Whatever the risk encountered by an organization, it must know how to understand it, evaluate it, and manage it, which is the mission of the manager. To do this, he must know the different business risk management methods such as root cause analysis or the 5 “Whys”. Thanks to these methods, he will increase the performance and efficiency of his business.
What is a business risk?
A risk is an event that can harm the success of the company and have serious consequences on its operation. Financial risks or strategic risks, companies face many threats such as accidents, natural disasters, IT security threats, non-compliance with legal responsibility, management errors, economic slowdown, price fluctuations in raw materials, epidemics, or damage to brand reputation, but these are just a few examples.
Risk refers to an action or event that prevents the company from achieving the objectives it has previously set. It may then encounter difficulties in implementing its business strategy, the risk also being able to impact the financial solidity of the company.
A company’s management team is regularly responsible for making decisions about how to grow and operate the company. However, every decision regarding a new product offering, a new target market, or a potential merger, for example, has the potential to fail and jeopardize the company’s ability to operate.
Multifaceted factors can influence business risk. For example, if a company is unable to produce the units needed to make a profit, the business risk is considerable. Although fixed expenses are normally known upfront, there are costs that a business cannot avoid – for example, electricity costs, rent, overheads, labor, and shipping costs. raw materials, etc.
Risk in business is therefore the danger hovering over an activity or a situation, a hazard, or a probable event that could lead to damage. Risk refers to known, identically repeated, and measurable events, but, for example, ISO 31000 takes uncertainty into account. Uncertainty refers to unknown and impossible events, such as a new market, an epidemic, a war, or a new technology.
You should also know that there are so-called “favorable” risks that correspond to an opportunity. Quality departments also use this term a lot, allowing them to analyze their company’s strengths and weaknesses. A favorable risk is therefore a benefit for the company.
The different types of risks
There are different categories of risk, but these categories are not rigid. Indeed, certain risks can fall into several categories, such as data protection risks, which are part of operational risks and risks related to compliance.
Strategic risks are risks associated with operating within a particular industry. They include risks from merger and acquisition activity, industry changes, research and development, internal customer change, or demand. For example, the risk may be the appearance of new competitors on the market or the actions of unscrupulous competitors.
Compliance risks refer to risks related to the need to comply with laws and regulations or a need to act in ways expected by investors or customers such as ensuring appropriate corporate governance. The company must, in fact, respect regulatory compliance. It must therefore, for example, introduce new health and safety laws. If a company cannot follow these standards or regulations, it is difficult for it to exist and remain sustainable.
Financial risks are associated with the company’s financial structure, transactions, and financial systems. These risks can be an internal or external event that threatens the company’s value in the financial markets. For example, a customer refuses to evade paying his invoices. It may also be an increase in interest charges relating to a business loan. It is also possible to take the example of tobacco and asbestos which are less marketed due to the law and legislation, which causes a financial loss for companies. You can hire a risk advisory expert to find out the reasons behind the financial risks to eliminate them.
Operational risks are associated with a company’s operational and administrative procedures. They include the supply chain, recruitment, accounting control, the information system, regulation, or the composition of the board of directors. For example, if a business process fails or a machine stops working, the company will not be able to produce its products. Consequently, the company will not be able to sell its production and will suffer a loss of turnover.
While strategic risk is quite difficult to resolve, operational risk can be resolved by replacing machines or providing the right resources to start the business process.
Digital and IT risks refer to losses and damages that occur as a result of the exploitation of a vulnerability in hardware or software. For example, it could be a cyber-attack that threatens the normal functioning of the company. You should know that security vulnerabilities are listed in the public CVE (Common Vulnerabilities and Exposures) list.
Environmental risks refer to damage caused to the environment by the company. You should know that all companies have an environmental responsibility. If they do not respect this, they must therefore pay to repair the damage. Many companies face this type of risk, for example, chemical factories. They must therefore cover the costs incurred for the damage and even finance preventive actions to avoid a recurrence of these environmental risks.
Climatic and natural hazards can be caused by weather events such as bad weather. For example, floods, storms, or storms can be violent and devastating and represent a real danger for businesses. They threaten employees and infrastructure and damage premises and equipment.
Companies and their employees may also encounter health risks. These risks are controlled by the authorities, but also sometimes by private actors. These risks include contamination problems, but also technological problems, and natural risks. They become a health disaster when left unchecked.
For example, the COVID-19 crisis is a health risk that businesses have had to face recently. There are many possible cases of contamination, for example by viruses, parasites, bacteria, hydrocarbons, heavy metals, radiation, or other various and varied exposures.
