Types of Business Risk with Description
A future possibility which may create a hindrance in your path of attaining a business goal is called business risk. The risks which a business typically faces are broad and consist of both the controllable things such as business strategy and the uncontrollable things such as the economic conditions. Risk and reward have a strong relationship. Generally, it will be quite impossible for you to attain gains in business without taking any risk at all. So, the motive of risk management is not the total elimination of risk rather the optimization of the ratio of risk and reward within a tolerable level.
There are different types of risk in business which are described below.
Economic risk is the probability that the economic conditions will expand your costs or decrease your sales. Such as an economic recession.
The risk which will hinder you from achieving your goals and your competitor will obtain superiority over you is called competitive risk. Such as your competition that basically has a better product or a cheaper cost base.
Legal risk is the possibility that new laws or regulations will hinder your business’s smooth flow or that you will suffer losses or bear expenses because of a legal dispute.
Operational risks are the risks of failures related to the daily operations of a business organization, e.g. customer care operations and the like. According to some definitions of this risk operational risk is the outcome of failed or insufficient processes. But operational processes which are thought to be perfect and successful can also create risk.
The risks related to a specific strategy is called strategic risk. These risks are caused directly from functioning within a certain industry at a certain time. So, changing customer preferences or changing technologies can turn your product-line outdated. Similarly, other extreme market forces may push your company to danger. You must put measures accordingly to continuously ask for feedback, so you can detect changes quickly and thus, can prevent strategic risk.
Read: Types of Financial Statements with Explanation
The probability of breaking laws or regulations is called compliance risk. There are many cases where a business’s full intention is to follow the regulations but unintentionally violates laws due to errors or oversights. Laws are everchanging and there is always a possibility of facing additional regulations in the coming time. With the expansion of your business, you should comply with the new laws which were not applicable to you earlier.
For example, you run a consumer goods company in Dhaka. You sell the products in departmental stores across Bangladesh. Your business is going so fine that you decide to expand the business to India and start selling there. The idea is good, but you will incur compliance risk. India has its own rules for food safety, labeling and others. If you start an Indian subsidiary, you will have to comply with local tax and accounting rules to handle everything well.
You will incur significant costs for your business to meet all these extra regulatory requirements. Again, if you don’t expand your business geographically, just add a new product line, you will incur compliance risk.
The risks related to a specific portfolio of projects or a specific business program are called program risk.
The probability of losses caused by a declining reputation because of incidents or practices which are dishonest, incompetent or disrespectful is called reputational risk. This risk describes a significant loss of trust upon a company rather than a minimal decline in reputation.
Innovative risks are risks associated with your business’s innovative areas e.g. product research. You should adopt suitable risk management techniques for fast-paced and higher risk activities.
Project risks are risks related to a project. Project risk management is a far more mature discipline which is incorporated in risks of major project management.
The probability of failing to meet the desired quality level for your business practices, products and services is called quality risk.
Country risk is the risk of being exposed to the situations in the countries of your business’s operation e.g. the economy and the political events.
Exchange Rate Risk
The risk of fluctuations in foreign exchange rates impacting the business transactions’ and business assets’ value is called exchange rate risk. Many businesses operating globally is highly exposed to some currencies which can result in volatile financial results e.g. operating margins.
Credit risk is the probability of failure of the people to pay the money back who are indebted to you. For most businesses, this risk is associated with the risk of accounts receivable.
The risk that new tax interpretations or laws will result in higher taxation than expected is called taxation risk. Sometimes new tax laws may fully disrupt the business of any industry.
Interest Rate Risk
Interest rate risk is the probability that fluctuations in interest rates will interrupt your business. For instance, interest rates can expand the cost of capital which may impact your business and its profitability.
The probability of failure to meet the goals of your business because of a lack of resources e.g. finance, skilled labor, sound management and the like.
Process risks are risks related to a specific process. A major focus of risk management is on processes because risk reduction in central business processes sometimes may reduce costs and improve revenue.
A business generating revenue concentrating on a specific season can face seasonal risk. For example, a ski resort, a sweater manufacturer, etc. which generate revenue only in winter. Seasonal risk can be minimized through diversification such as a ski resort can develop a water park which may attract tourists during summer.
The risk that political conditions, events or decisions will cause losses is called political risk. Politics has an impact on everything like taxes or interest rates. Again, there are dramatical impacts of political events on the cost of performing business or the prices of assets. Economics, political instability, legislation, taxes, trade barriers are some of the political risks.