Businesses of all sizes face a variety of daily business risks that can threaten their ability to achieve their goals if these risks are not monitored and navigated properly. With the threat of theft, cybersecurity and more on the rise in 2022, the need for security risk management services is at an all time high. In addition, having a thorough understanding of the key business risks to your organisation can help business owners mitigate and extinguish potential threats sooner rather than later.
In a bid to help you get the ball rolling, we have gathered the 7 types of business risks and how they can impact your company in today’s informative article. If you are a business owner looking to protect the security and health of your organisation, sit back, relax and read on to find out more.
- Economic Risk
Economic risk is an ongoing threat to businesses that refers to unpredictable changes within the economy that lead to losses in sales, revenue, or profits. A prime example of economic risk can be seen in the 60% drop in airline revenue as a direct result of the COVID-19 pandemic in 2020. With economic risks running rampant due to a variety of global crises at any given time, business owners should always prioritise monitoring the economy, identify emerging risks, and create solid plans to minimise damage in a variety of different scenarios.
Additionally, businesses are encouraged to maintain healthy cash flow and cut down on unnecessary expenses as a preventative measure, in a bid to ensure that operations can continue even in challenging economic landscapes. By finding ways to adapt to unpredictable changes, businesses will be better equipped to survive even in the most trying of economic times.
- Financial Risk
In essence, financial risk refers to internal and external events that directly affect a business and its profits. For example, a business may be at financial risk if it does not have sufficient cash to properly manage its debt payments and becomes delinquent on its loans. Additionally, market changes or loss can also contribute to a business’ growing financial risk. Other types of business financial risk include, but are not limited to:
Currency Risk: Currency risk arises from the change in price of one currency in relation to another. For example, if an Australian company agrees to sell its products or services to the US market for an agreed upon sum, but the value of the US dollar suddenly rises at the time of delivery and payment, the Australian business loses money because it takes more AUD to buy USD.
Liquidity Risk: When a business cannot convert its assets to cash, it is known as liquidity risk. LIquidity risk often happens when an organisation or business suddenly needs a significant amount of cash to meet its short term financial obligations. For example, a car parts manufacturer may not be able to sell outdated parts to generate cash if no buyers come forward.
Credit Risk: By definition, credit risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. For example, when a company extends credit to customers, there is a chance that those customers may stop making payments, thus significantly impacting revenue and earnings. A business may also face credit risk if it is unable to pay back lender extended business credit used to make purchases.
To counteract and prevent financial risk, it is vital for an organisation to adjust their existing business plans to maintain consistent cash flow to minimise the probability of debt.
- Security and Fraud Risk
In today’s ever technological business landscape, more and more people are relying on e-commerce and online shopping/business to adapt to changing times. Unfortunately, with this growth online business also comes an increased cybersecurity risk in the form of hackers, cybercriminals and fraudsters. With so much sensitive data shared online, customers are at risk of having their identities and credit card information stolen. Additionally, businesses are at risk of experiencing data breaches and numerous security issues that have the potential of damaging consumer trust and tarnishing the company’s reputation. Thankfully, with effective security and fraud risk assessment, businesses are able to strengthen security measures in a bid to prevent data theft, serious breaches and more from occurring. A fraud risk assessment can help you to better understand your company’s fraud exposure, the associated risks and the strength of your existing controls. Additionally, it can also help to identify how potential fraudsters and/or cybercriminals might attempt to find a way around existing measures and controls.
Find out more about how you can protect your company from cyber-threats in this informative article.
- Compliance Risk
No matter the type of enterprise you run, businesses are required to adhere to local laws and regulations that restrict various business processes. For example, WHS legislations provide for a balanced and nationally consistent framework to secure the health and safety of workers and workplaces in Australia. With that in mind, compliance risk is defined by a company’s potential exposure to legal penalties, financial forfeiture and material loss as a violation of external laws and regulations or internal standards.
To avoid compliance risk, businesses are encouraged to routinely review their risk compliance and new regulations to ensure that operations are running appropriately. FInd out more about how you can manage compliance risk as a business owner here.
- Human Risk
Put simply, human risks in business may arise from employees’ failure or inability to perform their essential duties in the workplace. For example, alcohol or drug abuse may cause an employee to make mistakes at work, which can lower productivity and affect overall business reputation. Human risk can arise from intentional actions such as employee-related theft, or may also be a result of factors that an employee cannot control, such as health conditions. It goes without saying that when a business faces human risks, it can experience a loss of profits.
To counteract human risk, businesses must prioritise staff training and compliance with business policies and procedures. Taking active measures to improve personnel management can also help reduce human risk by boosting employee morale through effective empowerment and compensation.
- Reputational Risk
A good business reputation is a critical aspect of running a successful enterprise since it indicates trustworthiness and honesty. Reputational risk threatens a company’s standing or public opinion, and may also result in profit decrease and lack of confidence among company shareholders. Factors such as a lawsuit, poor reviews on Google or social media can greatly affect public opinion, thus damaging a company’s reputation and overall business success. As such, it is vital for businesses to utilise effective reputation management strategies to continually monitor and respond to consumer complaints and reviews.
By addressing and attending to consumer concerns, a business can show how much they value constructive feedback and are willing to improve their services. Depending on the nature of business, an organisation may even consider providing free replacements or services as a means of retaining customer loyalty and standards.
- Competitive Risk
Lastly, competitive risk strikes when a business falls behind the competition once gaining a foothold in their industry. Also commonly referred to as comfort risk, this type of risk may be a direct result of a business becoming so comfortable with their products or performance that they fail to make continual improvements with said products or services. As a result, this paves a way for competitors to overtake a business in its relevant market, thus negatively impacting overall sales and revenue. The obvious solution to mitigating against competitive risk is for a business to continually strive to improve on its products and services, to ensure that it is not lagging behind the competition.
Explore 10 ways to keep up with the competition here.
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And there you have it – the 7 types of business risks and how they can impact your company in 2022. The truth is that there are a myriad of risks that businesses regularly encounter, making it crucial to develop risk management plans to mitigate loss. We hope that this article has offered some invaluable information on how you can counteract business risks, in a bid to continue the growth and success of your enterprise.
