Every business has its own risks, from financial to reputational risks. Even a company that has planned the best possible strategy is subject to risks. Building and developing a business is not easy, and challenges and obstacles always follow at each stage. For this reason, businessmen need to map out business risks that might arise so they can better anticipate them. So, what are business risks, their types, and how can they be dealt with? Check out the full explanation below!
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What is Business Risk?
Business risk
Generally, the term “risk” refers to uncertainty and the consequences that arise because of it. In business, the most common consequence is material loss. Uncertainty can occur in various aspects, such as inflation, political instability, disasters, and pandemics. In other words, uncertainty can arise from the global scope, nature, and human behavior. Additionally, business risks can also arise due to an immature strategy or bad management.
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Types of Business Risks
After understanding the meaning of business risks, it is essential to understand the types in order to map them better and find ways to overcome them. Business risks include the following:
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Strategic Risk
From the name itself, it is clear that this risk is closely related to the business strategy. Even large companies are subject to strategic risks.
For example, Aqua, a big brand, had to strategize to make the market accept bottled water. Initially, Aqua faced challenges and did not sell well because it “only” sold water through shops or stalls. However, after going through ups and downs, the brand is now well-known.
In the current digital era, companies may face strategic risks due to technological superiority. For instance, if Company A produces laptops with certain specifications and its competitors release similar products with additional features or advantages, Company A may suffer losses, especially if there is only a slight price difference.
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Compliance Risk
Sometimes, efforts to maximize profits conflict with existing written and unwritten regulations. For example, the internet cafe business grew rapidly in the mid-2000s. Internet cafes began adding online gaming services, which were loved by adults, children, and teenagers. However, this contradicted rules regarding children’s study hours, typically posted at the local community halls. Business actors should coordinate in advance with lawmakers at the local level to comply with regulations. Failure to comply and coordinate can result in fines and even forced closures.
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Operational Risk
Operational risk is common in many businesses, from the culinary industry to the heavy equipment business. This risk leads to unwanted events occurring in a company’s daily activities. Examples of operational risks include technical errors and human errors. For instance, writing errors in financial accounting can be fatal. Additionally, operational errors can occur during natural disasters like earthquakes, which can cause electrical short circuits.
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Financial Risk
Next is financial risk, which is related to extra costs and the loss of company income. Generally, this risk refers to the inflow and outflow of money in a business. For example, when a company depends on one or a few large clients who pay through credit systems, the company will suffer losses if the credit is suspended. Another financial risk is debt. For instance, when a company has long-term debt and the interest rate suddenly increases as the due date approaches.
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Reputational Risk
Lastly, there is reputational risk, which is related to a company’s good name. This is a risk that business owners highly fear because a bad reputation leads to increased consumer distrust. Indirectly, sales of products and services can decrease, clients may hesitate to continue business agreements, and workers may choose to leave the company. When a company’s good name is tarnished, potential employees are less likely to apply because they do not want to work for a company with a bad image.
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How to Overcome Business Risks
Business risk
Although business risks are unavoidable, there are ways to overcome and anticipate them. The following are ways to deal with business risks:
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Thoroughly plan the business
The first way is to thoroughly plan the business. Create a strategy that includes objectives and ways to achieve those objectives. Don’t forget to evaluate so that mistakes can be identified and rectified in the future.
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Create a risk management plan
At this stage, business owners should create steps and procedures to be followed when facing certain business risks. For example, establishing standard operational procedures (SOP) for managing incoming and outgoing raw materials using the “first in, first out” method to prevent spoilage. Business owners can reduce the risk of loss by creating a risk management plan.
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Execute according to the plan
The plans made will not produce results if they are not implemented. Therefore, both business plans and risk management strategies should be executed properly. After execution, evaluation becomes easier. From the evaluation, business owners can identify the losses they have incurred and determine necessary improvements to overcome similar risks in the future.
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Keep records and documentation
All activities should be properly documented, including financial records and other important documents, as they provide insight into profits and losses. Keeping thorough records allows for a better understanding of the business’s financial health.
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That is the definition of business risk, its various types, and methods to overcome them. All business actors will certainly experience business risks. The difference lies in business owners with mature strategies and risk management, who will be better prepared to face all the obstacles and challenges encountered along the way.
