Starting a business brings much opportunities in the life of the businessman. An entrepreneur can set up a unique business with an innovative and creative business plan in order to make much profit as well as reputation in the market.
Having own business advantageous as the person will be their own owner. Beside this, all the profit from the business will go to the owner only. They are having the right to choose the way they like to operate the business. They will be the one to enjoy all the profit from the business, and take business decision in order to maximize their profit.
But along with several advantages and profits, there are several risks as well that are associated with the business. The business owners along with enjoying the profits of the business need to be careful for all the risks that are associated with the businesses. Sometimes, these risks can lead to heavy loss to the company. And, in the case when the company is not having any strategy to deal with these risks or is not having any risk management strategy, the worst that can happen is the shut down of the business and heavy loss to the business.
Thus for a business, there is need that they all are having effective and efficient strategy for dealing with the risk that are associated with the business. But before making strategy to deal with risks in the business, one needs to understand the types of risks in the business, how to identify them, and how to evaluate them.
Following presents the types of the risks, and the way to evaluate the risks that are associated with the business.
Types of risks that are faced by an organization
A business organization can face several kinds of risks. Following we are listing some of the major kind of risks that a business owner can face. These are:
For a successful business, there is need for a detailed and comprehensive business plan. All of the people with business minds are aware of the fact that for a successful business, there is a need for a thorough out and comprehensive business plan. But in the case of change in the situations, the best business plan also can fail. The evolution is the rule of the nature and sometimes situations changes fast and suddenly. In these cases, even the best laid business plan can also become outdated and fail. When the business owner fails to keep up pace with the changing trend, the business is more likely to fail. This is known as strategic risk where the best strategy for operating the business fails with the change in the industry.
Basically we can define strategic risk as a risk type where the best strategy of the business even fails because of the change in the market. This could occur because of the change in the technology, new kind of computer entering in the market, or in the case of any other large scale change. Any change in the industry can change the trend in the market and thus the old strategy can become ineffective or fails to achieve the goal of the company.
For a business in order to survive in the market, they need to comply as per the rules and regulation of the market, the government, and the culture. But when the business fails to comply with any of the rule or regulation, it can lead to severe consequences for the business. They might need to pay the penalties or sometime even the shut down of the company.
Many times, when a company plans to open their branch in another state, they might not be aware for the rules and regulation in that area. For example, if a cement business plans to extend their organization in different state, they might function as per the rules and regulations of their old business state. Forgetting checking the rules and regulations of other state or fail to comply with any rule can lead to poor outcomes and penalties.
This is the most common type of risks that can occur in any organization while performing any business operation. It is a type of internal risk where the company fails to cope up with the day to day operational issues. It can relates to either people or the processes.
It is another kind of most common risk that occurs due to financial issues in the company. Unexpected changes in the financial conditions like hike in the price of the raw material, change in the exchange rates, interest rates, or the credit rates and many more can lead to the generation of the financial risk. It further include three types of risks that are political risks, Currency risks, and Counter party risks
Political risks are not a direct type of financial risks. However any political changes in other country can cause issues in the country and thus the ultimate loss to the finance.
Currency risks often impacts the companies that deals more with the foreign exchange as their cash flow changes with the change in the currency exchange rates.
Counter party risk occurs in the case when the company fails to deliver the good whose payment has already done in advance.
How to evaluate the financial risks?
The financial risk can be evaluated from different point of views:
From the stakeholder’s point of view, Financial gearing that is ratio of debt in capital structure as the major risk in the case of winding up of the company.
From company’s point of view, excessive borrowing or lending of money can force them to go into liquidation.
From the Government point of view, failure of any bank or other financial institution is major risk.
The bottom line
So these are all about the types of risk that can be faced in any business!