Hi Im Brett Quinn Founder and CEO of Strategy X
No business is entirely devoid of risk. Some types of business risks are more consequential than others.
But all of them can cause serious harm if you don’t plan for them at the right time. You regularly have to reassess your business to determine the risks that could stop your business from achieving its goals and then manage those risks to keep your business strategy on track.
Risk planning is the process of identifying, assessing, and managing business risks. In this podcast, we’ll explain:
- Six types of business risks you should plan for.
- I'll provide tips for how to identify business risks.
- And, we’ll discuss strategies for minimizing and mitigating risks.
After listening to this podcast, we trust that you’ll be equipped with the knowledge you need to manage your business risks thoroughly. So let’s begin!
6 Types of Business Risks You Need to Plan for
Business risk is any event(s) that threatens a company’s chances of achieving its goals. These could be expected or unexpected.
Here are six types of business risks that you should proactively plan for right from the start. By identifying these early on and then creating effective risk management strategies to deal with them, you can significantly minimize your business risks.
Economic risk is the chance that changes in the political and macroeconomic conditions of the country will negatively affect your business.
For example, if you have a foreign factory, exchange rate fluctuations are an economic risk. Inflation, unexpected changes in taxes, and political instability are all economic risks for businesses.
Compliance risk is where you might suffer a business loss if you fail to follow compliance standards set by the state or the government. This happens mostly in highly regulated industries, such as the food and beverage industry, or the healthcare, IT, and finance industry.
For example, if you sell user data but don’t notify your users about it according to the regulations, it’s a compliance risk you should fix.
Security risk in business includes cyber security and the security of physical assets such as inventory, transport trucks, and offices. Companies that deal with sensitive and/or confidential data, such as healthcare businesses, have to take security risks much more seriously.
If you operate a store in a politically unstable region or someplace with a high crime rate, then your business will have a higher than the average security risk.
Financial risk is the danger of losing money that you need to run your business. It could be in the form of losing capital, losing investors, or accumulating substantial debt. There are four main categories of financial risk which are: market risk, credit risk, liquidity risk, and operational risk.
A real-world example of this risk is Toy R Us. They closed down after over 70 years of business due to immense debt and lack of investors. That’s a prime example of the damage financial risk can cause when not adequately managed.
Operational risks are threats to your business due to faulty internal systems, procedures, and policies. These are common to all types of businesses: employee errors, fraud, or a failure to do what your business promises all fall in this category.
For example, if a courier service frequently fails to deliver parcels on time or at the correct address, it’s an operational risk that could damage their business.
Reputation risk is the danger of your public image being damaged. For example, multiple bad reviews on an online forum can negatively affect your brand’s image, and that’s regarded as reputation risk.
The increasing use of social media has made it harder and easier to manage this business risk. A bad reputation can have a domino effect and cause a loss of business revenue.
3 Practical Tips for how to Identify Business Risks
The above list of potential business risks can be intimidating, especially for new entreprenures but the good news is that identifying risks is not complicated.
But to efficiently manage risks, you have first to learn to identify them. I am going to start with the number one thing you need to remember from this podcast to help identify business risk.
Don’t think about business risk as just business risk. Think about business risk as the unwanted events you don't want to have happen. For example trees are not a risk, but a tree falling onto your car is a risk and it's also an unwanted event. By titling a risk as an unwanted event, you will also be able to more easily come up with the actions required to minimise or mitigate the unwanted event.
If you focus on establishing a list of unwanted events for each department using the categories we have mentioned previously then you will be well on your way to identifying and managing your business risk.
Here are some other practical tips to get you started.
Do Internal Audits of Your Business
Begin by taking one department of your business and then ask yourself questions relating to the six categories we’ve covered above. For example, if I take my Human Resource Department and then look at the category of Compliance. I may find myself asking if a change may cause our HR department to contravene a regulation set by the Department of Labour. What could be the consequences? Can this be managed?”
Analyze Your Competitors
There might be some risks that are specific to your industry. For that, you can analyze other companies in your industry and look at their losses, types of insurance they have, news releases, lawsuits, and other such data.
You can also hire expert risk management consultants from StrategyX that have experience with risk identification in your niche. That’ll help you calculate your business risks much more accurately.
Leverage Technology to Identify Business Risk
You can use risk management software to identify business risks by analyzing various reference points and multiple locations. Tools can help you gather and analyze data much faster.
Once you’ve identified your business risks, you have to analyze them. That means determining the probability of risks and potential damage scopes, then prioritizing them according to their impact on your business.
StrategyX can help with risk analysis and calculations as well. These can create realistic worst-case scenarios and simulations, thus helping you prioritize business risks.
How to Minimize and Mitigate Business Risk With Risk Planning
After you’ve identified and analyzed the business risks, it’s time to manage them proactively.
Here are a few ways to minimize and mitigate business risks with proper risk planning:
- Establish the actions required to minimise or mitigate the unwanted events
- Formulate operational guidelines and procedures to have contingency plans for uncertain risks like natural disasters, pandemics, or consumer market changes.
- Create policies for managing reputation risks.
- Diversify investments and find third-party investors to mitigate the financial risk.
- Get risk insurance to manage economic, physical, and security risks.
- Train employees, maintain equipment and find competent managers to minimize operational and compliance risks.
Businesses should create risk management strategies right from the start. Proper risk identification and mitigation planning can save you from excessive risk-related costs such as paying insurance premiums and losing sales due to business downtime.
Don't forget to think of risks as unwanted events to give you the best possible chances of identifying and managing business risk.
Also, this process needs to be repeated periodically because risks change and affect the validity of your risk mitigation strategies.
Your risk management plan can be the best one, but it won’t give you the desired results if you fail to implement it. Check out how StrategyX can help you plan and execute your business strategies and strengthen your business against different kinds of risk.