Understanding the risks that could effect your business January 15, 2018

There are many different types of business risks. Risks can be internal and external to your business. They can also directly or indirectly effect your business's ability to operate. Risks can be hazard-based (e.g. chemical spills), uncertainty-based (e.g. natural disasters) or associated with opportunities (e.g. taking them up or ignoring them).

The main types of risk to consider are:

Strategic

Strategic risk management can be defined as the process of identifying, assessing and managing the risk in the organisation's business strategy including taking swift action when risks are realised.

SRM involves evaluating how a wide range of possible events and scenarios will effect the strategy and its execution and the ultimate impact on the company's value. “Risk” is all-inclusive, encompassing everything from product innovation risk and market risk to supply chain risk and reputational risk. A primary component and foundation of enterprise risk management, SRM requires the organisation to define tolerable levels of risk as a guide for strategic decision-making. It is a continual process that should be embedded in strategy setting and strategy execution.

Compliance

Compliance risk is exposure to legal penalties, financial forfeiture and material loss an organization faces when it fails to act in accordance with industry laws and regulations, internal policies or prescribed best practices.

Financial

Financial risk is the possibility that shareholders will lose money when they invest in a company that has debt, if the company's cash flow proves inadequate to meet its financial obligations. When a company uses debt financing, its creditors are repaid before its shareholders if the company becomes insolvent. Financial risk also refers to the possibility of a corporation or government defaulting on its bonds, which would cause those bondholders to lose money.

Operational

Operational risk is the prospect of loss resulting from inadequate or failed procedures, systems or policies.

Employee errors
Systems failures
Fraud or other criminal activity
Any event that disrupts business processes

Most organisations accept that their people and processes will naturally incur errors and contribute to ineffective operations. In evaluating operational risk, practical remedial steps should be emphasised in order to eliminate exposures and ensure successful responses.

Poor operational risk management can hurt an organisation's reputation and cause financial damage. How much loss an organisation is prepared to accept, combined with the cost of correcting those errors, determines the organisation's risk appetite.

These categories are not rigid and some parts of your business may fall into more than one category.

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