How to identify and manage common business risks

Every business faces risk—it’s one of the main challenges that come with running and growing a business. Whether it’s compliance issues, operational disruptions or shifts in strategy, these issues can affect your ability to meet your goals and can harm your business. While there’s no surefire way to mitigate risk entirely, there are concrete steps you can take to reduce its impact and build a stronger foundation for your business to thrive.

Learn more about some of the most common business risks to look out for. Then, when you inevitably face them, you’ll be ready to respond decisively and protect everything you’ve worked for.

What you’ll learn:

• There are multiple types of business risks, including compliance, operational, reputational and strategic.

• Some of these risks are internal and others are external—and some are easy to manage while others will prove more challenging.

• Understanding potential business risks can help you eliminate some of their negative impacts on your company.

Business risk can be defined as the chance of unforeseen events or poor preparation disrupting your business. These risks can stem from decisions made within your company or from outside factors beyond your control. By familiarizing yourself with many of the different types of risk a typical business can face, you’ll be better prepared to devise a strategy so you can manage them with confidence.

Business risk may include geopolitical or regulatory changes, natural disasters, loss of reputation or consumer demand, private or public health emergencies, cyber issues, and economic downturns.

For the unprepared, any of these factors can potentially lead to the restructuring of your business, a halt in operations, a loss of investors or customers, frayed professional partnerships, or a range of other challenges.

By knowing how to navigate some of the most commonplace risks businesses face, you’ll be able to stay focused on growth, make confident decisions and keep your business moving forward.

Many businesses face compliance risks for not following federal and state laws. Violating any such laws, even unknowingly, can lead to costly fines and damage to your brand’s reputation with consumers or investors.

Examples of laws and regulations that require compliance include:

• Workplace laws

• Consumer protection laws

• Health Insurance Portability and Accountability Act regulations

• Industry regulations

• Business contracts

Proactively managing compliance is the easiest way to lower risk across your business. While specific requirements may vary, depending on the business structure, here’s what you can do to help manage these risks:

• If your business is a corporation: Consider holding initial and yearly meetings with directors and shareholders. Make sure to record the meeting minutes, set up and maintain bylaws, issue stock to shareholders and monitor any stock transfers.

• If your business is an LLC: Consider holding annual meetings, keeping your operating agreement up to date, issuing membership shares and tracking all changes in membership ownership.

• If your business is neither a corporation nor an LLC: Document important business decisions, keep abreast of what transpires during important meetings and keep detailed records of key transactions or business reports. 

Larger businesses and corporations can benefit from legal professionals whose job is to oversee compliance with laws, regulations and contracts.

Businesses of all sizes can run smoother—and owners can gain peace of mind—by using HR staff and compliance technology, such as payroll software.

Operational risks arise when daily operations—or something that interferes with them—negatively affect your business and profits.

Examples include:

• Internal errors, such as a website giving a 5% discount instead of a 10% discount

• External business fraud, like theft by a third party

• Natural disasters, like tornadoes or hurricanes, that disrupt or shut down day-to-day operations

To better manage operational risks, start by regularly reviewing your procedures and operations to identify potential pain points early and address them proactively. Examples include:

• Ensuring that your business facilities meet building codes and that your safety regulations are up to date and take natural disasters into account. 

• Developing a contingency plan for when disaster strikes—like establishing work-from-home options—so you can minimize downtime and stay productive in a crisis.

• Offering comprehensive risk management, employee training and internal review processes—like website alerts—to identify trouble spots early.

Reputational risks occur when a company’s public image is threatened. These threats may be direct, indirect or peripheral.

A poor reputation may discourage consumers, investors and professional partners from engaging with your brand.

Reputational risks may include:

• Nationwide recalls or widespread negative customer reviews (direct)

• Employees being involved in illegal or ethically questionable activities outside of work (indirect)

• An important business partner facing reputational damage (peripheral)

Strong, proactive quality control throughout your business can help reduce reputational risk. A good way to start is to monitor online reviews of your company and partners to identify risk concerns early. Taking accountability and addressing issues quickly can help you protect your brand from reputational risks.

You can also consider hiring a public relations specialist to manage your company’s image and reputation. A PR professional can help shape how your business is perceived in the media and steer you through any reputational challenges you may face.

