Risk management is a very powerful strategic tool that is being used for developing potential losses and also for carrying out plans to deal with losses. It is an important concept that focuses on identifying & assessing events which have adverse effects on the organizations. Avoiding, transferring and reducing the impact of risks are some of the strategies to manage risk. Risk management’s objective is to assure uncertainty does not deflect the endeavor from the business goals.
In risk management, one of the most common risks is the business risk. Business risk is basically when a company will have lower profit than the expected profit or having loss rather than having profit. It happens due to some uncertainties such as changes in tastes, preferences of consumers, government policy, climate etc. There are different types of business risk which exist in risk management. However, these can be managed following 5 steps of risk management process.
Types of Business Risks in Risk Management
Some of the major business risks are being described below.
1. Strategic Risk: Strategic risk arises while operating in an industry at a specific time. This risk arises at the time of shifting in consumer preferences and tastes, changing in technologies, business strategies, designing, and other expertises. Under this risk, a company normally fails to fulfill its ultimate goal and the company becomes less effective. Failure to adapt to strategic risk might go for bankruptcy.
2. Compliance Risk: Compliance risks are those which are associated with legislations, bureaucratic rules, and regulations. It is clear that laws will change and will be added according to the expansion of the business. As a business expands, it should comply with the rules constantly. But companies cannot cope up with these laws and they break the laws in future. In many cases, a business may fully intend to follow the law but ends up violating regulations due to errors.
3. Operational Risk: Operational risk arises from an organization’s internal failures. Organizational’s internal failures include internal processes failure, employee failure & systems failure. This risk basically refers to company’s day to day operational failures. Operational processes which are already completed and successful also generate risk sometimes.
4. Financial Risk: Financial risk is directly involved with the process of how a business handles its money. This risk also includes interest rates both for domestic and international businesses. Financial risk also refers to the money which flows in and out of the business and creates sudden financial loss. If customers fail to pay the delay payments then the business will be in great trouble. Another example of financial risk is increased interest charges on a business loan.
5. Reputational Risk: Reputational risk refers to having reputational loss of a company. For a business, reputation is everything. If reputation is gone then everything will vanish. Business will face an immediate loss of revenue. This risk happens due to dishonest, disrespectful or incompetent activities. Reputational risk describes the risk of a serious loss of confidence in an organization rather than a minor decline in reputation. Employees will get demoralized and even they may decide to leave.
Apart from the above risks, there are some other risks which are included in the business risk. They are:
⦁ Marketing & Sales Risks
⦁ Information Technology
⦁ HR Risks
⦁ Catastrophic Risk
⦁ Competitive Risk
⦁ Legal Risk
⦁ Project Risk
⦁ Innovation Risk
⦁ Quality Risk
⦁ Exchange Rate Risk
So we can come up with the conclusion that a company’s reputation can be ruined by one of the above risks at any time. A company with higher business risks should choose a capital structure that has a lower debt ratio to ensure it can meet its financial obligations at all times.