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Meaning of Business Risk
Business risk refers to any exposure or any negative impact that lowers the company’s profit, financial position, and goodwill. Anything that makes threatens the company’s financial goal or led to financial crises can be termed a business risk.
There may be many factors due to which a business risk may arise. Sometimes it is due to improper leadership or lack of management. Sometimes it is due to unforeseen events such as floods, fire, theft, economic downturn, etc. Factors such as lack of leadership or management occur within the organization and can be improved by taking strict action. So these are called internal factors. While the factors including unforeseen events are outside the reach and actions of an organization. So these are called external factors.
Types of Business Risk
Unlike various factors that lead to business risk, there are various types of business risk as well. Sometimes the risk is related to finance in which the company is unable to meet its financial requirements. Sometimes the risk is related to changes in technology, government policies, preferences of consumers, etc.
So, let us understand the various types of business risks that are present in the business.
Strategic risk
Strategic risk refers to those risks that made it difficult for the business to achieve its long or short-term objectives on time. This type of risk affects the business in the long run and causes a disinterest of the customer in the product. The key elements which are included under the strategic risk are:
- Change in technology
- Change in competitor’s strategy
- Legal changes
- Change in preferences and demand of the consumers
To avoid these types of risks, a business should plan a good and proper strategic management plan. It should review the market, competitor’s strategy, and customers’ demand from time to time to avoid fluctuations in business.
Compliance risk
This type of risk occurs when you fail to comply with any rules or regulations of government policies. This type of risk occurs when:
- There is corruption in the company
- Discrimination and harassment are conducted in the workplace
- There are no provisions for the health and safety of the workers
- There are no provisions for environmental safety
To avoid this type of risk you should maintain a positive, enthusiastic, clean, and friendly environment within and outside the organization.
Financial risk
It is the most common type of risk that occurs in the business. It is a situation when the company fails to meet its financial need and is unable to grow. In most situations, it occurs when the company is not earning sufficient profit to meet its expenses and repayment obligations.
To avoid this type of risk, a company should always make a financial plan for the proper allocation and utilization of funds. Also, it should maintain an emergency fund or opt for retained earnings to meet emergency situations.
Operational risk
Operational risk refers to those type of risk that causes pauses in the operations of your business. During this risk, you cannot operate, function, or perform any activity related to your business. The main causes due to which this risk arises are:
- Natural disasters
- Vandalism
- Theft
- Default in technology
- Change in law, regulation, or policies
These types of risks cannot be eliminated or predicted but the loss that occurs from this can be minimized by covering insurance claims for the loss that occurred or maintaining a fund to meet the unforeseen events.
Reputational risk
As the name suggests, it is the risk that is caused due to any harm to the reputation of the business. In this type of risk, the company’s goodwill fall, and the public image of the business is ruined. This type of risk occurs when:
- There is a breach of data
- The product or services are defective or lack trust
- There are any negative social media posts or advertisement is done
To avoid this type of risk, the business should manage its affairs carefully and cautiously and it should ensure that any activity that harms its reputation should be avoided.
Competitive risk
Every business has to compete with its competitor in order to survive and grow. But, when the competitor performs better than you, your customers are bending towards the competitor’s product and you are unable to compete with it, it is called competitive risk. In this type of risk, your competitor not only targets your customer but also slows down your growth.
To avoid this type of risk it is very important to continuously observe the strategy and policies of your competitor, adopt innovative ways to retain your customers, target new groups of customers, and communicate the values of your business in the market.
