Business risk in a nutshell – what are the types of risks and how to manage them most effectively?
Every business is associated with risks that relate not only to profits but also to the organization’s safety and continuity of operations. The fact that risks can be both internal and external doesn’t help either. So, how can one protect against them? To address this, it is necessary to implement a risk management system that will safeguard against any possible threat, regardless of where it comes from.
Among the most common risks are external ones, as they are beyond our control. These can include economic, political, or natural changes, such as catastrophes. The types of risks an organization may face can vary depending on the nature of its operations, size, structure, and specifics. It’s important to note that organizations face different business risks. This means that each should approach the issue of systematic risk management individually and design it in such a way that it best reflects its characteristics and market environment.
Basic types of risk
The first step in risk management is understanding that there are several types of risks. These can vary depending on the company, so it’s important to be aware of as many, if not all, potential threats as possible.
Tip: Risk is the likelihood of events occurring that could impact a given organization. Typically, this refers to phenomena that negatively affect the functioning of the business.
How to categorize business risk? We can use the simplest division into physical threats, location-related risks, technological risks, strategic risks, and human-related threats.
Business risk for an organization can include:
Physical risk – for example, damage to infrastructure or bodily harm. This could include fire hazards due to faulty software, or chemical and biological threats from exposure to hazardous materials.
Location-related risk – external threats such as floods, hurricanes, or earthquakes are often dependent on the organization’s location.
Technological risk – this relates to various devices used by the organization, including failures and cyberattacks, which can affect not only operational continuity but also the security of the entire organization.
Employee-related risk – this pertains to employees and the associated risks, such as illness, alcohol abuse, physical injuries, and even theft and fraud.
Strategic risk – this refers to initiatives and decisions made at the corporate level.
Management encyclopedias discuss and categorize risks more broadly, but we focused on these selected types. There are also operational, financial, and non-financial risks. The most important thing is to understand the risks the organization is exposed to and apply risk management standards, which will help better identify and analyze business risks.
How to identify and assess risk?
To correctly identify and assess risk, it’s essential to adopt a specific risk management standard. Among the most popular ones are COSO II and ISO 31000.
The most important point in risk assessment is analysis, regardless of whether we are talking about an organization that already has a risk management process in place or one that is just beginning to implement it. Everything related to risk should be analyzed – documentation, procedures, plans, and registers. A good approach would be to divide the tasks according to the risk categories, such as financial risk, technological risk, etc.
Tip: The analysis should be conducted using available tools; these may include employee interviews, internal and external surveys (including customer feedback). The questions asked should help determine whether there are existing risk management processes or if there is a need to develop a risk mitigation plan.
How to counteract risk? There are two main methods of managing business risk: prevention and risk insurance. The best approach is to anticipate risks and implement protective measures, both physical (e.g., storm doors if your business is located in an area prone to strong storms; protective clothing for employees working with hazardous materials), technological (e.g., software updates, creating backups), and educational (e.g., training employees on workplace safety, online security, etc.).
Risk Assessment Software
The risk management process consists of four stages:
Risk Identification
Risk Measurement
Risk Control
Risk Monitoring and Control
This process can be too complex and time-consuming for humans, especially considering that all potential threats need to be managed and controlled. Many companies choose to hire external consultants who not only conduct a risk analysis but also propose the informatization of this area.
An example of a comprehensive risk management tool is eRisk. It helps not only to determine what threats the company is vulnerable to and the likelihood of their occurrence but also to monitor and prevent risks. With this software, entrepreneurs can focus their business energy elsewhere, as it streamlines the risk management process and reduces the time and effort needed to control potential risks.
Check the offer: Risk Management with PBSG.
Remember, there is no universal approach to business risk management. Mitigating various types of business risks must be a deliberate, ongoing process that requires constant vigilance. The way you manage risk entirely depends on the type of risk you’re dealing with. That’s why it’s best to entrust this matter to professionals who will protect your business from risk.