Business Risks: Definition & Examples | StudySmarter

Business risk is common in among all business types, thus the importance of effective risk management cannot be overstated. Business risk affects a business’s ability to operate properly and succeed financially. Therefore, understanding business risk is essential for all types of business managers. Let’s take a closer look.

Business Risk Definition

Avoiding risk is an impossible task for businesses, but controlling and properly managing risk is achievable. Before we continue with this, it is important that we understand the term ‘business risk’.

Business risk is defined as any threat or force preventing a business from reaching its financial goals or causing a business to fail.

Forces that create business risk can come from internal sources, such as a poor management structure, bad publicity, theft, or the loss of talented employees. External forces may also be at play, such as the increasing prices of raw materials needed for production, increased competition, changes in customer demand, natural disasters, or changes to government or market policy.

Such forces make it impossible for businesses to avoid risk completely as they are unpredictable and can’t be controlled by the business. However, there are steps that can be taken by businesses in order to avoid these risks. An example is creating a risk management strategy.

Types of Risk in Business

There are five main types of risk in business:

• Strategic risk

• Operational risk

• Financial risk

• Compliance risk

• Reputation risk

Read along to understand each type with examples!

Fig. 1 – Types of business risk

1. Strategic risk

This risk arises when a previously laid-out business strategy becomes less effective or becomes no longer effective in a way that impacts business profit generation and growth, thus limiting businesses from reaching their set goals.

The risk can occur with changes in technology, the entrance of new competitors, changes in the business strategy of a direct competitor, or waning customer interest. To overcome this risk, businesses have to adapt their strategy.

Strategic risk occurs when a business’s direct competitor cuts down the prices of its products or services, thus affecting the business originally positioned as a low-cost provider.

2. Operational risk