Business Risks: 5 Types of Risks All Firms Should Know to Avoid Losses
All the businesses are prone to certain risks. Various uncertainties related to the micro and macro environment in which a firm operates pose as a constant threat to the enterprise. Business risk is the exposure an organisation has to elements that can potentially lower its profits or lead to firm’s failure. Anything that threatens a company's ability to achieve its financial goals is considered a business risk. There are many factors that can converge to create business risk. Though certain risks cab be mitigated by continuous analysis of the business environment, complete elimination of the uncertainties is not possible.
Business risk is influenced by a number of different factors including, consumer preferences, demand, and sales volumes, per-unit price and input costs, competition, legal and political factors, technology among others. Here are five types of business risks every business should be aware about -
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Economic Risk
One of the biggest risks a business faces is the economic risks. If the economy does not perform well or goes in recession, all the sectors will suffer. An economic slowdown directs hits the profitability and productivity of the businesses and even lead to closure of various firms. It's important to watch changes and trends to potentially identify and plan for an economic downturn. To deal with a sudden economic downfall, all the businesses should keep funds in reserves and maintain a steady flow of income. Firms should also be careful while planning budgetary expenditures.
Compliance or Legal Risk
Another constant looming risk is the compliance or legal risks. Governments have the power to change various legal provisions overnight, including introduction of a new tax, scrapping an old licence, revising the existing regulation rules. Business owners face an abundance of laws and regulations to comply with. The businesses should carefully follow the existing laws and keep a watch on any new regulation by the government. A failure in complying with all the rules might even results in closing of the company.
Operational Risk
Not all the risks arise because of external factors, sometimes internal uncertainties can also lead to disruption in the business’ functioning. Such risk which originates within the organisation and tends to disrupt the business operations is known as the Operational Risk. It might involve a server outage caused by technical problems, people, or power cut. Many operational risks are also people-related. An employee might make mistakes that cost time and money. In order to reduce such risks, the business should resort to proper planning and continuous assessment.
Competitive Risk
Another type of risk that all the businesses face is the competitive risk, the advantages competitors gain over the firm. In order to survive in the market, all the firms should have an edge over the competitors. A firm faces continuous challenges from its competitors. It should be careful about how its rival firms are performing and garb the market opportunities before others, gaining the first mover advantages.
Goodwill/Reputation Risk
Goodwill aids in long term survival of the business. A positive image of the firm helps in growth and expansion. However, one wrong decision or spread of a rumour about the firm and the entire reputation is lost. If the public conceive a negative image about the firm it will directly impact its profitability, sales and valuation.
Risk and uncertainties are a part of the business cycles, however firms should try and mitigate the potential loss arising from various risks as much as possible to stay afloat in the market. Knowing and being aware of the several risks is the first step in ensuring a healthy business.