In life, there are all kinds of risks. Walking across the street, investments you make in the stock market, people you hire, products your company makes. In this post, I will be focusing on business risks and a couple of ways to the manage those risks. After reading this article, you will be able to start to develop a strategy for dealing with business risks.
The five categories of business risk that most people talk about are Strategic, Compliance, Operational, Financial, and Reputation. I’ll focus on Strategic, Operational, and Financial and cover Operations and Reputation in another post.
When in business, you need to consider the kinds of decisions you make that could pose a risk to your business and take steps to mitigate them. With each business decision, there is a level of risk you find acceptable (risk v. cost to mitigate). You need to determine the types and levels of risk you are comfortable accepting. Risks might include opening a new market or creating a new product, or a decision that might cost you a major customer are examples that result in gain or loss of profits. With enough risk, you could lose your business.
1. Strategic Risk
Everyone knows that a successful business needs a well-thought-out Business Plan. Business Plans are living documents that are updated as circumstances with your business change. The strategic risk is one that your company’s strategy becomes less effective, and your company struggles to reach its goals. Strategic risks to your business might come from competition, environmental changes or changes to governmental regulations or your product become obsolete. To counter strategic risks, you’ll need to regularly monitor your business to detect changes and make adjustments to your business plan.
Strategic risk doesn’t have to be catastrophic, though, without action, you put your business in jeopardy of failure.
2. Operational Risk
Operational risks are where your business’s internal processes, systems or people fail. Operational risk can have more than one cause. As an example, consider the risk that one of your employees forgets to back up your servers, and now the hard drive fails. That’s a “process” failure, but also a “technical” failure. It could be prevented for example by having a second person as part of the backup process or using a cloud-based solution as your backup. In some cases, operational risk can be the result of events outside your control, such as a natural disaster or a problem with a vendor. Anything that interrupts your company’s operations comes under the category of operational risk.
Operational risks may have a significant impact on your business. Not only is there the cost of fixing the problem, but operational issues can also prevent you from running your business resulting in a loss of sales and associated profits.
3. Financial Risk
Most types of risk have a financial impact, regarding extra costs or lost revenue. How your business handles money are Financial risks. The most common financial risk is credit risk. Which customers do you extend credit? Do your sales come from a few large customers who might not be able to pay which would significantly impact cash flow? A company must also manage its credit commitments to vendors ensuring that it has adequate cash flow to pay its bills in a timely manner. Otherwise, suppliers may stop extending credit. Debt also increases your financial risk if it is short-term or debt with a variable interest rate that causes interest expense to increase as your business is struggling with cash flow.
Managing your accounts receivable and payables, customer relationships, and regularly checking credit reports will help identify problems in advance. Collecting what is due to you will also have an impact on your need to borrow.
Next Steps
I’ve covered the basics for three types of business risk, and given examples of how they can affect your business. The next step is to look at each type of risk in respect of your business. In your review, you need to get into the details of your operations to come up with specific things that might go wrong. Then you can start to develop a strategy for dealing with those risks.