Causes & Types of Business Risk : How to Identify & Manage

What is Business Risk?

Business risk is said to be a threat to the company’s capability to achieve its financial goals. Business risk means that a company’s plan may not turn out as planned or it may not achieve its goals or meet its targets. Such risks cannot be blamed on the company’s owner because risks are influenced by multiple external factors which include price inflation of raw materials for production, additions or changes to existing government regulations, growing competition, etc.

In this article, we will discuss the cause of business risk:

1. Natural Factors

There are some natural factors like earthquakes, floods, etc., which can damage the business. It is said to be uncontrollable by humans so any loss incurred by natural calamities is also unavoidable.

2. Competition

Having strong competitors in the market, manufacturers may involve in cutthroat competition by reducing the price of the goods or even produce cheap quality products which are considered a great hazard to the business.

Read here: Expert Tips to Boost your Business to the Next Level

3. Fluctuation in Demand for the Product

A sudden change in demand for a product is also considered a business risk. The rise of new products in the market may affect the demand for current products. For instance, when a new version of the mobile phone is introduced then the demand for the old model may reduce.

4. Use of Modern Technology

By using modern technology for production, cost per unit may decrease. This is possible for financially sound businesses but for small businesses it may not be possible. This may eventually lead to loss.

Read Here: How Technology is Reshaping the Modern Business Environment?

5. Human Causes

A loss in business may also occur due to forgery, theft, heavy expenditure, etc.

6. Change in Government Policies

Government policies are unavoidable for business. When there is a sudden change in the government policies and if it is not favorable for a business then it may lead to loss.

7. Mismanagement

The management needs to be capable of running a business. If not, it may lead to loss. Improper planning may not enable a business to achieve the planned objectives. All this can affect the cash flow and also increase the cost per unit.

8. Technological Cause

Technological causes of business risks involve a technology failure that may disrupt a business. The types of technology risks include cyber-attacks, security incidents, password theft, service outages, etc.

Types of Business Risk:

Risk comes in various forms. We have listed the types of business risks below:

1. Strategic Risk

Strategic risks tend to occur anytime. When people’s preferences change, there may be a sudden decline in the sale of a certain product. To avoid such risks, it is important to implement a real-time feedback system to learn the customer’s needs.

Read here : Why is Strategic Planning Important to a Business?

2. Compliance Risk

Compliance risk means companies requiring to comply with the new set of rules set by the government or any other regulatory body.

Read here: 4 Important Entrepreneur’s Compliance Regulations

3. Financial Risk

Financial risk involves the financial health of the company. For example, if the company is capable to offer installment payments to its customers or if it can handle the business operations when a few of its customers are unable to make the payment on time.

Read here: How to Overcome Financial Stress?

4. Operational Risk

Operational risk is something that occurs within the business processes or system. Risks like a breakdown of production machines, machine operator meets with an accident are said to be operational risks.

How to Manage Business Risks?

Though business risks are inevitable, there are several ways which can minimize their impact:

Companies can opt to avoid certain risks which are under control. Alternatives can be chosen to avoid facing the risk
Companies can be proactive so that they prevent a risk from happening. For example, by halting deliveries during bad weather
At times, some risks cannot be avoided. In that case, companies can contain that risk by putting up safety nets. For instance, while using the internet which is prone to risk, it is necessary to use firewalls & other preventive measures to ensure the safety

How to Identify Business Risks?

Risks are said to be prevalent in every business. Yes, they cannot be avoided but they should be addressed head-on to minimize their impact. The first step in managing risk is to identify risks so that one can come up with a risk management strategy.

Identify & analyze the sources that can trigger a problem. Risk triggers can be both internal or external
When something seems to be a threat, it is necessary to devise a plan of action to prevent the risk from causing a full-blown concern
Management can involve their employees to identify the risks that are involved in their respective departments
List down the possible risks that your company may face
Create a record of risks experienced by the company previously

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FAQs

1. What is business risk explain the causes of business risk?

It is called a business risk when it stops a business from achieving its financial goals. The causes of business risks are categorized into natural, human and economic causes.