business risk – Bada Business

Business Risks: 5 Types of Risks All Firms Should Know to Avoid Losses

All the businesses are prone to certain risks. Various uncertainties related to the micro and macro environment in which a firm operates pose as a constant threat to the enterprise. Business risk is the exposure an organisation has to elements that can potentially lower its profits or lead to firm’s failure. Anything that threatens a company’s ability to achieve its financial goals is considered a business risk. There are many factors that can converge to create business risk. Though certain risks cab be mitigated by continuous analysis of the business environment, complete elimination of the uncertainties is not possible.

Business risk is influenced by a number of different factors including, consumer preferences, demand, and sales volumes, per-unit price and input costs, competition, legal and political factors, technology among others. Here are five types of business risks every business should be aware about –

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Economic Risk

One of the biggest risks a business faces is the economic risks. If the economy does not perform well or goes in recession, all the sectors will suffer. An economic slowdown directs hits the profitability and productivity of the businesses and even lead to closure of various firms. It’s important to watch changes and trends to potentially identify and plan for an economic downturn. To deal with a sudden economic downfall, all the businesses should keep funds in reserves and maintain a steady flow of income. Firms should also be careful while planning budgetary expenditures.

Compliance or Legal Risk

Another constant looming risk is the compliance or legal risks. Governments have the power to change various legal provisions overnight, including introduction of a new tax, scrapping an old licence, revising the existing regulation rules. Business owners face an abundance of laws and regulations to comply with. The businesses should carefully follow the existing laws and keep a watch on any new regulation by the government. A failure in complying with all the rules might even results in closing of the company.

Operational Risk

Not all the risks arise because of external factors, sometimes internal uncertainties can also lead to disruption in the business’ functioning. Such risk which originates within the organisation and tends to disrupt the business operations is known as the Operational Risk. It might involve a server outage caused by technical problems, people, or power cut. Many operational risks are also people-related. An employee might make mistakes that cost time and money. In order to reduce such risks, the business should resort to proper planning and continuous assessment.

Competitive Risk

Another type of risk that all the businesses face is the competitive risk, the advantages competitors gain over the firm. In order to survive in the market, all the firms should have an edge over the competitors. A firm faces continuous challenges from its competitors. It should be careful about how its rival firms are performing and garb the market opportunities before others, gaining the first mover advantages.

Goodwill/Reputation Risk

Goodwill aids in long term survival of the business. A positive image of the firm helps in growth and expansion. However, one wrong decision or spread of a rumour about the firm and the entire reputation is lost. If the public conceive a negative image about the firm it will directly impact its profitability, sales and valuation.

Risk and uncertainties are a part of the business cycles, however firms should try and mitigate the potential loss arising from various risks as much as possible to stay afloat in the market. Knowing and being aware of the several risks is the first step in ensuring a healthy business.

How to Avoid the Risks faced by Small Businesses

How can a small business reduce internal and external risks?
Our economy is largely dependent on small businesses as these companies work in producing services or raw material for big brands. Running a business is not a child’s play. A lot of hard work and sweat goes into building a secure business entity. There can be many risks in business, such as the risk of capital, the right manpower, economic slowdown, and even natural calamity. So before setting up a business, every company should pen down the proper planning of their workflow, which affects overall operations because of these external and internal risks. Not doing this could bring the business to a gradual decline.

Factors that affect small businesses to survive in the market:

Internal Risk
Internal Risk is controllable in nature which derives from an improper execution of business plans. There are always some factors leading to internal risk in any company, so how can one overcome it?
1. Risk of Capital
For a small business entity, it is not easy to survive in a highly competitive environment. The risk of going out of business is always at stake.

Regular in-flow of funds either quarterly or half-yearly can help the business be ready for any unfortunate situations and to overcome the risk of losing capital.

2. Right Manpower
Finding the right person for the right job is a lifeline for all business ventures. If the key employees leave or cannot perform their duties, then your business could fail, particularly in small businesses that cannot offer attractive salaries and job stability.

Small businesses don’t require highly experienced people on the job and there is always a group of people who want to work for companies where they can show their creativity and passion. The right HR team can help businesses overcome the risk of finding the right people.

3. Product/Service Quality Issue
Small businesses cannot offer a low price for their products or services due to high operating costs. Any compromise in quality can lead to a setback for the business.

To overcome business risks due to quality issues, a strong QC (Quality Check) team should be kept in place to make sure that everything goes as per plan.

4. Debt
Debt can make the deepest holes in the balance sheet of small businesses. It should be very minimal if not zero, to keep going with their operations.

Instead, they should focus more on profitability than on volume, which helps them to avoid taking any loans from external sources and create risk in business.

5. Cybersecurity risk
The best organizations today can bear the cost of the best guards. As these bigger ventures show signs of improvement at protecting against cybercrime, cybercriminals threaten to descend on the business’s natural way of life and also tends to focus on private ventures who can’t manage the cost of complex security systems. Today, private ventures are the favored focus for cybercriminals.

At the point when income is restricted, spending on security seems like a risk in business. Acquiring cyber risk and information break protection inclusion, such as taking safeguarding measures to diminish Internet-based exposures can help you avoid falling prey to cybercriminals.

6. Legal risk
Numerous first-time entrepreneurs might not have the skill to assess everything about each agreement they need to sign or they may ignore something accidentally. These oversights can prompt issues in the near future. Legitimate cost protection can spare you from any extra or unforeseen dangers from providers or clients. This straightforward and simple choice can eventually help you save legal expenses and money spent on protection inclusion.

Protection or insurance is a key part of every small business strategy. By understanding these dangers for independent ventures, you can make strides at an early stage to deal with the above dangers and secure your property and assets against catastrophes.

External Risks

Businesses have no control over external business risk factors. Small businesses should keep this in mind at the time of planning and setting objectives to avoid the risk in business.
1. Competition
Industry leaders can play with small businesses to keep them out by eating their share of the market. They can reduce the prices of their products or services to make it more affordable for customers; any small business cannot afford to get into a price fight with these big giants.

To overcome this risk in business, one should always have a USP (Unique Selling Proposition), which is not possible for competitors to match.

2. Government Policy
Any change in Government policy can shut the small business venture overnight. An automobile engine part manufacturer won’t be getting any business if the government bans the kind of engine this business was manufacturing.

It is not easy, but diversification in more than one industry can help overcome the risk of change in government policy.

3. Economic Slowdown
Nobody was prepared for COVID-19. After this outbreak, the most affected industries were Hospitality and Travel. Consumption became very low in these cases and when there is no or very less demand, businesses cannot make any revenues.

To overcome these risks in businesses, one should always keep emergency funds ready for bad times.

4. Natural Calamity
Accidental fires, earthquakes, and tsunamis can happen without any warning. At times, the losses could be beyond recovery if a small business entity has not prepared itself for these situations.

A good insurance plan can help to avoid any such losses.

Therefore, in every business which faces risk, there is always a silver lining that offers hope and helps you to overcome it. One should be motivated and must have a positive attitude towards every situation that can impact you in the future.