A business risk is a potential event or situation that could negatively impact an organization’s ability to achieve its objectives. These risks can arise from a variety of sources, including internal factors such as strategic decisions and external factors such as economic conditions. It is important for businesses to identify and assess the risks they face in order to develop strategies to mitigate or manage them.

There are many different types of business risks, including financial risks, operational risks, strategic risks, and compliance risks. Financial risks include the possibility of financial loss due to factors such as changes in market conditions, credit risk, or liquidity issues. Operational risks refer to the potential for disruptions or failures in business processes, such as supply chain disruptions or IT system failures. Strategic risks involve the potential for misalignment between an organization’s goals and its resources or capabilities. Compliance risks refer to the risk of non-compliance with laws, regulations, and other requirements that may result in fines, legal action, or damage to reputation.

Managing business risk is an ongoing process that involves identifying potential risks, assessing their likelihood and impact, and implementing strategies to mitigate or manage them. This may include implementing controls or procedures to prevent or minimize the occurrence of risky events, as well as developing contingency plans to address potential risks if they do occur. By proactively managing business risks, organizations can better position themselves to achieve their goals and navigate challenges that may arise. The following are common types of business risk.

Competitive Risk
The risk that your competition will gain advantages over you that prevent you from reaching your goals. For example, competitors that have a fundamentally cheaper cost base or a better product.

Economic Risk
The possibility that conditions in the economy will increase your costs or reduce your sales.

Operational Risk
The potential of failures related to the day-to-day operations of an organization such as a customer service process. Some definitions of operational risk claim that it is the result of insufficient or failed processes. However, operational processes that are deemed to be complete and successful also generate risk.

Legal Risk
The chance that new regulations will disrupt your business or that you will incur expenses and losses due to a legal dispute.

Compliance Risk
The chance that you will break laws or regulations. In many cases, a business may fully intend to follow the law but ends up violating regulations due to oversights or errors.

Strategy Risk
The risks associated with a particular strategy.

Reputational Risk
Reputational risk is the chance of losses due to a declining reputation as a result of practices or incidents that are perceived as dishonest, disrespectful or incompetent. The term tends to be used to describe the risk of a serious loss of confidence in an organization rather than a minor decline in reputation.

Program Risk
The risks associated with a particular business program or portfolio of projects.

Project Risk
The risks associated with a project. Risk management of projects is a relatively mature discipline that is enshrined in major project management methodologies.

Innovation Risk
Risk that applies to innovative areas of your business such as product research. Such areas may require adapting your risk management practices to fast paced and relatively high risk activities.

Country Risk
Exposure to the conditions in the countries in which you operate such as political events and the economy.

Quality Risk
The potential that you will fail to meet your quality goals for your products, services and business practices.

Credit Risk
The risk that those who owe you money to fail to pay. For the majority of businesses this is mostly related to accounts receivable risk.

Exchange Rate Risk
The risk that volatility in foreign exchange rates will impact the value of business transactions and assets. Many global businesses have high exposure to a basket of currencies that can add volatility to financial results such as operating margins.

Interest Rate Risk
The risk that changes to interest rates will disrupt your business. For example, interest rates may increase your cost of capital thus impacting your business model and profitability.

Taxation Risk
The potential for new tax laws or interpretations to result in higher than expected taxation. In some cases, new tax laws can completely disrupt the business model of an industry.

Process Risk
The business risks associated with a particular process. Processes tend to be a focus of risk management as reducing risks in core business processes can often yield cost reductions and improved revenue.

Resource Risk
The chance that you will fail to meet business goals due to a lack of resources such as financing or the labor of skilled workers.

Political Risk
The potential for political events and outcomes to impede your business.

Seasonal Risk
A business with revenue that’s concentrated in a single season such as a ski resort.

Reputational risk refers to the potential for damage to an organization’s reputation as a result of its actions or inactions. Reputation is an important asset for businesses, as it can affect customer trust and loyalty, employee morale, and overall financial performance.

