Business risk cannot be entirely avoided because it is unpredictable. However, there are many strategies that businesses employ to cut back the impact of all types of business risk, including strategic, compliance, operational, and reputational risk. Sometimes it is a company’s top leadership or management that creates situations where a business may be exposed to a greater degree of risk.

Financial institutions such as banks or credit unions take on strategy risk when lending to consumers, while pharmaceutical companies are exposed to strategy risk through research and development for a new drug. Each of these strategy-related risks is inherent in an organization’s business objectives. When structured efficiently, the acceptance of strategy risks can create highly profitable operations. Netflix is an example of how risk management can inspire innovation.

Location Risks

One  can also do business risk assessment  by using operating leverage ratio and degree of operating leverage to help find out the company’s business risk. Thus it is extremely crucial b for businesses to be able to understand what are the causes of risk and try to identify them at early stages for better business risk management. If a company loses its goodwill in the market, it is a big chance to lose its customer base. For example, if a car company is blamed for launching cars without proper safety features, it would be a reputational risk for the company. The best option, in that case, is to take back all the cars and return each one after installing the safety features.

Minimizes Losses

Cyberthreats are the particular dangers that create the potential for cyber risk. The risk impact of cyberthreats includes loss of confidentiality, integrity, and availability of digital assets, as well as fraud, financial crime, data loss, or loss of system availability. In the past, some organizations have viewed risk management as a dull, dreary topic, uninteresting for the executive looking to create competitive advantage.

Insurance is a principle safeguard in managing risk, and many risks are insurable. Fire insurance is a necessity for any business that occupies a physical space, whether owned outright or rented, and should be a top priority. Product liability insurance, as an obvious example, is not necessary for a service business. Auxiliary gas-driven power generators are a reliable back-up system to provide electricity for lighting and other functions.

1. However, if XYZ decides to undercut ABC’s prices, this becomes a strategic risk for ABC.
2. Foreign currency exchange rate risk is a part of the overall financial risk for companies that do a substantial amount of business in foreign countries.
3. Product liability insurance, as an obvious example, is not necessary for a service business.
4. Policies that guarantee a safe working environment would, in this instance, be an effective strategy for managing internal risks.

Some of the factors that may affect a company’s financial risk are interest rate changes and the overall percentage of its debt financing. Companies with greater amounts of equity financing are in a better position to handle their debt burden. If a business relies heavily on computerized data—customer lists and accounting data, for example—exterior backup and insurance coverage is necessary. Finally, hiring a risk management consultant may be a prudent step in the prevention and management of risks. Companies exposed to substantial strategy risk can mitigate the potential for negative consequences by creating and maintaining infrastructures that support high-risk projects.

Done properly, scenario planning prompts business leaders to convert abstract hypotheses about uncertainties into narratives about realistic visions of the future. Good scenario planning can help decision makers experience new realities in ways that are intellectual and sensory, as well as rational and emotional. Scenarios have four main features that can help organizations navigate uncertain times.

He is an accomplished author of thousands of insightful articles, including in-depth analyses of brands and companies. Holding an MBA in Marketing, Hitesh manages several offline ventures, where he applies all the concepts of Marketing that he writes about. So, this was all that we thought would help you in understanding the concepts of commerce risk. Plus, you should also be recording different risks that you had faced and measures that you had taken to neutralize or minimize them. It will bid you well to jot down these risks beforehand and come up with effective strategies to mitigate or remove such risks when they arise.

Start Managing Your Organization’s Risk

Thus, the company started losing its customers rapidly and ended in losses. This example shows an external risk that lead to the downfall of the business, which could be avoided had the company properly researched its raw materials before starting to use them. For example, if a firm isn’t able to produce the units to make profits, there is a considerable business risk. Even if the fixed expenses are usually given before, there are costs that a business can’t avoid – e.g., electricity charges, rent, overhead costs, labor charges, etc. To identify these risks, McKinsey recommends using a two-by-two risk grid, situating the potential impact of an event on the whole company against the level of certainty about the impact. This way, risks can be measured against each other, rather than on an absolute scale.

In business, risks are factors that an organization encounters that may lower its profits or cause it to fail. Sources of risk can be external, such as changes in what consumers want, changes in competitor behavior, external economic factors, and government rules or regulations. They can also be internal, such as decisions made by management or the executive team. For example, a company may face different risks in production, risks due to irregular supply of raw materials, machinery breakdown, labor unrest, etc.

In such a scenario, it is a good idea to keep a record of all the risk the company has faced in the past. The first and foremost thing that a company should do is identifying all the sources that can present risk in the future. Early analyzing of sources will do away with the unwanted risk surprises later. An example of this is the involvement of an employee in the misuse or selling of drugs. Also, embezzlement and fraud are what do you mean by business risk other forms of human risks that the company must protect itself from. Every aspect of business spells risk, but that doesn’t mean that there are no longer surviving and thriving businesses in our world.

Business risk, on the other hand, encompasses broader operational uncertainties such as market fluctuations, competition, regulatory changes, and technological disruptions. It affects a company’s overall profitability and sustainability beyond just financial obligations. But it can’t be ignored that crises—and missed opportunities—can cause organizations to fail. By measuring the impact of high-impact, low-likelihood risks on core business, leaders can identify and mitigate risks that could imperil the company.

In marketing, risks may arise due to fluctuations in market prices, changing trends and fashions, errors in sales forecasting, etc. In addition, there may be loss of assets of the firm due to fire, flood, earthquakes, riots or war and political unrest which may cause unwanted interruptions in the business operations. Thus business risks may take place in different forms depending upon the nature of a company and its production.

Financial risk comes with the use of leverage (sometimes called gearing); it occurs when a company has a heavy reliance on debt as a funding source. According to the Harvard Business Review, some risks are so remote that no one could have imagined them. Some result from a perfect storm of incidents, while others materialize rapidly and on enormous scales. By pulling data from existing control systems to develop hypothetical scenarios, you can discuss and debate strategies’ efficacy before executing them. By offering more freedom within internal controls, you can encourage innovation and constant growth. Hitesh Bhasin is the CEO of Marketing91 and has over a decade of experience in the marketing field.