How do Companies Identify Business Risk?

Risky-Business-Leadership-Kai-Roer

In each stage of the business life cycle, companies face both internal and external risks that can have detrimental effects on operations. For startup businesses and established organizations, the ability to identify which risks pose a threat to successful operations is a key component of strategic business planning. Business risks are identified using a myriad of methods, but each identifying strategy relies on a comprehensive analysis of specific business activities that could present challenges to the company. Under most business models, organizations face preventable, strategic and external threats that can be managed through acceptance, transfer, reduction or elimination.

Preventable Risks

All organizations face certain internal risks that are preventable when identified correctly. Preventable risks include the unethical or illegal acts of company management or employees, also known as human risk, or a breakdown in operational systems or processes. Companies establish a tolerance level for each type of internal risk as errors are likely to occur at some point in the business life cycle. However, strong corporate governance policies and continuous monitoring of operational procedures assist in reducing or eliminating the occurrence of preventable risks within an organization.

Strategic Risks

Unlike internal risks, strategy risks are not altogether undesirable. Financial institutions such as banks or credit unions take on strategy risk through lending to consumers, while pharmaceutical companies are exposed to strategy risk through research and development of a new drug. Each of these strategy-related risks are inherent to an organization’s business objectives. When structured efficiently, acceptance of strategy risks can create highly profitable operations.

Companies exposed to a great deal of strategy risk can mitigate the potential for negative consequences by creating and maintaining infrastructures that support high-risk projects. A system established to control the financial hardship that occurs when a risky venture fails often includes diversification of current projects, strong cash flow or the ability to finance new projects in an affordable way, and a comprehensive process to review and analyze potential ventures based on future return on investment.

External Risks

All businesses face risks over which they have little to no control. External risks include changes in domestic and international economic environments, shifts in political landscapes, and natural disasters. While some organizations are more exposed to certain external risks than others, all companies can create risk management strategies to reduce the negative consequences and long-term impact of external risks. Liability or property and casualty insurance are often used to transfer the financial burdens of external risks to a third party or an business insurance company.

Not all risk management plans are structured in the same fashion, but all businesses must be able to identify each of the internal, strategic and external risks associated with specific business activities. Companies can lessen the negative consequences of a risk materializing by creating and maintaining strategies to accept, transfer, reduce or eliminate organizational risk.

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