Business risks can stem from your operations and environment and as a result, impair your company’s ability to provide a return on investment.
The term ‘business risk’ applies to anything that can be deemed a threat to a company and its ability to obtain a target, such as its financial goals or its ability to be merged or acquired. Consequently, these business risks can come from within or be external.
In general, most companies employ a systematic approach to identify, monitor and mitigate business risks through a combination of policy, procedure and enforcement. But in order for these processes to be enacted, business risks must first be identified. In this article, the risk management experts at Blackhawk Intelligence walk you through the different categories of business risk, how risk can be avoided and what your business can do to minimise risk.
Understanding business risks
Any event – be it social, political, business or even an act attributable to nature without human interference – that has the potential to affect how a company operates and makes a profit is considered a business risk.
In order to mitigate business risks, business analysts will often calculate the degrees of risk in an event first and inform decision-makers, allowing them to make more calculated decisions in a company’s interests. While business risks can be rather diverse, and can often be very specific to the nature of a particular business, they are generally grouped into five categories:
- Financial risk
- Strategic risk
- Operational risk
- Compliance risk
- Reputational risk
Financial risk occurs when a business or any shareholders or investors in a business or organisation will lose money. Some of the most common financial risks include liquidity risk, equity risk and credit risk, however, the most common financial risk to a business is when the company’s cash flow is hampered or is inadequate.
This is when a business chooses a path to pursuit strategically and by doing that, it puts itself at risk. For example, the decision to focus a product on one particular demographic factor may isolate the product from other demographic factors.
Operational risk occurs within the business and it often relates to a failure in the day-to-day running operations. An example of operational risk of a company is when, for example, its financial controller fails to detect or stop a fraudulent payment and causes monetary loss.
This relates to regulation and laws – particularly in industries where there is heavy regulation. This can occur when there is a failure to comply with regulations or laws and is often present when a company becomes multi-national. A failure to understand the laws and regulations surrounding the company’s industry in a new country, for example, would be a compliance risk.
Reputational risk is an event – often as a result of a business risk – where a company has incurred reputational damage. Consequently, the company is at risk of losing its loyal customers or a large portion of its customer base.
Changes in business risk trends
While business risks are present at any time, they can also intersect with one another and become more urgent depending on the situations.
For example, the introduction of the EU General Data Protection Regulation (GDPR) in 2018 – heralded as the biggest change to data privacy regulations in the past two decades – is intersecting with the growing need for cybersecurity. Failure to protect data from cyber threats – an operational risk – could see a business fined for a breach and, thus, introducing a compliance risk.
How are business risks dealt with?
While some risks can be planned for, there are some business risks that happen as a result of extraordinary events happening outside of your company – events that could not have been predicted.
Irrespective of this, it is important that a company is able to identify as many business risks as possible. This is achieved, essentially, through proper business planning and with the help of risk management experts like our team here at Blackhawk Intelligence.
Risk analysis is often done in groups and it generally consists of the following steps:
- Identify risks: Take into account anything that may affect your business and its goals. This step also involves identifying the causes and controls.
- Establish the likelihood and consequences: Determine how likely of an identified risk happening and what are the consequences.
- Evaluate the impact: Once the consequences have been identified, it is time to evaluate their impacts. This should involve a decision as to whether or not the risk is acceptable or if it has to be mitigated.
- Rank and treat the risks: Create a hierarchy of risks sorted by priority – with the most impactful and critical business risks taking precedence. Work through the list and decide if the risk should be avoided, mitigated, transferred or accepted.
- Track the risks: Monitor what is happening and how your risk management efforts have interacted with the risks.
As mentioned, once risks have been identified, the business can then take steps to manage the risks and protect its assets. The most common risk management techniques include:
Avoiding a risk often means not to take any action, such as a business choosing not to make a purchase because there is a risk that the investment cannot generate enough revenue to cover the cost. Avoidance is usually the first consideration as taking no action is the easiest way to mitigate a risk after it has been identified.
When a risk cannot be avoided, then risk mitigation is applied in order to mitigate or lessen the blow of the risk.
It may be possible for transfer the risk away from the business. This can, for example, take the form of insurance. By taking out insurance, the potential repercussions resulting from a risk can be transferred to the policy provider in return for a fee.
Finally, there is acceptance of the risk. This is an approach often taken by businesses when they believe that the possibility of revenue generation is greater than the risk that has been identified. For example, the development of a new product is inherently risky, particularly if it does not work out. But if the projected revenue is deemed to outweigh the risks of this development, then the risk may be acceptable.
Not all risks are bad
It is easy to think of risk management as an approach to address the ‘negative’, but it must be said that it can also help to unleash new opportunities. For example, if your business handles sensitive data and you can demonstrate to your clients that you have a robust risk management process in place, chances are they will stay with you instead of going to a competitor.
Blackhawk Intelligence can help you identify and manage business risks
At Blackhawk Intelligence, corporate intelligence is our core strength and we have five teams within this capability: due diligence, research, security, GDPR and risk management. Each team works cohesively with one another, and it is with this cross-functional approach to risk that makes us unique, delivering great insights to the evaluation of your company’s risks and opportunities.
As risk management is also not a one-off process. Monitoring of all risks frequently is a key part of effective risk management – and with us providing regular reviews to assess progress, you can confidently rest assured that risks and opportunities are understood and visible across your business.
So give us a call on +44 (0)20 8108 9317 today to discuss risk management, and our team of specialists with a background in identifying business risks can help your company to identify risks before they cause detrimental harm.
This post is intended to provide information of general interest about current business issues. It should not replace professional advice tailored to your specific circumstances.
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