Every type of business, no matter the size, faces all sorts of risks. In larger companies there are departments dedicated to managing risk systematically. However, for smaller business owners it may be necessary to take the time themselves to research and learn about the types of possible risks and how to navigate them. There are five major business risks to look at as a business; strategic, operational, compliance, reputational, and financial. In this article I’m going to discuss just three.
Every successful business forms from an extensive plan. However, things change and the plan that once worked can become dated or completely invalid. Things in business can shift very quickly, and no matter how well thought out your business plan was, within it, exists strategic risk. This means that the strategy of your company can become less effective, thus creating a struggle to reach your goals.
There are numerous causes of this. Things such as a new competitor, a major increase in necessary materials, or the customer demand shifting. When this happens it’s vital that a business learns to adapt, quickly, and to form a new plan that can work within the new parameters.
When it comes to operational risk your own company is the source. Rather than an external cause this stems from a failure in day-to-day operations. There are multiple ways something could go wrong, such as a server outage or another technical failure. Sometimes it’s a human error that causes operational risk. If someone writes the wrong total on a check from your account and it isn’t caught right away, the consequences could be severe. That is an example of not only a person making a mistake, but a process failure, as well.
Anything that interrupts the operations at your company is seen as an operational risk. Sometimes it could be a natural disaster that creates a power outage or a problem with the website that hosts your business. The risk is in the cost of fixing the problem and the money you lose while things aren’t operating correctly. In the long run, operational risks can sometimes cause damage to your reputation.
Of course, there are laws and regulations that apply to your business. However, compliance risk exists because laws and regulations can change over time. You may be following all the rules, but then a new law passes that didn’t apply to you before. Sometimes having to comply with new regulations can slow down business as you adapt and change protocols and processes.
Furthermore, when you expand your business to different states or countries, there are a whole new set of regulations to follow. These rules are not only in the manufacturing of your product, but in accounting, and every other detail that goes into running a business. Following extra regulations that are new to your company can end up costing you money in the end so it’s incredibly important to understand compliance risk.
We just covered three types of risk, however, there are many more. When constructing a plan it is paramount to consider all risks and the impacts that they could have on the success of your business.