The Nature of Business Risk

“You must take risk, both with your own money or with borrowed money. Risk taking is essential to business growth.”

J. Paul Getty

A business risk is a future possibility that may prevent the management from achieving business goals. It is typical business risks facing that are broad and things you can control and things beyond your control such as the global economy.

Business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. It may decrease in demand will result in lesser sales and profits. Business enterprises constantly face two types of risk: Speculative and Pure.

Speculative Risks involves both the possibility of gain and the possibility of loss. It arises due to changes in market conditions whereas unfavorable ones may result in losses. While Pure Risks involves only the possibility of loss or no loss. It is to be noted that pure risks can be insured, speculative risks should be managed by means of financial derivatives, forward trading, and such other financial tools and measures.

It’s generally impossible to achieve business gains without taking on at least some risks. The purpose of risk management isn’t to completely eliminate the risk but to optimize the risk-reward within the bounds of the risk tolerance of your business. Risk management is a continuous, forward-looking process that is an important part of the business and technical management processes.

Business risk usually occurs in one of four ways: Strategic Risk, Compliance Risk, Operational Risk, and Reputational Risk.

Strategic Risk

It arises when the implementations of the business do not go according to the business plan. Every strategy has a risk that can be estimated as part of strategic planning. The following are a few examples of strategic risks.

Compliance Risk

It is the potential for losses and legal penalties due to failure to comply with laws or regulations. A business may fully intend to follow the law but ends up violating regulation due to oversights or error. Here are the following examples of compliance risk.

Operational Risk

It is the chance of a loss due to the day-to-day operations of an organization. It can also result from a break down of processes of the management of exceptions that aren’t handled by standard processes. The following are a few examples of operational risk.

  • Human Error
  • Information Technology
  • Insufficient Processes
  • Process Failure
  • Quality Risk

Reputational Risk

It is the loss of a company’s reputation or community standing might result from product failures, lawsuits or negative publicity.

A Risk Treatment is an action that is taken to manage a risk.

In general, there are four types of risk treatment. It involves developing a range of options for mitigating the risk, assessing those options, and then preparing and implementing action plans.

  1. Avoidance

    Deciding not to proceed with the activity that introduced the unacceptable risk, choosing an alternative less risky approach or process that meets the business objectives.

  2. Reduction

    Implementing a strategy that is designed to reduce the likelihood or consequence of the risk to an acceptable level where elimination is considered to be excessive in terms of time or expense.

  3. Sharing or Transfer

    Implementing a strategy that shares or transfer the risk to another party or parties, such as outsourcing the management of physical assets, developing contracts with service providers or insuring against the risk.

  4. Acceptance

    It is also known as risk retention, making an informed decision that the risk is at an acceptable level or that the cost of the treatment outweighs the benefit.

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