Strategic business risks aren’t always a bad thing and can end up paying off. But ones that aren’t fully thought through or executed well can hamper a business’s success. Some common strategic risks may include:

• A major marketing initiative that fails to live up to expectations 

• Investments in research and development that don’t achieve the desired results

• A miscommunication that blunts the success of a business strategy

To manage strategic risks, develop a business plan that includes expert input and clearly defines your goals, initiatives and action steps. When considering risky investments, take the time to weigh the potential risks and upsides. Having a well-thought-out contingency plan can help you adapt quickly to changing circumstances and reduce the negative effects if a move doesn’t work out.

Financial risk consists of threats to your company’s cash flow, assets and liabilities. When debt levels are higher, your financial risk increases, which makes it more challenging to manage payments and meet your financial obligations.

You can better manage financial risk by:

• Lowering operational costs and decreasing your level of debt to spur your disposable earnings and maintain a healthy cash flow

• Diversifying and expanding your customer base to support consistent growth 

• Choosing low-interest options when applying for loans or business lines of credit

• Minimizing foreign currency risks by opting to do business in your country’s native currency whenever possible

Lending money inherently comes with risk because there’s always a chance that the borrower might not have the means to repay the loan. Many businesses use credit for their day-to-day operations. Some common examples include offering large clients more favorable payment terms or financing large purchases. But in these cases, if a customer fails to pay their balance, your business can lose earnings, which will hurt your bottom line. 

One way to more effectively track your expenses is through a business credit card. It helps you manage your finances more securely and efficiently—giving you more control, even in an environment where a certain level of risk is inescapable.

In an age where every business has a digital presence and billions of online transactions happen every day, unforeseen events such as power outages or cyberattacks have the potential to devastate a business. They can often lead to lost production time and damaged equipment and, perhaps worst of all, diminish your brand in the eyes of your customers. And while the internet allows you to work more efficiently, cybersecurity needs to be top of mind every day.  

You can manage technology and cybersecurity risks by:

• Installing backup batteries and surge protectors to prevent extended downtime and data loss

• Using cloud storage for an extra layer of protection and backup

• Training employees on cybersecurity best practices, such as using strong passwords, consistent software updates and multifactor authentication

A competitive risk is the possibility that your business will lose its edge in the market or become “yesterday’s news” in the face of a new upstart in your industry. These are also sometimes known as comfort risks.

When businesses grow too comfortable, there’s a tendency to get complacent. It becomes easy to lose the drive to innovate or adapt—making it easier for competitors to shrink your customer base and damage your brand.

You can better manage competitive risks by:

• Staying flexible and nimble, quickly adapting to change

• Keeping up to date with industry trends 

• Using research to strengthen and energize your business strategy

• Obtaining feedback from clients and consumers to improve your products, services and the overall brand experience

• Keeping an eye on your main competitors and offering services, products, solutions and a brand experience that they can’t match

Human risks are circumstances that may arise within your internal team. Some examples, such as a sudden illness or medical emergency, are unavoidable.  Others—like fraud, internal theft or substance use disorders—can be more disruptive because they’re harder to anticipate.

To help minimize the damage from human risks, consider the following:

• Professionally screen new employees.

• Ensure you have managerial backups in case someone on your team falls ill.

• Implement financial best practices for employees, like setting transaction limits on business credit cards.  Make sure your senior staff regularly reviews company purchases.

Physical risks consist of damage to your company’s physical assets, such as your building, equipment or company vehicles. Maybe there’s a fire on-site or a company vehicle is damaged in an accident. Covering the cost of repairs—or worst of all, injuries to your team or bystanders—can hurt your profits, operations, and brand image.  To effectively manage physical risks to your business, you can: 

• Ensure your property has necessary safety features, like sprinkler systems, illuminated exits, fire extinguishers, security systems and clearly communicated evacuation plans.

• Maintain all equipment and vehicles to keep them in good working order.

• Make sure your building is up to all safety regulations and codes.

• Have emergency plans in place in case of fire, flood or workplace accidents. 

• Consistently review these emergency plans with your team to ensure everyone knows how to respond quickly and minimize potential damage. 

Identifying potential risks, actively working to prevent them and developing plans to minimize their impact are often the best strategies to protect your business. It may not be possible to eliminate all business risks, but there are ways to control risk variables, manage uncertainties and avoid a business crisis.

Capital One’s business credit cards offer features to help your organization manage its spending and minimize risks. These include spending limits and the ability to see transactions on employee cards immediately. Compare cards and find the right solution for your business today. The best part? You find out what cards you’re pre-approved for before you apply, so there will be no impact on your credit.