Risk & Assurance

Everything You Need to Know About Business Risk Management

In spite of the relative stability in the global economy, Businesses are facing a series of substantial impending risks that will need a planned Business Risk Management. Every business goes through a series of ups and downs as long as it exists. Therefore, it becomes essential for a business to infuse Risk Management into its strategic plan to avoid any potential hazards that could destroy the business.

The ability to figure out future risks is a key component of strategic business planning for both startups and established businesses houses. Many companies hire a risk management consultant to keep an eye on the operations of the company and hence, preventing it from different types of risks.

Types of Business Risk that Companies Face

1. Physical Risk

This is the most common risk faced by organisations. All the natural and man-made hazards come under the category of Physical risks. Office buildings are vulnerable to all kinds of physical risk. A fire breakout or an explosion is the most common risk to a building. 

Every business be it a startup or a major one should have the proper equipment such as fire alarms, smoke detectors, etc coupled with appropriate management to handle such a situation if it occurs. Government agencies and local fire authorities provide information and conduct special drills to prevent these accidents. Such hazardous incidents leave a long term impact in the functioning of the company as well in the life of the employees.

2. Strategic Risk

This type of risk arises when the decisions and strategies made by an organization backfires. Strategic risk is kind of inherent in an organizations business objectives. If structured efficiently, strategic risks can be extremely profitable and help in expanding the horizons of the business. A company should be aware of the changing environment and plan it’s strategies accordingly. If a company refuses to change along with the time , the level of strategic risk rises up.

For example, “Pepsico” earlier used to be a beverage brand and only used to sell sugar-based cold drinks. As time changed, people started becoming more conscious about their health. Pepsico keenly observed the change in the market and came up with a more healthy product line which included products such as diet pepsi, water bottles etc.

This example shows that when in a business you often take risks, sometimes they work and sometimes they don’t. All a business owner needs to do is make a thorough research in the market before implementing any strategy.

3. Financial Risk

Risk is inherent in any business enterprise^[1], and financial risk is one of the major risks a company faces.  Financial Risks of a company depend upon various other aspects such as market risk, credit risk etc. Some of the aspects because of which Financial risk occurs are as follows:

Market Risk

This type of risk occurs when there is a change in the functioning of the targeted market of the company. For example, when online stores started selling more products than retailers, it posed a serious market risk for retailers and street vendors. During that period, those retailers who were able to foresee this shift in the market earned significant revenues out of it.

Credit Risk

It is the risk which businesses incur, by extending credits to its customers. A business takes a financial risk when it provides financial assistance to its customers hoping that the customer may default on payment. A company shall efficiently handle its credit allotment so that it has sufficient cash flow to run the functions of the company.

4. Operational Risk

 This type of risk occurs because of the inadequate or failed procedures of the company. Operational risk is heavily dependent upon mistakes or failures of the employees of the company. For example, in a manufacturing company, not hiring the skilled set of individuals can be considered as an Operational risk.

Business Risk Management Ways

Once you are aware of all the possible risks that a business may face, it becomes essential to have a proper Business risk management. Managing a business risk requires developing specific options to deal with the risks. These options include:

• Avoiding the risk

This is one of the best ways to manage a business risk. If you are already prepared for the upcoming risks you can make the changes as per the requirement of the business.

• Reducing the risk

In such cases where it is inevitable to avoid the risk, you can simply try to reduce the business risk. This can be achieved by staff training, complying with legislation, maintain the equipment etc.

• Accepting the risk

Every business owner be it of a startup, or an established company never would want to land themselves in this situation. When every other way of managing the business risk fails the only option you are left with is to accept the risk and try to bring the business out of it.

Takeaway on Business Risk Management

“Prevention is better than cure”, this idiom well summarises the blog. For any business, be it a startup or a big company, it becomes essential for them to make an appropriate Business Risk Management strategy. A sound risk management strategy allows the businesses to rectify their mistake before hand and solve it at the earliest. This saves the company from losing its market image as well as the valuable assets of the company.

Suggested Read: What is a Risk Assessment Model