There are many factors that can contribute to reputational risk, including negative media coverage, customer complaints, poor quality products or services, ethical breaches, and regulatory violations. These risks can have significant consequences for an organization, as they can damage the organization’s reputation and lead to financial losses.

To effectively manage reputational risk, it is important for organizations to have strong risk management processes in place to identify and assess potential risks to their reputation. This may involve implementing strategies to address customer complaints or negative media coverage, as well as establishing policies and procedures to ensure compliance with regulations and ethical standards.

In conclusion, reputational risk is a critical consideration for businesses, as it can have significant impacts on their reputation and financial performance. By effectively managing reputational risk, organizations can protect their reputation and maintain the trust and loyalty of their customers and employees. The following are a few examples of reputational risks.

Accounting

A company finds an error in its accounting and need to restate its results for the past 2 years. The stock price crashes and the company loses all credibility with investors. They have difficulty raising capital and their cost of capital rises dramatically. The accounting scandal generates waves of negative publicity that result in a decline in sales.

Information Technology

A retailer experiences a security incident in which an attacker publishes their customer’s private information such as name, address and credit card details. They face lawsuits, regulatory inquiries and a severe drop in sales as customers close their accounts or avoid their website.

Quality

An electronics company releases a phone that gains a reputation for being easy to break. Sales and the value of the brand decline. The quality of the next model of phone improves but sales falter because the brand is widely viewed as cheap and unreliable.

Project

An IT company wins a major contract to implement a new pension administration system for a government. The project comes in dramatically late and over budget. As a result, the company is effectively banned from further business with the government as news of the failed project is much talked about amongst the government’s senior administrators and leaders. The government also refuses to make final payment for the project resulting in years of legal wrangling and bad publicity.

Customer Service

A customer’s wheelchair is damaged in luggage handling by an airline. The airline has an inappropriate response that is recorded by the customer. The customer manages to get the public interested in the story and the airline suffers a loss of reputation. Sales on some of its most competitive routes decline and the airline is forced to further discount its prices.

Executive Management

An executive of a fashion company says something insulting about overweight customers while giving a television interview resulting in a customer backlash and declining sales.

Operations

A bank’s systems go down during a stock market crash and its customers can’t trade their stocks for several critical hours. The crash gains much publicity and regulators investigate the bank. The outage becomes a key selling point for competitors who claim to have more stable systems. Customers close their accounts and regulators impose fines.

Risk awareness refers to the extent to which people or organizations are aware of risks and the strategies in place to manage them. This can include understanding the potential consequences of risks, as well as the measures that are in place to mitigate or prevent those risks. Risk awareness is an important aspect of risk management, as it enables individuals and organizations to make informed decisions about how to handle potential risks.

Risk awareness can vary at different levels, including within societies, organizations, groups, and individuals. It is important for organizations to cultivate a culture of risk awareness, as this can help to identify and address potential risks more effectively. This can involve providing training and resources to help people understand risks and risk management strategies, as well as promoting open communication and transparency about risks.

Unawareness
Unawareness of risk such as an individual who purchases a home in an area at high risk for forest fires without any knowledge of this risk.

Risk Identification
Performing the due diligence to identify risks such as a home buyer who researches the air quality in an area before purchasing a house.

Risk Analysis
Analyzing identified risks including factors such as probability, impact and moment of risk.

Optimism Bias
Risk identification and analysis that is performed with an optimism bias. For example, happily assuming that interest rates will go down soon in a financial risk calculation.

Defensive Pessimism
Using defensive pessimism to identify risks and conservative estimates of risk probability and impact.

Motivated Reasoning
Understating or overstating risks due to motivated reasoning. For example, a project manager who is eager to please an executive so they underestimate the risk a project could be late or over budget.

Unknown Risks
A risk that is missed by risk identification due to optimism bias, motivated reasoning or unknown unknowns.

