Types of Business Risks and Ideas for Managing Them

Business risks can include financial, cybersecurity, operational, and reputational risks, all of which can seriously impact a company’s strategic plans if business leaders don’t take action to mitigate them.

What’s most important is that business owners are aware of the risks that could shake up their operations. That way, they can take steps to prevent them or minimize their impact if they occur. Here’s a look at some common business risks. 

Financial Risks

Companies must generate sufficient cash flow to make interest payments on loans and to meet other debt-related obligations on time. Financial risk refers to the flow of money in the business and the possibility of a sudden financial loss. A company may be at financial risk if it doesn’t have enough cash to properly manage its debt payments and becomes delinquent on its loans.

Businesses with relatively higher levels of debt financing are considered at higher financial risk, since lenders often see them as having a greater chance of not meeting payment obligations and becoming insolvent. Types of financial risk include:

• Credit risk: When a company extends credit to customers, there is the possibility that those customers may stop making payments, which reduces revenue and earnings. A company also faces credit risk when a lender extends business credit to make purchases. If the company doesn’t have enough money to pay back those loans, it will default.
• Currency risk: Currency risk, also known as exchange-rate risk, can arise from the change in price of one currency in relation to another. For example, if a U.S. company agrees to sell its products to a European company for a certain amount of euros, but the value of the euro rises suddenly at the time of delivery and payment, the U.S. business loses money because it takes more dollars to buy euros.
• Liquidity risk: A company faces liquidity risk when it cannot convert its assets into cash. This type of business risk often occurs when a company suddenly needs a substantial amount of cash to meet its short-term debt obligations. For example, a manufacturing company may not be able to sell outdated machines to generate cash if no buyers come forward.

Cybersecurity Risks

As more businesses use online channels for sales and e-commerce payments, as well as for collecting and storing 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.

When these incidents happen, consumer confidence and trust in companies can take a dive.

Not only do security breaches threaten a company’s reputation, but the company is sometimes financially liable for damages.

Ideas for managing security risks: 

• Investing in fraud detection tools and software security solutions.
• Educating employees about how they can do their part to keep the company’s data safe. Basic guidance includes not clicking suspicious links in emails or sharing sensitive data without encrypting it first.

Operational Risks

A business is considered to have operational risk when its day-to-day activities threaten to decrease profits. Operational risks can result from employee errors, such as undercharging customers. Additionally, a natural disaster like a tornado, hurricane, or flood might damage a company’s buildings or other physical assets, disrupting its daily operations.

Of course, one of the starkest examples of negative impacts to companies' production and supply chain operations is the Coronavirus pandemic. In an April 2022 Small Business Pulse Survey conducted by the U.S. Census Bureau, roughly 65 percent of respondents reported that the pandemic had either a moderate negative effect or a large negative effect on their business. 

Ideas for managing security risks: 

• Making time for necessary employee training to minimize internal mistakes.
• Developing contingency plans to shield against external events that may impact operations. For example, a restaurant impacted by a natural disaster might be able to partner with another local restaurant, bar, or coffee shop to use their kitchen and sell to-go items.

Reputational Risks

Reputational risk can include a product safety recall, negative publicity, and negative reviews online from customers. Companies that suffer reputational damage can even see an immediate loss of revenue, as customers take their business elsewhere. Companies may experience additional impacts, including losing employees, suppliers, and other partners.

Ideas for managing reputational risks: 

• Pay attention to what customers and employees say about the company both online and offline.
• Commit not only to providing a quality product or service, but also to ensuring that workers are trained to deliver excellent customer service and to resolve customer complaints, offer refunds, and issue apologies when necessary.

The Takeaway

Business owners face a variety of business risks, including financial, cybersecurity, operational, and reputational. However, they can take proactive measures to prevent or mitigate risk while continuing to seize opportunities for growth. To learn more about the benefits of risk management planning read, "5 Hidden Benefits of Risk Management."

Frequently Asked Questions

1. What are the main types of business risks?

There are several types of business risks:
• Financial Risks
• Cybersecurity Risks
• Operational Risks
• Reputational Risks

2. What are common examples of business risks?

• Financial risks can include cash flow problems, inability to meet financial obligations, or taking on too much debt.
• Cybersecurity risks are risks associated with data breaches, hacks, or cyber-attacks.
• Operational risks include supply chain disruptions, natural disasters, or IT failures.
• Reputational risks can occur when a company's reputation is damaged by negative publicity, scandal, or other events.

3. How can you identify a business risk?

There are a few key ways to identify business risks:

• Reviewing financial statements and performance indicators: This can help you identify risks related to cash flow, profitability, or solvency.
• Conducting a SWOT analysis: A SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) can also be a helpful tool for identifying risks and brainstorming ways to mitigate them.
• Identifying key dependencies: Key dependencies are things that your business relies on to function, and if they were to fail or be disrupted, it could have a serious impact on your business.
• Carrying out root cause analysis: Conducting root cause analysis can help you to identify what underlying factors could lead to a problem or issue.

A version of this article was originally published September 01, 2022.

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