Are you concerned about the risks your business faces?
You’re not alone. Business risk is a top concern for many business owners. But what exactly is business risk?
Business risk is the possibility of a negative event occurring that would impact your company’s ability to achieve its goals. This can include financial risks, operational risks, reputational risks, compliance risks, and cybersecurity risks. All of these risks can have a serious impact on your company’s strategic plans if they’re not properly managed.
There are many different kinds of risks that businesses face. While some risks are inherent to the business itself, others can be managed through effective risk management strategies.
One of the most common risks that businesses face is Financial risk. This can come in the form of market risk, credit risk, or liquidity risk. Market risk is the risk of losses due to changes in the market, such as fluctuations in the stock market. Credit risk is the risk of losses due to the inability of a customer to pay their debts. Liquidity risk is the risk of losses due to the inability of a business to meet its financial obligations.
Operational risk is another common type of risk that businesses face. This is the risk of losses due to problems with the operation of the business, such as errors in manufacturing or distribution. Operational risk can also include the risk of losses due to natural disasters or other events that disrupt the normal operation of the business.
A company faces compliance or legal risks if it violates government laws or regulatory standards. A business may face compliance risk, for example, if it fails to follow environmental regulations, such as meeting certain pollution and hazardous waste standards.
Cybersecurity Risks. As more businesses rely on the internet and mobile channels for sales, authentication, and storage of customer data, they are exposed to greater opportunities for hacking, creating security risks for companies and their stakeholders. Both employees and customers expect companies to protect their personal and financial information, but despite ongoing efforts to keep this information safe, companies have experienced data breaches, identity theft, and payment fraud incidents.
Reputational risk is the risk of losses due to damage to the reputation of the business, such as from negative publicity.
How to Manage Risks
There are four ways of dealing with, or managing, each risk that you have identified. You can: accept it, transfer it, reduce it or eliminate it.
You can think about all of the risks that could occur and how likely they are to occur. In some cases, you may decide that the risk is so low that it can be ignored. For example, if there is a very small likelihood that your business will suffer a large loss, then you might consider accepting the risk. But if the risk is high and could produce significant losses, you may conclude that eliminating or reducing it is a good choice. You may also be able to use insurance to transfer risk from your business to an insurer.
Risk management is not a one-off exercise. Continuous monitoring and reviewing are crucial for the success of your risk management approach. Such monitoring ensures that risks have been correctly identified and assessed, appropriate controls put in place and an appropriate risk appetite established. All of this can be formalized in a risk management policy, setting out your business’ approach to and appetite for risk and its approach to risk management. Good risk management can improve the quality and returns of your business.
Business risk is more than just a “what if” scenario. It’s real and immediate, and it’s something that all business owners should be aware of. If your company is struggling to stay on top of risk management, contact MA Financial Consultants today for an obligation-free consultation. We will review your current risk management strategies, help you develop strategies to deal with specific risks facing your business, and provide the ongoing reassurance that comes from working with an experienced firm.