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5 Typical Business Risks and How to Manage Them

5 Typical Business Risks and How to Manage Them

Risks are inherent in any business. They’re uncertain events or conditions that could positively or negatively impact a business. Hence, the ability to identify, analyze and manage them is critical to effective business management.

Risk management is all about identifying, assessing, and managing risks. In this article, we’ll look at the most common types of risks businesses face, how they can affect a company’s bottom line, and some ways to mitigate them.

Market Risks

Market risk is the risk of loss from adverse financial market changes, including interest rate fluctuations, changes in exchange rates, and stock market volatility. It’s also called systematic risk because it affects all companies with publicly traded shares.

In managing market risk, companies should first determine their risk tolerance. They must decide how much risk they’re willing to shoulder. Some organizations use Value at Risk Modeling (VaR) to determine the likelihood that an investment will result in a loss. However, that only helps investment decisions if companies have already decided what risks they’re willing to take.

Additionally, diversifying investments is a simple risk-management strategy. It ensures that the stability or gains in another can offset a loss in one area. While it isn’t a risk-free strategy because any market shift can affect investments, strategically selecting investments and derivatives can help protect companies from truly devastating losses.

Financial Risks

Financial risk is a common problem for start-ups and small and medium-sized enterprises (SMEs). They tend to have insufficient funds in the first few years of their businesses. Only 40% of new businesses survive past their fifth year, and only 1 in 10 make it past their tenth year.

Getting insurance coverage is a common approach to mitigating financial risks. A strong risk-management plan means a company doesn’t only have foundational insurance coverage. Companies should also have optional insurance that will make sense based on the industry and characteristics of the business.

Another way is through opting for financing. Recently, several credit products, such as online easy loans, are becoming more and more borrower-friendly. They still have specific requirements, but they now tailor loans to the financial capability of the borrowers. Sometimes, they don’t even regard the borrowers’ business history and credit rating.

Lastly, hire an expert business consultant. They can give professional advice on financial planning, budgeting, forecasting, and sales forecasting. It helps companies determine how much money they need each month to cover all their expenses.

Operational Risks

Operational risk is the risk of loss resulting from inadequate or failed internal processes and systems. If left unmanaged, this risk can put companies at a competitive disadvantage, so identifying how it can impact a company is essential.

Operational risks may include:

  • Theft by employees or contractors
  • Failure to comply with laws and regulations
  • Fraudulent activities by customers or suppliers

Companies can manage operational risk by implementing best practices. Some of these are asset management programs that monitor inventory levels, incident response plans that outline steps for handling security breaches, and disaster recovery strategies in case of emergencies like fires or floods.

Reputational Risk 

Reputational risk is the damage to a company’s brand that the business itself can cause. For example, running a restaurant serving food that makes people sick could harm a business’s reputation for years to come. It also occurs when a company’s brand is impacted by a negative media story, damaging lawsuit, government investigation, or other public relations event.

There are several ways to manage reputational risk. But the most common one is to measure it. Companies must know how much reputational risk they’re exposed to, so they can address any issues before they become serious problems. It will also help companies identify where they might need more support or training.

Another way is to ensure there are processes in place that can identify and mitigate the risks associated with reputational damage. These could include developing a crisis management plan for all staff members likely to be involved in any potential crisis. The plan should cover how the information will be shared internally and externally during the crisis period and how companies will seek to minimize any damages caused by negative news stories or legal action taken against a business.

Compliance and Regulatory Risk

Compliance and regulatory risk are major concerns for any business. The rules can be confusing and difficult to navigate, so companies must be aware of everything to stay compliant with the law.

Usually, a company will have a team of legal experts responsible for ensuring everything is on the up and up. The lawyers will ensure that a business complies with all applicable laws and regulations.

Final Thoughts 

Risks have the potential to do damage to a company if mishandled. The good news is that companies can manage these business risks by taking the proper steps. A business can stay afloat and sustain long-term growth by managing these risks and having effective risk management processes in place.

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