The Top 7 Types of Business Risk

Types Of Business Risk March 19, 2021

Lauren Christiansen

Writer

7 Types of Business Risk Every Company Should Know

The word risk sometimes has a bad connotation to it. Risk sounds preventable, scary, and foolish. While individuals should certainly avoid risk in some circumstances, other risks are worth taking. Risk can be an opportunity for reward, while risk avoidance at all costs equates to stagnation.

The business world encounters strategic risk every day. Business owners need to prepare for operational risk, natural disasters, competitive risk, project risk, rate risk, financial risks, credit risk, and risks associated with compliance. Successful organizations also know that they must take certain risks to increase profits, outperform a competitor, and increase their market share.

But how does a company know which risks to take and which not to? An effective risk assessment program can help an organization identify potential risks, manage them, and eliminate the dangerous ones. It can also pinpoint opportunities to improve the customer experience and grow a brand. There are several types of business risks to watch out for and understand.

Organizations that use the correct management risk strategies to manage risk can mitigate many of the following -

1. Types of Business Risk - Economic Risk

Economic conditions fluctuate depending on politics, the market, and foreign countries. A good economy enables businesses to innovate and hire. Customers are more apt to purchase luxury items outside of their normal expenses during a good economy.

Harsh economic conditions impact business decisions and lead to a decrease in sales for most industries. Sometimes large corporations can benefit during a poor economy. For example, the COVID-19 pandemic hurt small businesses across the country but helped large enterprises such as Amazon.

A well-prepared risk company needs to monitor economic patterns and prepare for any downturns. Managing risk requires an organization to save money and optimize cash flow management. It's critical to stay within one's means and decrease any incurred expenses.

2. Types of Business Risk - Compliance Risk

All industries have tax laws and regulations to comply with. The larger the enterprise the more complex these regulations become. Congress passes new laws each year that impact healthcare, finance, and online industries.

For example, Dodd-Frank requires both small and large banks to comply with larger requirements. Because smaller banks don't always have the same resources as large banks, this is expensive and time-consuming. When businesses don't implement a strong business strategy to prepare for compliance risk, disruptions can ruin their reputations and cause them to close permanently.

It's critical to hire the correct personnel that can help to navigate through these regulations. Most businesses invest in automated software solutions to ensure compliance. For example, timekeeping software ensures the HR department doesn't underpay employees or allow them to work too many hours.

3. Types of Business Risk - Securities and Fraud

Cybersecurity threats are a huge concern for businesses, particularly since the digital transformation. With so much customer data available online, hackers can steal confidential information and ruin an organization's reputation.

Businesses must enact the proper security measures for each of their applications and databases to prevent security risk. It's critical to invest in fraud detection tools and train employees on the proper way to mitigate theft.

4. Types of Business Risk - Financial Risk

Banks and other industries are susceptible to financial fraud every time they loan money to customers. All banking institutions use credit card scores and other measures to mitigate risks and loan money with the proper interest rate. Everyone saw what the 2008 financial crisis and artificially low interest rates did to the economy. If organizations don't mitigate financial risk properly, it becomes a ripple effect that wreaks havoc elsewhere.

Small businesses also need to create a risk management process to avoid financial loss. It's critical to minimize expenditures and debt. Successful companies diversify their client base so they don't have to rely on a couple of customers for the bulk of their income. This will also help an organization expand its brand and generate a bigger share of the market.

5. Types of Business Risk - Reputation Management

Businesses that suffer from a ruined reputation know the heartache and financial ruin this causes. It's essential to create a risk management plan to handle all potential disruptions in the supply chain and elsewhere.

For example, Chipotle had an outbreak of salmonella several years ago that nearly damaged their brand. Through a series of strategies and public relations moves, they overcame the reputational risk and assured customers with the implementation of new food safety practices.

In the age of social media and online reviews, it's important to manage an online presence. Businesses should immediately resolve customer complaints, offer refunds, and issue apologies when they are in the wrong.

6. Types of Business Risk Operational Risk

Businesses need to streamline and monitor all internal processes to ensure customers receive value from the products/services they purchase. Unfortunately, many companies try to acquire new customers and increase profits when their internal processes aren't up to par. Because internal operations impact external circumstances, it's critical to prepare for operational risks.

Operational risk can also occur when natural disasters or other power cuts impact internal operations. Most of the time, a person causes an operational problem. Perhaps they waste resources or spend too much money on an ill-conceived project.

Regardless of the cause, an organization should mitigate operational risk at all times. This requires leaders to prioritize employee training, implement health/safety procedures, and monitor all business activities. It's critical to create a continuity or risk management plan to make sure a disruption doesn't impact business operations.

7. Types of Business Risk - Competition Risk

Many established companies become too comfortable and forget the highly competitive environment they exist in. An organization should invest in automated software solutions, monitor market trends, and create a new product that provides value to consumers.

Organizations that were once at the top can easily fall to the bottom if they fail to prepare for and manage business disruptions. For example, Blockbuster and Borders Books were unable to adapt their business strategies to modern times. Both are no longer operating.

A business owner mustn't become too comfortable. Each organization should always strive to innovate, grow, and stay on top of the latest technologies and trends. Proper research and the use of marketing specialists can help industries know what customers expect, want, and need.

Key Takeaways of Types of Business Risks

Organizations should monitor and prepare for economic downturns to avoid financial ruin. They should save money, optimize project management, and identify economic factors that lead to disruption.
Non-compliance and securities fraud are two different types of risk that impact an organization the most. Non-compliance costs an organization thousands of dollars a year and can cause a ruined reputation. It's critical to put safeguards in place to prevent hacks and non-compliance.
To mitigate financial risk, businesses should budget each business process carefully and diversify their client base. To protect one's reputation, a company must incorporate an effective ERM management process that handles complaints and prepares a set of strategies.
Business owners should not become too comfortable when their organizations are established. It's critical to monitor trends and create a risk management strategy to avoid a competitive takeover.