Starting a new business or operating a business comes with a degree of risk. Basically, any kind attached largely depends on your type of business, hence, it is important to know the type that is likely to affect your business. Here, you will get an answer to the question “What is business risk?” and every other thing you need to know about it.
What Is Business Risk?
Business risk is any factor that can threaten an organization’s profit or lead to bankruptcy. Basically, anything that endangers a company’s capacity to accomplish its financial goals is regarded as one. Numerous factors can unite to generate business risks. It may be the type of business or how people in leadership positions manage it. Factors like these can cause a business to be endangered to a greater degree of risk.
However, most times the reason for risk is external to a business. Hence, it is impossible for a business to completely protect itself from risk. Regardless, there are still some ways to reduce the overall risks related to operating a business. Most businesses achieve this by using a risk management strategy.
What are the types of Business Risk?
There are five main business risk categories. They include:
1. Financial Risk
This is anything that exposes a company’s profit and financial growth to threat. Most times, financial risks are created from sources external to the company like its customers, suppliers, as well as legal regulations. This is why most businesses opt for reliability insurance.
2. Operational Risk
Operational risks involve anything that disturbs a company’s capacity to function, either temporarily or permanently. Basically, this risk is very unpredictable, so it is usually beyond your control. However, your business can still take active steps to prepare for it.
3. Global Risk
No matter the type of industry your business is in, operating business with other countries or even on foreign territory comes with risks.
4. Strategic Risk
Strategic risk occurs when a business does not run according to its business plan or model. Basically, when a company does not function according to its business model, it weakens its strategy and makes it become less effective over time. The company may even struggle to reach its defined goals.
5. Reputational Risk
This is the risk attached when a company’s reputation is ruined. This may be as a result of previous business risk or by any other unfortunate occurrence. Basically, the reputational risk may cause the company to lose customers and its brand loyalty is likely to suffer.
How can I reduce business risk?
You can not completely avoid business risk because it is unpredictable. However, businesses use different strategies to cut back the effect of all types of business risk. They include:
1. Identify all sources of potential risk in your business plan
These are not only external. Basically, you need to assess both the external and the ones that are likely to come from within your business itself. Also, you have to take action to mitigate the risks as soon as they express themselves. You need to plan different ways to handle all types before they become too big to handle.
2. Documentation
Once you have come up with a plan to handle any risk that may come up, you must take the extra step of documenting every single thing in case a similar situation arises again.
3. Adopt a management strategy
Lastly, adopt a management strategy. You can do this before your business starts operations or after it suffers a setback. Basically, this management strategy helps the company to be better prepared to handle risks.
Do not forget that your plan needs to have tested ideas and practical procedures in place. Basically, this ensures that everything is smooth when risk presents itself.
Bottom line
The simple answer to the question, “What is business risk” is anything that threatens your company’s ability to make a profit. Basically, there are five different types that could either be caused by external or internal factors.
Also, there are ways you can take active measures to reduce your business risk, which you can read about above. Essentially, you just need to plan ahead on how to reduce the impact your business may face since business risks are unavoidable.
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