Business risk: What it is and how to manage it

Every business faces risk—it’s one of the main challenges of running and growing a company. Business risk is the potential for a company to experience a reduction in profits due to internal or external factors. While there’s no guaranteed way to eliminate risk, there are steps you can take to minimize threats and build a stronger foundation for your business.

Learn more about what business risk is, some of the most common types to look out for and how to manage them.

What you’ll learn:

• Business risks are threats your company faces—whether from internal or external sources—that could negatively impact profitability or performance.
• The seven most common business risks are operational, financial, compliance, strategic, competitive, reputational and global.
• By familiarizing yourself with the different types of business risk, you could be better prepared to create a management strategy to protect your company.

Business risk is the potential for internal or external events or conditions to disrupt a company, resulting in financial loss or failure to meet business goals. Risks can arise internally from organizational challenges or externally from factors beyond your control. Various types of business risks could affect different areas of a company’s operations and performance.

The main types of business risks are operational, financial, compliance, strategic, competitive, reputational and global.

Operational risks can negatively affect how you run your business on a day-to-day basis. They can involve failed internal processes or stem from external factors that pose a risk to a business’s daily functions.

Financial risks negatively impact your company’s profits, cash flow, assets and liabilities—resulting in a loss of revenue. These can occur due to inadequate financial planning or an economic downturn.

Compliance business risks are when federal and state laws—such as workplace laws, consumer protection laws or industry regulations—aren’t followed, either knowingly or unknowingly. These risks can result in fines to cover damages or increased customer churn.

Strategic risks involve a company’s long-term plans and initiatives, and the possibility that these strategic decisions may be flawed or fail to achieve desired outcomes. Strategic risks also arise when a business fails to adhere to its strategy.

Competitive risks could cause your business to lose its market advantage to a new competitor in your industry. These are also sometimes known as comfort risks because when businesses grow too comfortable, there’s a tendency to get complacent.

Reputational risks occur when a company’s public image is threatened—either directly or indirectly. These risks might cause a reduction in profits and can also undermine the trust of shareholders or clients.

Global business risks can arise when something negatively affects your business internationally. Companies that operate across borders could be prone to this type of risk.

Examples of business risks include operational issues, financial challenges, data breaches, strategic missteps and reputational damage. These risks can affect different areas of a business, from day-to-day operations to long-term growth. Below are common categories of business risks and examples of how they may impact an organization.

Operational risks arise from internal processes, systems or external events that disrupt day-to-day operations. Examples include:

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

Financial risks affect a company’s ability to manage cash flow, expenses or profitability. Examples include:

• A higher amount of debt than cash flow
• Chargebacks from customers
• Economic instability

Compliance risks arise when your company doesn’t comply with applicable laws or regulations. Examples include:

• Discrimination or harassment within the workplace
• Violating health or safety measures 
• Failure to comply with certain environmental regulations

Strategic risks occur when business decisions fail to achieve desired outcomes. Examples include:

• A major marketing initiative that fails to live up to expectations
• An investment in research and development that doesn’t achieve the desired results 
• A breakdown in communication that undermines the success of a business strategy

Competitive risks happen when you lose business to another company. Examples include:

• A market rival launches a new product or service that outperforms your offering.
• A competitor implements a superior promotional strategy.
• Another business starts a loyalty program that entices your customers.

Reputational risks may pose a threat to how others perceive your business or brand. Examples include:

• Nationwide recalls
• Widespread negative customer reviews
• Employees involved in illegal or ethically questionable activities outside of work
• An important business partner facing reputational damage

Global risks could impact your business due to international threats or events. Examples include:

• A natural disaster in another country
• Geopolitical issues that cause shutdowns or sanctions
• Supply chain disruptions

Risk management in business is the process of identifying, evaluating and addressing potential risks that could impact a company’s operations or profitability. It involves:

• Assessing your organization to identify areas of concern
• Determining which threats to prioritize, creating and implementing strategies to combat risk, and continually monitoring risk mitigation processes     

Below are some ways to manage and minimize the effects of the main types of business risk.

Managing operational risks starts by regularly reviewing your procedures and operations and implementing employee training programs to identify potential pain points early and address them proactively.

Managing financial risks requires identifying potential threats, projecting how they could impact your business’s revenue and overall profitability, and finding solutions to minimize financial loss, such as:

• Lowering operational costs and decreasing your level of debt to maintain a healthy cash flow
• Effectively tracking your expenses through a business credit card to help you manage your finances more securely and efficiently
• Choosing low-interest options when applying for loans or business lines of credit

Managing compliance risks means evaluating your business’s risk level and creating strong internal controls to protect your business from potential violations or infractions with measures like: 

• Ensuring that your business facilities meet building codes and that your safety regulations are up to date
• Investing in technology such as payroll software
• Documenting compliance standards and ensuring employees are trained on expected conduct and procedures

Managing strategic risks involves developing 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.

Manage competitive risks by keeping up to date with industry trends and your main competitors’ offerings, quickly adapting to change and obtaining feedback from clients to improve your products and overall brand experience.

Managing reputational risk requires businesses to be proactive. One way to start is to monitor online reviews of your company and its 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.

Managing global business risks involves anticipating potential challenges, diversifying supply chains and creating business continuity plans.

Here’s additional information about business risks.

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

Business credit cards from Capital One Business 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. You’ll find out what cards you’re pre-approved for before you apply, so there will be no impact on your personal credit scores.