including avoidance, reduction, sharing, and acceptance.
Risk avoidance involves halting any action that could lead to risk, while risk reduction is about taking steps to reduce potential damage.
In risk sharing, risks are shared among several businesses, while in risk acceptance, businesses accept the consequences of risk.
A risk management plan involves defining risks, developing procedures to warn businesses of risk, and deciding in advance how to address these risks.

Influence of External Factors on Business Risks

External factors such as economic, social, legal, technological, and environmental factors can significantly affect business risk.
Change in government laws or policies, technological advancement or market trends can introduce new risks or change existing ones.
Preparation and planning for these changes can help businesses remain adaptable and resilient.