Business can carry risks
Business risks pose threats to a company’s business goals. Usually the business’s management team develops plans, works with the product, and tries to maintain the profitability indicator. If suddenly all efforts go down the drain, it means the risk has materialized.
However, if you know where and what kind of danger to expect, you can keep the indicators within the desired range. In a business SWOT analysis, risks are put into a threat block.
Getting familiar with the top categories of business risk is a good place to start.
1. Risk of losing competitive advantage
In highly competitive industries, it can happen that a company loses its competitive edge. For example, a new product is entering the market that has much better consumer properties than the one that you offer. Or another firm was able to significantly reduce production costs.
To reduce this threat, always keep an eye on the market, your biggest competitors, the technological development in the industry. A breakthrough in a competitive environment shouldn’t come as a surprise.
2. Economic risk
These are changes in the economy that can lead to a drop in sales or an increase in company expenses, especially if you are conducting high risk merchant services.
There are a large number of tools that reduce the consequences of such risks: from business diversification beyond the borders of one state, a single product to fixing contract prices on a long-term basis and utilizing tools like a management expense report that provide valuable insights for managing economic risks effectively. Some economic risks can’t be countered, but that doesn’t mean that they can be ignored.
3. Operational risk
Suppose an excavator in a neighboring area breaks the communication line during work. The company instantly loses the flow of incoming calls and the Internet. Even one day without clients leads to a significant loss of income So you need to think about establishing backup or alternative workflows.
4. Legal risk
What’s legal today may become a crime tomorrow, and vice versa. Changes in the legal field pose great threats, but are often predictable. The legislative process in most states is a slow business.
Therefore, the legal department must monitor changes in government regulations that may affect the company’s activities. And in countries where the legal situation is poorly predictable, additional vigilance is needed, as much as possible simplification of operations or even a reduction in market presence.
Risk Management
In risk management, an important element of the system is the development of measures to reduce them. Following are method that you can employ:
Normative method
This method involves the establishment of certain standards, limits, restrictions on the conduct of certain actions:
Establishing the maximum production volume
Establishing the maximum volume of shipment of products on credit (taking into account the financial situation of consumers). This means that you should not sell products more than a certain limit to your customers with the risk of not receiving money for these products.
Establishment of limits for raising borrowed funds
This means that you should always have a certain threshold of the credit load, as a rule it is 30/70 to your own funds. Taking a loan – remember to give it back to you.
Insurance
Risk insurance is the transfer of certain risks to an insurance company. You can use employee insurance against accidents, property insurance (cargo, transport, property), financial risk insurance, liability insurance.
Diversification
Diversification, as a method of risk reduction, is the expansion of an enterprise by joining technologically diverse fields of activity. For the successful conduct of any type of business, it’s necessary to use measures to reduce risks in the aggregate. Also, it’s important to analyze and predict possible risks.
The degree of permissible risks is determined by the size of fixed assets, production volume, and the level of profitability. The more capital an enterprise has, the less sensitive it is to risks and the less unfavorable external factors can affect it. The main task of a manager is to take into account potential risks in a business plan so that in the future they don’t become an unpleasant surprise.