17 January 2020 AnkitChadha

Types of Business Risks and How to Manage Them

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Setting up a business has its own perks and charm. Firstly, you need not report to people and can work the way you want. But with being a business owner, you get the responsibility to manage its operations and ensure it grows with time.

One common aspect of owning a business is about facing risks next to every crucial decision you make. Many people end up losing their goal of establishing a business because of various risks. While some others stick to their plans, face uncertainties with confidence and end up leading a successful business of their choice.

If you have recently started your company, it is crucial that you know well about risk-management strategies.

Before moving on to different types of risks, let’s start with a brief definition of risk management.

What is Risk Management?

In business terms, it refers to the process of identifying potential risks timely and mitigating them to minimize their adverse impact on the business.

Take the case of a firm that plans to invest a certain sum into mutual funds. Since the returns from mutual fund investment decisions depend on market volatility, there is a risk involved in it. To control the impact of the risk to the investment, the firm hires fund managers as a part of the financial risk management strategy.

 

Types of Business-related Risks

  1. Strategic Risk

Successful business operations are always based on well-thought strategies. Still, it often happens that the best plans don’t work because of changing market trends or customer behaviour.

This is because of the strategic risk involved.

It refers to the risk where the strategies related to the business fail, making it struggle to achieve goals for a specific period.

Ways to Overcome Strategic Risks

  • Regular competitor analysis
  • Realistic goal setting based on KPIs
  • Timely risk identification
  • Business tolerance analysis
  1. Compliance Risk

There are certain laws and regulations that every business must comply with to continue its operations in a country. These laws and regulations may vary from one industry to the other, and even get changed with time.

Compliance risk is about failing to mitigate Legal and regulatory compliances. It can arise because of regular amendments in the laws or making wrong decisions that fail to adhere to them. For a business owner, this risk can lead to a hefty fine, prosecution or even loss of brand reputation in the market.

 

Basic Compliance Risk Management Practices

  • Business compliance enforcement with the right staffing to make sure professionals are always there to tackle this risk
  • Staying updated about the new laws and regulations and their impact on your business
  • Regular compliance monitoring
  1. Financial Risk

Simply put, this risk is about losing money or paying more than required for the business-related activities. In other words, it refers to the likelihood of a financial loss.

Factors that may result in a financial risk can be internal to the business, such as compensation for a lawsuit filed against directors. Similarly, it can be the result of external stimuli, like not receiving payments from the clients timely.

Financial risk is higher for multi-national companies as the exchange rates can fluctuate at any time.

 

Ways to Mitigate Financial Risk

  • Financial planning
  • Financial risk assessment
  • Perform Quality Control Tests
  • Credit control
  • Strategic investment for business growth

 

Importance of Risk Management

Running a business is full of uncertainties. All the goals of your organization are incomplete without considering the possible risks. It’s because you may lose the path to success if an unexpected risk comes up to shatter the plans and strategies built beforehand.

You can proactively prepare to combat these risks with a well-built risk management plan for your business. We, at TRC Consulting, can help you with risk audit and assessment needs.