4 Main Types of Business Risks – Explained

Introduction

Business Risks can be defined as factors that a business faces because of which there a risk of the business is failing, or losing out on its profitability.

It is very crucial for businesses to be aware of these risks because they need to create a proper hedging strategy that can help them with these particular risks, in order to ensure that they are able to sustain themselves financially in the increasingly competitive and complex business dynamic of the modern-day and age.

Therefore, it is imperative for businesses to take note of these risks in order to create a strategy that revolves around minimizing these risks to a maximum level.

Furthermore, it also needs to be understood that underlying business risks tend to be influenced by a couple of factors.

These factors mainly include consumer preferences, the existing cost structure of the business, competition in the relevant industry, the overall macroeconomic climate in the region, as well as different government regulations.

Types of Business Risks

In addition to the basic business risks that have been mentioned above, it can be seen that there are a couple of other business risks too that need to be incorporated in order to get a better understanding about the risks that are relevant to the business cycle today.

1) Strategic Risks

As far as strategic risks are concerned, it can be seen that strategic risks can be defined as the risks that are incurred because of the potential risk of the company’s strategy losing its effectiveness and failing to deliver the required results.

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In the existing volatile environment, it is highly important for businesses to be able to take their strategy in a very serious manner so that they can be as agile and adaptive as possible.

Strategic Risks basically hints at the inability of the company to deliver the required results, because of which they can fail. The reason for failure, in this regard, is for the strategy not being well-grounded enough to deliver results.

2) Compliance Risk

Compliance Risk talks about the inability of the company to comply with the existing rules and regulations.

As a result of failure to abide by the laws and legislations of the place the business is working in, businesses can face significant litigation costs, which would take a dip in their profitability.

In some extreme cases, businesses might be forced to shut down as a result of their defiance of the legislation.

3) Operational Risk

Operational Risk refers to businesses being exposed to a risk of failure in their day to day operational activities. This can hamper the ability of the company to deliver to their customers.

If this is a persistent issue, this might severely affect the target market, as businesses would eventually lose their customers. This can result when companies fail to deliver on the quality parameters they promised to deliver on.

In this regard, they can often face severe loss of reputation, and that can eventually force them out of business if this is not rectified in due time.

4) Financial Risk

Financial Risk mainly relates to the company facing financial losses as a result of their policies (mainly financial policies).

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In the case of such a financial risk, it can be seen that these risks mainly result in companies facing a severe decline as a result of financial policies.

In this regard, there are certain aspects which can be regarded as increasingly important financial considerations based on inability of a significant debtor defaulting on his payment.

Alternatively, a business can also face a financial risk in the circumstance where organizations conduct business internationally.

In this case, their exposure to exchange rate risk is quite phenomenal, and it eventually results in companies being exposed to volatility in the international exchange rate market.

Conclusion

Therefore, there is no doubt to the fact that business risks are quite substantial, and should be taken into account by all companies, regardless of their size and structure. This is essential because of the fact that all businesses tend to face these business risks, regardless of their size.

The only thing that differs is the intensity with which they are exposed to the given risk. In this regard, it is increasingly important to consider the fact that these business risks need to be mitigated in order to ensure that businesses are able to create an effective hedging strategy against these business risks, in order to sustain themselves in the increasingly competitive business environment.

Retention of profitability and survival tends to be the primitive motive behind identification and hedging against these risks.

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