What Is Business Risk?

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what is business risk

Business risk refers to anything that could impact your company’s finances. In many cases, these financial risks could destroy your company. While there are many factors that can create a business risk, some include:

Fire damage
Flooding
Natural disasters
Theft
Economic downturn
Loss of important suppliers

Although it’s impossible for small business owners to shield their company from risk, there are steps you can take, like purchasing small business insurance or having a hold harmless agreement . This should be an important part of your risk management strategy because it can help reduce the impact on your business operations if a disaster strikes.

What Are the 7 Types of Business Risk?

types of business risk

There are many types of business risks. That’s why it’s important to understand how each type of risk arises. You’ll want to address each one in your risk management strategies.

1. Strategic Risk

If you’re like most small businesses, you probably have a business plan and strategy. So, what happens when your operation deviates from your business model? This is known as a strategic risk. Some examples of strategic risks include:

Technology changes
Competitive pressure
Legal changes
Shifts in customer demand

So, if your customers no longer have interest in one of your products, that can become a strategic risk for your small business. To manage these types of risks, you’ll want to prioritize risk management in your operation. It’s important to identify these risks before they can impact your company’s finances.

2. Compliance Risk

If you fail to comply with a new regulation from the government or your state, you’ll face compliance risks. These risks often involve:

Corruption
Discrimination or harassment in your workplace
Workplace health and safety violations
Environmental regulations
Data storage issues

So, if your small business is polluting a local river and is not operating in accordance with the environmental regulations in your state, your business may have to pay a fine. Your business may also need to pay a fine if it does not follow data protection rules . To avoid compliance risks, you’ll need to establish expected behavior in your workforce and document it in a manual. You’ll then need to communicate this with your employees.

3. 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. These interest rates are an important factor in looking at your company’s overall credit risk.

You can implement strategies for financial risks, including:

Carrying insurance to cover any unexpected accidents or disasters at your small business
Setting aside an emergency fund
Having an exit strategy for investments your business makes
Keeping debt to a minimum

4. Operational Risk

Operational risks include events that cause your small business to have to stop running. Some examples of this include:

Natural disasters
Theft
Vandalism
Failures in technology
Changes in laws and regulations

While most of these events are unpredictable or out of your control, you can prepare by getting coverage, like business interruption insurance or equipment breakdown coverage . This policy can help pay your expenses if your business needs to temporarily shut down for covered losses. It can help pay for the revenue you’d normally make if your business was open. It also helps pay for your:

Rent
Loan payments
Taxes
Payroll

5. 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 small business. Either way, brand loyalty is often damaged, which ultimately reduces your profits and your customer base. Some examples of events that can pose reputational risks for your business include:

Data breaches
Defective products
Negative social media posts
Workplace accidents

You can protect your reputation by addressing customers that write negative reviews and helping find a solution. This can be a refund or sending them a gift card. You can also encourage customers to write positive reviews.

It’s also important to invest in cybersecurity and get the right insurance coverages for your operation. Be sure to set time aside and look for potential risks in your operation. Regular maintenance of your facility and equipment can also help prevent workplace injury.

6. Global Risk

If you do business in a foreign country, you’ll likely face global risks. For example, a natural disaster that disrupts your business operation in another country can impact your income and supply chain in the U.S. Geopolitical issues in other countries can also cause temporary shutdowns or sanctions that impact your operation.

It’s important to try and anticipate global risks and implement risk engineering strategies that can help if an event puts your small business in jeopardy. It’s also important to note that global businesses face more competition than companies that operate within the U.S. You’ll want to foster innovation within your company to give you a competitive edge in your market.

7. 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. Some strategies for doing this include:

Communicating what your business stands for and your values
Providing quality customer service
Offering a loyalty program
Asking for feedback
Focusing on providing quality products or services

Protect Your Small Business Against Risk With Insurance

Every business faces risks. The key to overcoming them is to be prepared. Small business insurance from The Hartford can help you protect your employees and operation. We offer important policies, like:

You can also combine business property and liability insurance into a Business Owner’s Policy (BOP), which is a convenient way to save money. To learn more, get a quote from us today. We’re an insurance company you can count on to provide quality customer service and products.