Companies face a variety of business risks that can threaten their ability to achieve their goals if these risks are not monitored and navigated properly. Business risks include everything from financial and reputational risks to compliance and cybersecurity risks, all of which can seriously impact a company’s strategic plans if business leaders don’t take action to mitigate them. Show
Yet successful business owners can’t reasonably tip-toe around every risk. Attempting to avoid all risks at all costs can hinder a company's growth. A certain amount of calculated risk is necessary for a company to take chances that allow it to stand out in the marketplace, outperform competitors, win over customers, and earn profits. What’s most important is that business owners are aware of the typical risks that could shake up their operations. That way, they can aim to prevent them and minimize their impact if they occur. Here’s a look at common business risks for business leaders to consider as they protect the health of their companies. Financial RisksCompanies must generate sufficient cash flow to make interest payments on loans and to meet other debt-related obligations on time. Financial risk refers to the flow of money in the business and the possibility of a sudden financial loss. A company may be at financial risk if it doesn’t have enough cash to properly manage its debt payments and becomes delinquent on its loans. Businesses with relatively higher levels of debt financing are considered at higher financial risk, since lenders often see them as having a greater chance of not meeting payment obligations and becoming insolvent. Types of financial risk include:
Ideas for managing financial risks:
If a company relies on just one or a handful clients for most of its revenue, its financial risk could be significant if one or a few stop using its services. Businesses may want to diversify their customer base so the loss of one client wouldn’t devastate their bottom line. Compliance and Legal RisksA company faces compliance or legal risks if it violates government laws or regulatory standards. A business may face compliance risk, for example, if it fails to follow environmental regulations, such as meeting certain pollution and hazardous waste standards. In certain industries, such as financial services, laws were enacted to protect consumers, so both small and large banks must comply with a variety of lending and financial disclosure regulations. Companies can also expose themselves to legal risks by breaking contracts with suppliers and other partners, which could subject them to lawsuits. Employers are also legally responsible for providing safe and healthy working conditions for their employees, and different industries may need to follow a variety of safety requirements. Plus, companies need to comply with equal opportunity laws that make it illegal for them to discriminate against a job applicant or employee. Companies that violate laws and regulatory standards are subject to a variety of punishments, including fines against the company, prison time for executives, and reputation damage with customers and other stakeholders. Ideas for managing compliance and legal risks:
Cybersecurity RisksAs more businesses use online and mobile channels for sales and e-commerce payments, as well as for collecting and storing customer data, they are exposed to greater opportunities for hacking, creating security risks for companies and their stakeholders. Both employees and customers expect companies to protect their personal and financial information, but despite ongoing efforts to keep this information safe, companies have experienced data breaches, identity theft, and payment fraud incidents. When these incidents do happen, consumer confidence and trust in companies can take a dive. Not only do security breaches threaten a company’s reputation, but the company is sometimes financially liable for damages. Ideas for managing security risks:
Operational RisksA business is considered to have operational risk when its day-to-day activities threaten to decrease profits. Operational risks can result from employee errors, such as undercharging customers. Additionally, a natural disaster like a tornado, hurricane, or flood might damage a company’s buildings or other physical assets, disrupting its daily operations. Of course, one of the starkest examples of negative impacts to companies' production and supply chain operations is the Coronavirus pandemic. In an April 2022 Small Business Pulse Survey conducted by the U.S. Census Bureau, roughly 65 percent respondents reported that the pandemic had either a moderate negative effect or a large negative effect on their business. Ideas for managing operational risks:
Reputational RisksReputational risk can include a lawsuit against a company, a product safety recall, negative publicity, and negative reviews online from customers. Companies that suffer reputation damage can even see an immediate loss of revenue, as customers take their business elsewhere. Companies may experience additional impacts, including losing employees, suppliers, and other partners. Ideas for managing reputational risks:
The TakeawayBusiness owners face a variety of business risks, including financial, compliance, cybersecurity, operational, and reputational. No company can avoid all risks, but they can take proactive measures to prepare without letting that stop them from seizing opportunities for growth. Photo: Getty Images Frequently Asked Questions1. What are the main types of business risks? There are five main types of business risks: 2. What are common examples of business risks? • Financial risks can include
cash flow problems, inability to meet financial obligations, or taking on too much debt. 3. How can you identify a business risk? There are a few key ways to identify business risks: What is the purpose of a company's strategic vision?A strategic vision delineates management's aspirations for the company's future, providing a panoramic view of “where we are going” and a convincing rationale for why this makes good business sense.
What are the obligations of a company's board of directors quizlet?A company's board of directors has the following four important obligations to fulfill: (1) oversee the company's financial accounting and financial reporting practices; (2) critically appraise the company's direction, strategy, and business approaches; (3) evaluate the caliber of senior executives' strategic ...
Why should the mission statement not focus on the company's goal of making a profit quizlet?-The mission statement should define "who we are and what we do." -Making a profit will actually distract the company from achieving worthwhile goals.
What is a stretch objective quizlet?stretch objectives. set performance targets high enough to stretch an organization to perform at its full potential and deliver the best possible results.
|