What Is Business Risk Management?

In business, risk management refers to the process of identifying, monitoring, and managing potential risks to mitigate the negative effect they may have on a company.

The business development and compliance lawyers at Kendall PC offer a comprehensive suite of risk assessment and advisory services. With substantial experience in every aspect of a company’s enterprise, from business formation to corporate governance, we help organizations in a range of highly regulated industries identify, monitor, and minimize or eliminate risks at all levels.

Every business faces potential risk in a number of ways, the most common of which involve the following.

1. Strategic Risk

Successful businesses require comprehensive, well-thought-out business plans. However, business realities can change quickly, and even the best-laid plans can become suddenly outdated.

This is strategic risk. It is the risk that your business’s strategy grows less effective and causes your company to struggle to reach its goals. These risks can develop as technology changes,  new competitors enter the market, customer demands shift, the costs of raw materials spike, or any number of other unexpected changes.

Failure to anticipate or adapt to a strategic risk can jeopardize the vitality, growth, and longevity of a business. Preserving past advantages and position is not sufficient to thrive in today’s complex and dynamic business environment. In a fast-changing world, successful businesses must have the capacity to explore new options, renew their strategies, and grow sustainably.

2. Compliance Risk

Laws and regulations change frequently. Your business may likely face adjusted or additional regulations in the future. As your business expands, you may face corporate compliance issues that didn’t exist or apply to your business before.

For example, new data protection and privacy rules may emerge that require you to enhance your website’s security, or employee safety regulations may require you to invest in new, safer factory equipment. 

These issues involve costs and present a compliance risk to your company. In some cases, a compliance risk can affect the future of your business and become a strategic risk as well. The tobacco industry, for example, has had to adapt to a series of advertising restrictions in the modern landscape of increased social and political pressures and sensitivities.

3. Operational Risk

Operational risk refers to unexpected failures in your company’s daily operations. Operational risks could involve technical failures, like server outages, or they could be linked to your people or processes.

Operational risks can also have more than one cause. For example, perhaps an employee writes the wrong amount on a check, and pays out $200,000 instead of $20,000 from your account. That is both a “people” failure and a “process” failure. The mistake could have been avoided if a more secure payment process had been in place – by perhaps using an electronic system that flags unusual amounts for review, or having another staff member tasked to authorize every major payment.

Sometimes, operational risks can stem from circumstances beyond your control, such as a problem with your website host, a power outage, or a natural disaster.  Anything that disrupts your business’s core operations falls under the category of operational risk.

Not only is there an expense to fixing operational problems, but these issues themselves can directly affect your bottom line, by preventing orders from being delivered to customers, making it impossible to contact you, or causing other problems that result in revenue loss or reputational damage.

4. Financial Risk

While most types of business risks have an inherent financial impact, the category of financial risk refers specifically to the flow of money in and out of your business, and the possibility of a sudden financial loss.

For example, if a significant percentage of your revenue is tied to a single large client, you have a significant financial risk. If that customer leaves, delays payment, or is unable to pay for any reason, your business is in serious trouble.

Carrying substantial debt also increases your financial risk. Perhaps you have a lot of short-term debt that is due in the near future, or interest rates go up suddenly, and you are facing 15 percent interest on a loan instead of the 8 percent you had been paying previously. That could be a considerable unexpected cost for your business, making it a serious financial risk.

Financial risk increases when business is conducted internationally. Exchange rates are in constant flux, meaning that the amount of money your business receives in dollars will change. Your company could potentially earn more sales one month, but actually take in less U.S. currency. 

5. Reputational Risk

Regardless of the industry, your business’s reputation is everything. If your reputation has been damaged, customers will become wary of doing business with you and your revenue will see an immediate loss. Sponsors, advertisers, or other partners may sever ties. Suppliers may start offering less favorable terms. Your employees may feel the impact and decide to leave, and in light of your poor reputation, you may struggle to find eager replacements.

Reputational risk can take the form of negative publicity, a product recall,  a major lawsuit, or high-profile criticism of your products or services. In today’s environment, it doesn’t even take a major event to harm your company’s reputation; damage can simply result from a stream of negative tweets.

Why Is Risk Management Important?

Risk management is important in every organization because it gives businesses the crucial tools needed to identify and deal with potential pitfalls. Moreover, it provides management with the information it needs to make informed decisions and ensure that the business thrives and remains profitable.

Contact Our Business Development and Compliance Lawyers Today

The business development and compliance lawyers at Kendall PC understand your company’s potential risks and obstacles because we’ve been in your shoes. With years of experience in business and legal matters, we can help your company effectively plan for challenges and focus on possibilities.

Contact Kendall PC today online or at (484) 414-4093. We serve small, emerging, and mid-size businesses throughout the United States and across the globe.