Business risk is the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail. Anything that threatens a company’s ability to achieve its financial goals is considered a business risk.
Types of business risks
* security and fraud risk – eg identity theft, embezzlement to the firm.
* compliance and regulatory risk – eg introduction of new rules or legislation.
* financial risk – eg interest rate rise on your business loan or a non-paying customer.
* operational risk – eg the breakdown or theft of key equipment.
* reputational risk – eg putting out bad product or service.
1. Security and fraud risk
The types of risks like Data breaches, cyberattacks, identity theft, embezzlement, money laundering, criminal record, and intellectual property theft. These are all examples of how security and fraud risks are growing for businesses, especially as the volume of online transactions increases and trends like remote work are pushing more and more internal processes onto the cloud.
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While there may be some technical aspects to this – such as vulnerabilities in software or previously undiscovered gaps in new technology – security and fraud risk is often “human” in nature. By implementing more rigorous protocols in the industry’s hiring and talent management processes, the new guidelines hoped to ensure sufficient understanding of the applicant’s personal background and character, conflict of interest, and susceptibility to collusion, fraud, or illegal activities before making hiring decisions.
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2. Compliance risk
How familiar are you with the laws and regulations that apply to your business? Compliance can be tricky for many reasons. For one thing, the legal landscape is ever-evolving. Laws related to occupational health and safety, equipment certification requirements, taxes, and more are constantly being updated, and claiming ignorance of these changes is not a valid defence.
[Problem]
The nature of your business can also change and grow over time, bringing new risks and new compliance requirements. For instance, if you are expanding your team and hiring internationally, you will most likely have to comply with the local employment laws in the candidate’s home country. Another example: if your business has recently moved from offline to online sales, you will need to comply with data security and privacy protection laws that you previously did not need to think about.
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3. Operational risk
Operational risks can be internal, external, or a combination of both. Examples of operational risks include a natural disaster that damages your physical premises or equipment, a pandemic that forces people to shelter in place or work from home, or a server outage that causes technical problems like lack of power or disrupted internet connectivity. Internal business risks are often related to human error, such as an accountant entering the wrong payment amount or a developer inputting the wrong code.
[Problem]
Most businesses have a business continuity plan to tackle operational risks, which often details how to respond and recover should something go wrong. It also usually outlines proactive measures like having a backup system to ensure disruptions, if any, aren’t too severe.
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4. Financial or economic risk
Managing risk is related to financial and business profits, which is why it is often the most closely scrutinised by investors and shareholders. Financial risks are caused by multiple factors such as market movements, foreign currency exchange rates, commodity price fluctuations, and more.
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Strategies to mitigate financial or economic risk usually aim to ease cash flow issues, and common tactics include getting insurance, diversifying income streams, and limiting the amount or tenure of loans.
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5. Reputational risk
Faulty products or services, poor customer support experiences, negative publicity about your employees or your leadership, or high-profile failures in the press. These are all reputational risks that will affect your bottom line, and your relationship with customers and partners.
[Problem]
More importantly, failure to address business risks is itself a reputational risk! Security breaches, fraud incidents, non-compliance to laws and regulations, lengthy operational outages, and poor financial performance all damage your business reputation.
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[Source: RMI]
