Businesses tackle nearly all types of risks, some of which can lead to very serious losses or even bankruptcy.
In the investing world, risk indicates the possibility of not receiving a return on an investment. It is an exposure to threat to an investor’s bottom line.
Being in this environment leaves you vulnerable to various risks and therefore it is important to understand what they mean, and how they can affect the company.
In order to have a better understanding with the different types of risk, we must first start by identifying what a business risk is.
Defining Business Risk
A business risk is the possibility that might prevent the company from achieving its goals. It may indicate the business will have lower-than-expected earnings, or suffer a loss rather than acquire profit.
Risks in a corporation are broad and could involve aspects that you can manage, such as your strategy. However, they could also turn out to be something that is beyond your control, like the global economy.
Business risk is affected by several factors, such as sales volume, per-unit cost, input prices, competition, the overall economic climate, and government guidelines.
Business risk typically happens in several different ways:
Strategic Risk
Strategic risk is a result of an unsuccessful execution of a business model or plan. This risk makes the strategy less effective over time and puts the company in a somewhat tight spot to accomplish its defined goals.
Compliance Risk
Risk associated with compliance is those involved in legislative or bureaucratic rules and regulations. This type of risk normally occurs when an industry that is highly managed by laws is unable to recognize the individual obligations and becomes obstinate with state-specific distribution laws.
Operational Risk
Operational risk is simply a sudden failure in a company’s daily operations and can be anything that disrupts main operations in a business. It can be influenced by a number of factors, such as technical difficulties, or can even be caused by the employees or processes.
Operational risk may also arise from external factors, like natural calamity, power failure, or a website host problem.
Financial Risk
Financial risk refers specifically to the company’s money. It indicates the possibility that shareholders will lose money if they invest in a business that currently has a debt to pay, given the cash flow of that group is not enough to fulfill its financial obligations.
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