Risk is an inherent aspect of any business undertaking. However, just because it is a part of the DNA of any business—of life really—it doesn’t mean that it can’t or shouldn’t be managed. It also doesn’t mean that one should try to avoid it, because that’s not possible.
When it comes to risk, there are certain key skills that stand any business in good stead: risk identification, risk assessment, and risk mitigation. The first step of the risk management process is risk identification.
If you don’t know what you’re up against, you’re not going to know how to prepare for it or deal with it.
Types of risk The most common types of risk are listed below.
Strategic: Businesses devise development strategies based on the industry they’re in, the financial climate, and any other critical information that may pertain to them. It’s impossible to predict future developments that could threaten these plans, such as the introduction of disruptive new technologies; natural or political disasters like droughts or civil wars that cut off the supply of raw materials; or changes in customer tastes.
This is a strategic risk, or the risk businesses take when they adopt a particular strategy. However informed or risk-averse their decision may be, it is still only based on projections, not actual data (which would require time travel to gather!)
Operational: This refers to errors that derail or disrupt your core business operations. It could be your website crashing, server malfunctioning, or an incorrectly written check, all of which could hit your day-to-day operations. Operational risk can be avoided by conducting frequent M&E of your company systems and equipment.
Compliance: If they’re not careful, companies run the risk of breaking government rules and regulations. This potential failure to adhere to or comply with the law is referred to as a compliance risk. This is why it is crucial for companies to have diligent professionals such as accountants and lawyers, who will ensure that they meet the requisite industry and government standards.
Financial: There are a couple of factors that put a company at financial risk, like debt for example. The higher your debt burden, the greater the risk to your finances. For example, say there’s a sudden rise in interest rates, and you’ve already taken out a number of loans. This would increase your monthly payments and could put your company in financial jeopardy depending on how much money you can free up to meet these sudden expenses.
Reputational: Sociologists came up with a term to describe the privileges associated with a person’s family name and background: social capital. Closely related to economic capital, but not synonymous with it, social capital refers to attributes like educational qualifications and family connections that can be leveraged for financial gain. In other words—reputation. A company’s reputation is indeed a form of capital, and its destruction can affect its bottom line. It is important to keep abreast of the different risks that your company runs, and find ways of minimizing their impact. The best offense is the best defense as they say, and nowhere is this more apparent than on the business battlefield.