Types of risk your business faces
Understand the main types of business risk - what they mean and how they can affect your business
Business risk is a broad category. It applies to any event or circumstance that has the potential to prevent you from achieving your business goals or objectives. Business risk can be internal (such as your strategy) or external (such as the global economy).
Different types of risk should be managed and treated differently. You should understand exactly what type of risk you are facing before you consider how to deal with it.
Types of business risks
The main four types of risk are:
- strategic risk - eg a competitor coming on to the market
- compliance and regulatory risk - eg introduction of new rules or legislation
- financial risk - eg interest rate rise on your business loan or a non-paying customer
- operational risk - eg the breakdown or theft of key equipment
These categories of risks are not rigid and some parts of your business may fall into more than one category. The risks attached to data protection, for example, could be considered when reviewing both your operations and your business' compliance.
Other sources of business risk
Other factors can present certain threats to your business, including:
- environmental risks, such as natural disasters
- political and economic instability in any foreign markets you export goods to
- health and safety risks - see health and safety risk assessment
- commercial risks, including the failure of key suppliers or customers
- workforce risks, eg maintaining sufficient staff numbers and cover, employee safety and up-to-date skills
See how to evaluate business risks.
Importance of understanding risk
Risk is often posed by an event, a change in circumstances or their consequences. A common definition of risk suggests that risk is the effect of uncertainty on achieving or surpassing business objectives. This effect may be positive, negative or a deviation from the expected, for example in forecasts and projections.
Without identifying risks, it is difficult to successfully define your objectives and set out strategies for achieving them. It is best practice to integrate business risk management with your strategy formulation and business planning processes.
Understanding and managing risks allows you to control, and often prevent, the financial, organisational, legal and other ramifications associated with risks.
See more on strategic planning for business growth.