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Evaluating and Managing Business Risk
Business Risk is a component of total risk. Anything that threatens a company’s ability to achieve its Financial Goals is considered a Business Risk. A Firm’s management team is regularly tasked with making decisions about how to grow and operate a Business. However, every decision about a new product launch or market expansion can fail and put the company’s ability to operate at risk.
Take a look at the various Business Risks listed below:-
Strategic Risk
It involves adverse outcomes resulting from poor decisions made by top management, such as entering a new market, introducing a new product or diversifying the Business Portfolio.
Compliance Risk
It results from a failure to comply with laws, regulations and ethical norms governing an organisation’s activities.
Financial Risk
It results from the potential losses that may arise from a company’s inability to meet its financial tasks, issues in liquidity, or fluctuations in the financial market.
Operational Risk
Events that arise from business processes include breakdowns in the supply chain, system failure, and cybersecurity risks.
Reputational Risk
This involves harming your Business’s public image. It can be the outcome of bad publicity or poor customer experiences.
Various factors can impact Business Risk, such as regulatory changes, market fluctuations, technological advancements, etc. External Factors like natural disasters and political instability can pose significant risks. Internal factors such as poor decision-making leading to poor management, operational inefficiencies, and financial mismanagement can also lead to these Business Risks.
Risk Management is crucial for any business or organisation that tends to operate for a longer term. Risk is unavoidable, and Risk Management is essential for any Business. An effective business risk management system indicates the implications of potential risk, the organisation's exposure to risk, and strategies to mitigate them. Through this plan, any organisation can minimise the impact of risk, protect its reputation, meet its legal obligations, and enhance its overall performance. Further, having a Business Risk Strategy gives ideas for the growth and expansion of Businesses.
Given below are the steps which need to be followed to identify Business Risks:-
Analyse Business Process
Start with analysing your Business with a SWOT Analysis
Strength- Identifying your company’s strengths can help you determine whether the company is doing well.
Weakness- While identifying the weaknesses, you can develop strengthening strategies and work on the weakened areas.
Opportunities- You can perform market research to learn about potential growth opportunities.
Threat- By reviewing internal and external factors, you can learn about the threats or risks in the business.
Survey for Risks at every level
After analysing processes and workflows, you can look for risks at any level. Start with looking for risks by anonymously surveying employees at every level.
Identify common risks in your Industry
Perform Market Research by identifying the strengths and weaknesses of your industry competitors. Looking for common risks for similar businesses can give you ideas for policies and reduce Business Risk.
Record Risks
Establish a log for each risk to track recurring threats to the business's reputation or profitability. When a company faces the same risks multiple times, you can develop policies to mitigate these threats and safeguard the industry.
Since business risk is unavoidable, you can surely minimise the risk. Given below are the ways you can use to minimise it:-
Hire a Business Risk Consultant
Hiring a Consultant can help you identify areas of risk, calculate their likelihood, and develop plans to address them.
Develop a Risk Management Strategy
After identifying risks, you can devise a plan to mitigate current and future risks to your business.
Document all relevant Financial Information
Documenting finances can help you keep your records organised and lower the risk of fraud or theft.
Stay informed of all Rules and Regulations
Performing research on applicable corporate finance laws and rules in your area can help you avoid compliance risks.
What are the types of Business Risks?
Several business risks exist, including financial, operational, strategic, compliance, and reputational risks.
What are the factors of Business Risk?
Business risk can arise from various factors, including market fluctuations, competition, economic conditions, and regulatory and technological advancements.
What are the characteristics of Business Risk?
These include uncertainty, potential for adverse outcomes, impact on profitability and sustainability and the need for proactive management and mitigation strategies.
What are the examples of Business Risk?
Examples of business risks include damage caused by fire, flood, or other natural disasters, unexpected financial loss due to an economic downturn or bankruptcy of other businesses that owe you money, loss of important suppliers or customers, and decrease in market share because new competitors or products enter the market.
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