Being a good business owner means recognizing the great amount of risk, both positive and negative, that comes with running a business. Effectively mitigating risk is absolutely crucial to your business’s success, but first you must determine what sort of risk you’re dealing with before developing any sort of contingency plan.
Here, we will focus on defining and examining the five different types of business risk that can plague even the most successful of companies.
What Is Business Risk?
In essence, business risk is the likelihood that a business will either experience a loss or bring in less profits than forecasted. It could be influenced by anything from government regulations to competitor practices to the amount of sales a company brings in to the overall health of the economy.
Depending on the severity of the risk, it could present severe danger to your bottom line as well as threaten your relationships with stakeholders and investors.
Breaking Down The 5 Types Of Business Risk
Before dealing with a risk, you need to first recognize what kind of risk it actually is. This will ultimately help you to determine the severity of the risk. With that in mind, here are the five types of risk that a business could be exposing itself to at any given time
1. Strategic Risk
A strategic risk is an industry-specific risk, and it could indicate that your business model is ineffective or outdated. Strategic risk could be caused by a variety of factors, such as any emerging competitors, shifting consumer demands, the increased costs of raw materials, and technological advancements.
Consider this strategic risk example: A sporting goods store tries to set itself apart by marketing itself as having the lowest prices on the block.
Then, another sporting goods company comes along and offers even lower prices. Since that first business’s strategy was based on low cost, it has opened itself up to strategic risk and may need to either drastically lower prices or rethink its model.
2. Compliance Risk
Compliance risk focuses on the regulatory and legislative side of things. Also known as integrity risk, compliance risk is what companies are faced with when they are not operating ethically or following certain industry standards.
Such standards can include everything from
Any company that relies on heavy distribution could especially be at risk compliance wise since there are a variety of standards and practices relating to the distribution of goods, particularly depending on what industry you’re in.
3. Financial Risk
Financial risk deals with how your business handles money. You could be at risk financially if you have a large amount of debt, have too many employees on your payroll, have too few customers, or if you are constantly extending lines of credit to customers.
You could also be opening yourself up to financial risk if you do business internationally, because of foreign exchange rates and other added costs.
4. Operational Risk
Operational risk covers the risk present in the day-to-day operations of your business. For example, if you are delivering production materials via train from one state to another and the train, for whatever reason, breaks down, this is an operational risk.
Any sort of process failure, whether it be preventable (like an employee processing error) or unforeseen (like the delay of production due to a severe storm) presents an operational risk.
5. Reputational Risk
Reputational risk is presented by anything that could damage the reputation of your company. Are you currently involved in a class action lawsuit? Was your company recently embroiled in a fraud scandal? Did you just have to recall a product? Did you or one of your employees make an offensive remark on social media?
These are all examples of reputational risk, and depending on the severity of the reputational risk, you could see a sharp decline in customer retention or even be forced to close up shop.
