What is Business Risk? The term business risks simply refers to the likelihood of a particular commercial enterprise making insufficient profits because of various uncertainties – such as: increases in consumer demands, changes in consumer tastes, changing attitudes of consumers, strikes etc. The chances of all these things happening are unpredictable but it is possible to minimize losses due to them by acting promptly. In order to do this, businesses must take advantage of the tools and techniques that are available to assess, evaluate and minimize risk.
A business risk management strategy is a set of plans or techniques designed to mitigate risks (by) reducing the frequency and magnitude of losses. For instance, if there is high customer demand, a low profitability level, or if the industry is experiencing competitive challenges, then those factors could lead to financial losses, which will eventually affect the market share or profit margins of the enterprise. Those enterprises that fail to prepare a well-planned strategic risk management strategy are likely to suffer financial difficulties in the future – either their customers stop buying, they default on debts, they are taken over by other firms, or they are reduced in size and sales force. On the other hand, enterprises that adopt a well-planned strategy can avoid problems in the future and maximize their profits. It is also necessary to develop the right organizational and financial structure for the enterprise in order to meet the challenges of uncertainty. These tools and techniques, in addition to effective management policies, could lower the risks faced by an enterprise, thus increasing its capacity to grow and prosper and thereby helping it to build its brand image and reputation in the market.
If you have been dealing with financial risk management, then you probably understand what business risk is all about. However, not many people are aware of the different types of business risks that an organization might be exposed to. To make things worse, business news nowadays is full of stories about business disasters such as the recent bankruptcy of Enron wherein a massive number of American companies went bankrupt. To know more about business risk and how it can affect your business, take the time to read this article. It will surely give you some insights regarding business risk and its different types.
Strategic risks are caused by the organization’s inability to achieve certain objectives. It can either be short-term (such as decreasing inventory turnover or increasing gross profit) or long-term (such as increasing customer satisfaction or lowering cost). Most organizations experience some degree of strategic risk, but there are also instances when strategic risk is considered acute, especially when it is related to their balance sheet. When a company experiences a major change in its balance sheet, this usually indicates that the business will run into financial problems, with negative results for its share price, if it is unable to successfully manage the change in the balance sheet. This is where a solid business risk management strategy comes into play.
Legal compliance risk is the other type of business risk which most organizations encounter. Legal compliance risk is primarily concerned with issues that are addressed within the various laws, regulations, and rules set forth by various government agencies that regulate business activities. These laws and regulations can either affect the way an organization does business or even the way in which it conducts its internal operations. A legal risk assessment can help organizations identify the areas which they need to focus on and overcome to successfully comply with these laws and regulations. For instance, an organization can face compliance risk if it begins to sell products which are not allowed in certain countries, or if it begins to use abusive chemicals or if it engages in any other activity which could be considered illegal. To reduce these risks, organizations will have to carefully evaluate and prepare their strategies and operational plans in order to avoid running afoul of the various legal regulations which surround them.
Operations risk is closely related to legal compliance risk, as it pertains to the way in which an organization organizes and operates its internal operations. Most organizations develop a formal operations procedure which spells out the procedures, policies, and risk management protocols which they follow in order to ensure that they are in line with all applicable laws and regulations. However, organizations may also find themselves facing operational risk from time to time. For instance, if they begin to purchase a large amount of supplies from a single vendor who is known to distribute products with a higher risk of failure, or if they begin to use outdated technology without changing this, they may be in violation of the various laws that govern health care and business practices.
In many instances, organizations will face strategic risk from external factors such as competitors or government officials. These events may either threaten an organization’s existence or its core principles. If the organization does not respond appropriately, the results can be devastating as a result of catastrophic losses. The methods used by the management team to address and minimize these threats are known as strategy and planning.
The three main areas that are most prone to risk and the techniques that organizations use to manage them are described below:
There are many legal solutions available for organizations that face internal as well as external risk. For example, there are liability protection, securities, commercial property, and litigation law firms which are able to provide sound legal advice to help businesses meet their legal needs. A good option is to consult with a lawyer who has a good reputation for solving business risk management problems. Consulting a lawyer will give you a clear picture of your liabilities as well as your ability to control these liabilities. This will enable you to find the right solution that best suits your circumstances.
There are also a number of strategies to manage business risk. One of these strategies is through the creation of a strategic risk management plan, which is designed to help businesses make the most of their risk exposure. Once the strategic risk management plan is created, it must be implemented so that the business can successfully mitigate risk exposure. The most effective strategy is to implement a solid risk management plan that effectively controls and manages all the risks which are facing the business.
Among the tools and techniques that could be used for managing risks are the following: internal control measures, audit management, assurance programs, probabilistic risk management, and operational risk management. Among these, internal control measures are the most important since they are designed to ensure the protection of the assets and the financial health of the company. Management of audit risk and assurance programs helps enterprises to mitigate the risks arising from their failure to meet performance requirements. The other three risk management tools and techniques can be used for increasing the company’s resilience to external risks. Thus, these techniques can contribute significantly toward achieving the goals of strategic and operational risk management.