Are you aware of all of your business's areas of risk and how you can be impacted if you neglect to foresee risk and put controls in place to minimize or eliminate it?
Business risk is a broad term that can cover many angles or areas of risk. Understanding these risks is crucial as they are factors that can impact your ability to grow or develop and continue trading. The specific risks you might face will depend on your work, your industry, and the type of anti-risk measure you are currently implementing.
While business risk can never be zero, it can be reduced. This knowledge should empower every business owner, CEO, and team, knowing that they have the tools and strategies to manage risk effectively and not be at the mercy of unforeseen circumstances.
But why is it so important to recognize and protect against business risk? Any type of risk for anything in life poses a threat and a danger to the status quo. There is uncertainty, and in business, uncertainty can swing both ways; it can surpass expectations, and it can fail to meet them. When not managed or mishandled, risk can be a massive threat, and the deviation caused by unnecessary or even poorly managed risks can derail the entire organization. Even seemingly positive outcomes can be jarring and lead to issues if they are not correctly accounted for. This underscores the urgency and responsibility of recognizing and managing business risks.
If you are not looking for and identifying risks, then you can't determine your objectives, you can't put controsl in place, and you won't be able to ride out the storm whether the storm is beneficial or not.
This post is going to look at some of the different types of risks facing businesses today.
A physical risk is a risk to the physical assets of your business. This is your employees, the building, your stock equipment, etc. Your physical risk can present in a manner of different ways, such as damages and loss from theft or vandalism. It can be damaged by burst water pipes, neglecting to carry out repairs, and staff getting injured. It can be fires or anything that damages the physical aspects of your business. This risk can be a final loss, reputation loss, legal action threat, and more.
Compliance refers to the act of following laws, regulations, and standards set by authorities or industry bodies. Failing to comply with these can lead to severe consequences, including legal action, fines, and even closure of the business.
Some compliance risks will be unique to your sector, industry, and what you do, while others will be more generic, such as data protection and health and safety laws. You need to ensure that your business is compliant with the legislation, regulations, and specialties of an organization and that everyone involved is, too. This is your employees and suppliers you partner with, too. You can use intercede software to help you stay on top of compliance and train everyone so that everyone is aware of their personal responsibilities in this area as well as those of the company as a whole. Supplier Compliance is paramount, as is employee compliance and that of any management team or directors, for example, and everyone needs to adhere to the same rules and regulations at all times to minimize compliance risk.
The potential impact of failing to stay on top of this can be, as we mentioned, a loss of the business in its entirety, as well as massive fines, legal action, and penalties, which can be a heavy burden to bear.
Strategic risk is the decisions you make for your company and the balance between risk and reward. The right decisions can accelerate your business, while poor decisions can be extremely detrimental. This underscores the responsibility and control you have in managing strategic risk.
But it's not just the decision itself but how it is made. You need a well-executed strategy for making decisions regarding your business, and if your plan is off, this is a massive risk. A well-executed strategy can instill a sense of security and confidence in your decision-making process.
When considering operational risks to your company, these are typically classed as human interactions and operations performed. So, they include things like human error, inappropriate behavior, fraud, embezzlement, or a breakdown in the process due to poor knowledge or ability to structure.
It's essential to fully understand how your employees can impact you and your business and what exactly can go wrong if you're not staying on top of human operational risk. Having regulations in place, training, and overseeing behaviors and actions can help you limit operational risk. However, due to the human element, there will always be some level of risk to your business from this view.
Cybersecurity is a massive concern for all businesses in the digital age. Even though technology is becoming more complex and advanced, so are the methods hackers are using to gain access to our data. Increasingly, small businesses are becoming just as big a target as larger organizations, meaning everyone is at risk. With this in mind, you need robust cyber security measures and control, and your team needs training on the best practices regarding digital security to help keep defense secure.
In addition, you need to be aware of the risks of technology as a whole, not just cybersecurity. System failures, loss of power, and obsolete technology can all pose risks to your business and leave you stained should technological failure impact you.
Financial risks can occur both internally and externally. Internally, it can be that your company frivolously spends money, is not strategic with finances, and does not understand your current financial position, which can impact the business and create a greater risk than necessary. Controlling spending, working towards a budget, and implementing cash flow forecasts can all help keep you on the low-risk side of financial problems and ensure your business has what it needs moving forward.
However, Internal risk isn't the only financial risk present for your company; external factors such as interest rates, rising employee wages, fraudulent activity, changes in the market, and social and economic factors are also at play and can be a massive risk to your operations. As a savvy business owner, you will be abreast of everything that can impact your business financially and put plans in place to preempt fluctuations or protect against damage.
When people talk about reputational risk, this is often a direct result of mishandling other risks. You can damage your reputation by showing you're not competent enough to handle risks or other factors within your business. Slowly, your reputation will become tarnished, and there will be less faith and trust in your company. This sometimes irrevocable damage to your reputation cannot always be undone, and in a world where information is easily shared and spread via social media, word travels fast and is permanent.
Managing reputational risk is crucial. You can mitigate the risk of damaging your company's reputation by addressing issues promptly and striving for excellence in all aspects of your business.
The environment can impact your business in multiple ways. It can form seemingly minor impacts like a change in weather stopping you from hosting external events or attending them as advertised. It can be the weather impacting your ability to make deliveries or even your building or equipment, rendering them unusable. Fires, heatwaves, floods, etc, are all natural disasters that you can't always protect from. A severe storm or hurricane can wipe out your facility, leaving you with nothing, or it can disrupt power in your building, leaving you unable to work. The environment can impact your business in multiple ways, so it is important to be aware of this.
The economy can change instantly, which can impact your ability to do business. If you're not innovating or moving with market changes or fluctuations in the economy or your industry, then you're doing your business a disservice. If you trade in foreign markets, you need to be aware of potential upsets in the economy regionally and internationally.
Political risk includes actions like civil war, terrorism, economic collapse, and social unrest, all of which can impact your company. A great recent example is Russia's invasion of Ukraine. Understanding how this can impact your business and how you will be affected can help you make smart decisions to protect yourself and your business moving forward.
In conclusion, risk will always be present in any area of life; even waking up in the morning presents some risk to you and your life. However, as far as your business is concerned, you need to be, at the very least, aware of all of the potential risks and how you can eliminate or reduce any risks.