There are many types of business risks. That’s why it’s important to understand how each type of risk arises and how they can harm the business. These are the main types of business risks you can encounter.
Compliance and Legal Risks
Legal or compliance risk refers to any situation that might violate state, local, or federal laws or regulations. To avoid compliance risks, you’ll need to establish expected behavior in your employees or vendors and document it in your policies. You’ll then need to communicate this with your employees. Companies that violate laws and regulatory standards are subject to a variety of punishments, and legal risks by breaking contracts with suppliers and other partners.
- Company's violation of external laws, government laws, regulations, regulatory or internal standards
- Product liability
- Device non-compliance
- Illegal actions taken by employees
Examples of compliance and legal risks:
- Employees don't follow government safety regulations while building machines
- Fails to follow environmental regulations or waste standards
- Manufacturers' manual or recommendations are not followed
- Discrimination or harassment in your workplace
- Workplace health and safety violations
Negative consequences of non-compliance
- Fines against the company
- Prison time for executives
- Reputation damage with customers and other stakeholders
- Lawsuits
Ideas for managing compliance and legal risks:
- Company policies are compliant with regulatory requirements
- Employees are aware of policies, procedures and job duties
- Workplace, devices and tools are operated according to regulatory requirements
Health and workplace safety risks
These risks arise from workplace health and safety violations. They can be defined as the likelihood that a person may suffer harm or an adverse health effect if or when exposed to a hazard. Employers are legally responsible for providing safe and healthy working conditions for their employees, and different industries may need to follow a variety of safety requirements.
Examples of health and workplace safety risks:
- Falls, trips and slips
- Noise
- Vibration
- Manual handling
- Collapses
- Asbestos
- Electric shocks
Ideas for managing health and workplace safety risks:
- Identify and assess hazards, employers and workers
- regular maintenance of your facility and equipment can also help prevent workplace injury.
- Collect and review information about the hazards present or likely to be present in the workplace.
- Conduct initial and periodic workplace inspections of the workplace to identify new or recurring hazards.
- Investigate injuries, illnesses, incidents, and close calls/near misses to determine the underlying hazards, their causes, and safety and health program shortcomings.
Security and fraud risks
Fraud or security risk relates to any event where persons internal or external to the organization cause harm through deliberate deception.
Examples of security and fraud risks
- Theft, or other
- Loss of material
Negative consequences of security and fraud risks
- Loss of reputation
- Fines
- Prison time for executives
- Reputation damage with customers and other stakeholders
- Lawsuits
Ideas for managing security and fraud risks:
- Implementation of security measures on both physical (keys, entrance cards, etc) and information assets
- Implementation of anti-fraud processes and systems
Security and Cybersecurity Risks
Every company keeps some information, using enterprise applications, employees using mobile devices or computers. Information can be stolen, changed, or hacked. As the use of digital technology grows, cybersecurity risks are growing as well. They are exposed to greater opportunities for hacking, creating security risks for companies and their stakeholders. Both employees and customers expect companies to protect their personal, financial and other business information.
Examples of security and fraud risks
- Theft, or other
- Loss of material or reputation
Negative consequences of security and fraud risks
- Loss of reputation
- Fines (for breaches of HIPAA, GDPR)
- Financially liable for damages
Ideas for managing cyber-security risks:
- Implement information-cyber-security standards, ISO 27000, NIS2, HIPAA, GDRP, etc.
- Invest in fraud detection tools and software security solutions.
- Educate employees about how they can do their part to keep the company’s data safe
- Use safe applications and enterprise software
- Implement offboarding checklist, (removal of accesses)
Financial Risk
Financial risks, or economic risks, impact your profits and therefore, your company’s ability to grow. For example, if your company debt is higher than your cash flow, your business is considered at financial risk. It’s also important to be aware of your interest rates on loans and how that will impact your cash flow.
You can implement strategies for financial risks, including:
- Carrying insurance to cover any unexpected accidents or disasters in your business
- Setting aside an emergency fund
- Having an exit strategy for investments your business makes
- keeping debt to a minimum
Strategic Risks
Business plan and strategy, market situation. This is known as a strategic risk. So, if your customers no longer have interest in one of your products, that can become a strategic risk for your business. To manage these types of risks. It’s important to identify these risks before they can impact your company’s finances.
Some examples of strategic risks include:
- Competitive pressure
- Market changes
- Geopolitical situation changes (e.g. war)
- Technology changes
- Legal changes
- Shifts in customer demand
Reputational Risk
Reputational risks involve the harm of your business’ public image. This can come from a negative news story creating bad publicity or customers having poor experiences with your business. Either way, brand loyalty is often damaged, which ultimately reduces your profits and your customer base. Reputational risks can arise from compliance, security or fraud risks.
Some examples of events that can pose reputational risks for your business include:
- Data breaches
- Defective products
- Negative social media posts
- Workplace accidents
Ideas for managing reputational risks:
- Addressing customers that write negative reviews and helping find a solution
- Encourage customers to write positive reviews
- Invest in cybersecurity
Operational Risk
Operational risks include events that cause your business to have to stop running.
Some examples of operational risks include:
- Natural disasters
- Theft
- Vandalism
- Failures in technology
- Changes in laws and regulations
Ideas for managing operational risks:
- Most of these events are unpredictable or out of your control,
- Get insurance coverage for your operation
Competitive Risk
Every business has competitors, but when other business’ actions are negatively impacting your company, you face competitive risk. One of the biggest negative impacts that comes from your competitors is losing your customers to them. This can occur for a variety of reasons. However, there are ways to combat this. The most important thing to do is build up a loyal following.
Ideas for managing competitive risks:
- Provide quality products or services
- Provide quality customer service
- Offer a loyalty program
- Ask customers for feedback