Un-communicated Risk
A risk that is fully documented somewhere that becomes knowledge waste due to a lack of communication.

Communicated Risk
A risk that has been communicated to anyone it can impact.

Dread Risk
Dread risk is a class of risk that people find particularly fearsome or emotional. This tends to result in an overestimate of such risks and a desire to minimize such risks whatever the cost. Awareness of dread risks is typically high but they may be surrounded in popular misperceptions.

Risk Comprehension
A risk may be communicated without many people actually taking interest or fully understanding the risk. Risk comprehension is the degree to which people actually understand a risk including its probability, impact and treatment. This may require over-communicating a risk using storytelling to make the information consumable. For example, a government that communicates the health risks of smoking for many decades using mass media and education systems.

Risk Culture
Risk culture are the norms, expectations and processes that a society, organization or group uses to identify, assess, communicate and manage risk. For example, a manufacturing firm where it is a norm for managers to communicate safety risks on an regular basis such that safety risks and preventative measures are well understood.

Risk culture refers to the values, attitudes, and behaviors related to risk management that are inherent in the culture of an organization. These elements of risk culture are not directly controllable, as they are shaped by the shared experiences and interactions of the group and influenced by factors such as leadership, communication, policy, procedure, and process. Risk culture is an important consideration in effective risk management, as it can impact an organization’s ability to identify, assess, and mitigate risks. The following are common types of risk culture.

Risk Tolerance

The risk taking spirit of an organization or team. In many cases, an organization specifically recruits talent for their risk taking prowess in areas such as innovation, design and sales.

Checks and Balances

A culture of balancing risk taking functions with control functions. This can include structural balances such as risk management teams and lower level balances such as segregation of duties. For example, a bank where no trader can take a risk that goes unobserved by teams with accountability for risk exposure.

Risk Awareness

The degree to which employees are aware of risks that are relevant to their job. For example, factory workers that know the common types of injury and health hazard associated with a production process and are well versed in risk reduction procedures.

Due Diligence

The expectation that employees perform due diligence in managing risk. For example, a firm where it is understood that no project is approved without sufficient risk identification and analysis.

Values

The values of an organization that are relevant to risk such as prioritizing safety, health, environmental and financial sustainability.

Tone at the Top

Leadership that serve as exemplary examples of the values and diligence required to manage risk. Where tone at the top is lacking values may be viewed as flexible.

Participation

The degree to which everyone in an organization is aware of risk and participates to identify and treat risk. An organization with low participation may see risk management consigned to an isolated team that is disconnected from operational realities.

Authority

The distribution of the authority to identify and treat risk. For example, a factory where any worker has authority to stop a production line for a safety issue versus a factory where such authority lies in an executive who is rarely on site. This is an element of culture because an employee may technically have authority that they feel they are unable to use due to norms and expectations.

Accountability

An organization that holds leadership accountable for unmanaged risk. In some cases, leadership is rewarded for risk taking but not penalized for a lack of due diligence in managing risk. This is mostly cultural as organizations simply get in the habit of rewarding successes and hiding failure.

Failure of Imagination

In some cases, an organization takes risk management seriously but has a lack of imagination in identifying risk and risk treatments. This can manifest itself as an obsession over minor risks whereby bigger risks are neglected such as a society that is focused on dread risks while ignoring large scale environmental risks. A failure of imagination can also cause a society or organization to over focus on recent events in identifying risk. For example, a banking regulator that focuses on the managing risks related to the causes of a recent financial crisis without managing emerging threats.

Resilience

Resilience is a society, organization or individual’s ability to withstand stresses. Risk management can be stuck in a reactive mode of identifying emerging risks to a poorly structured and designed system. Alternatively, risk management can drive the fundamental restructuring and redesign of a society or organization to reduce risk. For example, a city can develop an emergency response plan for a flood to reduce risks to life and property. Resilience would call for the city to avoid floods in the first place with techniques such as infrastructure and land use planning.