There are a lot of risks that organizations need to take into account when they run a business. This will help them build better relationships with their customers and other stakeholders. It will also increase the revenue generated and help companies achieve their business goals.
This is why managing risks is so important. There are different types of risks that companies need to take into account beforehand so they can run their business smoothly. This means they will always be prepared in case of a threat.
According to a recent study, over 57% of senior-level executives believe that risk and compliance are the biggest risk categories that they are not prepared enough to address. There are different types of business risks that need to be taken care of with an effective risk management platform that will help them along the way.
There are 7 types of Business Risks
1. Economic Risk
The markets are always fluctuating, which means that the market is always changing. The changes can have either a positive impact on a business or negative. The negative impact is an economic risk that organizations need to be prepared for so that the company can still generate revenue despite the economic climate.
This can be done by constantly monitoring economic trends and taking preemptive measures with a risk management framework. Organizations need to focus on building savings so that they can maintain a steady cash flow for their operations. They also need to work on creating a budget that is a part of their main business plan with a low overhead that can last them through all economic cycles.
2. Compliance Risk
The total amount of money that was spent by corporations as penalties for not being compliant to regulations was $59 billion in 2015 in the United States. There are a lot of laws and regulations that business owners need to be compliant with. This requires a lot of vigilance in the organization. A risk management platform can assist with keeping up with the laws, both federal and state-wide so that businesses can save money on penalties.
The internal audit team can handle compliance with all the regulations and policies and keep themselves updated at all times. There needs to be a periodic assessment of the same to protect the organization from compliance risk.
3. Security Risk
There are a lot of threats to the company when it comes to cybersecurity. 32% of the organizations who were a part of a survey conducted in 2017 were victims of a big cyber attack. Cybersecurity and the threat to a company’s data is a very real risk that needs to be addressed.
Businesses need to protect themselves from threats like hacking, data breaches, identity theft, and payment fraud. A breach in the company is bad for the organization’s reputation as well. It affects the company’s image and can lead to a loss in consumer trust. Security solutions also need to be a part of the organization’s enterprise risk management platform so that they can detect any fraudulent activities. Employees also need to be trained so they can detect fraud as well.
4. Financial Risk
Financial risks to a company can include extended credit lines given to different vendors and customers. It can also mean the debt that the organization itself faces. Another financial risk can be the fluctuations in interest rates. To manage these types of risks, organizations need to make adjustments to their own business plans so that the cash flow does not get disrupted and the company doesn’t face any unexpected losses.
If the debt is organizational debt, companies need to work and create a business plan to minimize the debt. They can also choose to expand their clientele and diversify their base.
5. Reputation Risk
Reputation risk is something companies cannot control. One bad review, one product failure, or even some bad press can completely break the organization and cause revenue to plummet. Companies can always prepare for this risk by keeping certain reputation management and public relations strategies at hand. The people in charge of this can regularly monitor the brand image online and offline. One good way to manage the organization’s reputation is to always respond to the customer and address their concerns immediately.
6. Operational Risk
Operational risks can be caused internally or externally causing businesses to lose continuity. It could be technical issues or natural disasters, or human error. The range for operational risks that a company faces is quite wide.
Regardless of the reason for operational failure, companies always need to be prepared for all outcomes to minimize the impact on the business in terms of revenue and functions. This risk can be mitigated by creating an extensive business continuity plan to address any operational issues as well as rigorously training all employees to reduce any human error. This will create a backup system in case of a threat and also ensure proactive ways to mitigate the operational risk.
7. Broad Categories of Risks
Risks can also be categorized into three broad categories for companies to help them create an enterprise-wide risk management plan. They are listed below:
- Preventable Risks: They are internal risks that can be easily controlled and eliminated. Preventable risks include any inappropriate, illegal, or unethical actions from the employees and breakdowns in operational processes.
- Strategy Risks: These are voluntary risks that a company accepts based on the benefits of returns from the strategy. They are well-researched and planned risks and are usually of a higher impact. A risk management system to monitor the risk and mitigate any future risks is a necessity to ensure the success of the strategy.
- External Risks: These risks are beyond the company’s control such as major changes in the economy, natural disasters, and so on. Managing these risks needs a different approach because they are not preventable. This means companies can only prepare to mitigate the impact of the risk. This can be done by identifying all potential external risks and then coming up with a risk management plan to minimize their impact.
Final Thoughts
Companies need to do more than just tailor their risk management strategies and platforms to identify and manage different types of risk. They need to train their employees successfully so they are fully aware of all types of risks and remain compliant. Creating a strong risk culture helps companies combat all types of risk and that can only come when it is an enterprise-wide process and active participation from all their employees.
