Business risk is that which is undertaken in an effort to increase earnings and maximize shareholder (or owner) value. This is the exposure to conditions that, if not managed properly, could negatively impact revenues and profits.
Companies and, in particular, CEOs seek to minimize the risks they face by employing a risk management strategy. Here is where procedures are put in place to not only identify the outstanding risks a corporation faces but also how to alleviate them.
Unfortunately, not all business risks come from outside a company. Upper management can, at times, provide the risk themselves through making poor decisions. Failure to assess and create a risk/reward ratio in each situation means that company's often take action where the potential return is far outweighed by the potential downside loss.
Some factors in business risks that companies often face:
- Consumer preferences, demand, and sales volumes
- Input costs increases such as commodities that go into finished goods
- Competition
- State of the economy and business cycle
- Government and industry regulations
Types of Business Risk
- Strategic - when a company does not follow its own strategic model
- Compliance - risk associated with failure to comply with regulations. This applies to industry that tend to be under the oversight of regulating bodies since as the financial industry.
- Operational - an internal risk that arises when a company does not perform its daily tasks up to the level required.
- Reputation - a loss of reputation due to previous risks coming to fruition. This could affect the brand of the company, reducing customer loyalty.
Much of this can be avoided simply by implementing and following a business plan. This along with a risk management strategy can help a company overcome many of the potential business risks that exist.