Understanding Business Risk and Risk Management Strategies

Introduction

The risk in a business is something that impacts its performance or ability to achieve financial goals. The risk might come from various sources so it is not the head of a company or manager who can be blamed for it. The Business risk can also be defined as the chance that arises in an organization which results in less profit then what is expected. The factors can be controlled by the management of an organization if it is measured or calculated at an early stage. The nature of risk depends upon the size of business as the larger business might have higher exposure to risk in the market. The risk can insurable which means it can be recovered or improved in future or Non-insurable risk which indicates that it cannot be controlled. The Business risk is influenced by many factors such as consumer preferences, Competition in the market, Government regulation as well as the overall climate of economics. For businesses facing complex challenges, seeking business dissertation help can provide the most valuable and needed insights into risk management strategies and decision-making processes.

The risk in business can also be classified as liquidity risk, financial risk, systematic risk, and many others. The Risk-management strategy can be used for solving the risk which directs the business to understand the actual area where the risk is arising and then provide a solution to resolve it. This report will discuss the different types of risk in business and also the ways to calculate the risk using different methods or applications.

Discussion

Risks in Business

Many risks can occur in business and it can be classified into strategic risk, operational risk, and compliance risk. Businesses can also face critical issues of security and fraud risk. The environmental risk is also affecting 70% of the retail business that is located worldwide. In most volatile environments many companies are likely to exit the market and it is with greater uncertainty (Bertrand and Parnaudeaum 2019). In most of the Information technology sector, the company is facing the risk related to the data errors that impact the economic condition of business (Bai et al. 2013). The risk which can occur in business are classified as given below

Strategic Risk: The management of business takes any random decision to improve it but it considered to be wrong as it may be because of a lack of execution or resources. This can arises many risks like poor operating cash-flow, low sales by business, and many others.

Compliance Risk: The fall of business in terms of following the legislation and regulation set by the government for every business might result in fine, high-charge, and also reputational damage. At this stage the business faces the most critical risks as it can also result in the shut down of business

Financial Risk: The financial risk is the most common risk that occurs in any business and it mainly occurs because of fluctuations in the exchange rate as well as a fall in liquidity or profit ratio of the business. The financial risk is one of the major reasons that impact the performance of the business for SMEs due to the lack of bank financing. The poor capital structure of Small and medium-size businesses is also a reason for the increase in financial risk (Kozubikova et al. 2017). The financial risk can result in business bankruptcy and loss of income through which the business cannot compete in the market.

Technology Risk: This is another risk that is most common in any business like software or hardware failure or errors in transactions as well as a server failure. The threats like cybercrime or loss of data might occur if the risk is not solved at an accurate time. According to the study of (Miller and Griffy-Brown, 2018), cyber risk is one of the existential threats of business and it is necessary to deal with it.

Human Risk: The employees are the assets if they behave in favor of business but at the same time if they start behaving like unusual within or outside the workplace like misusing drugs or alcohol, forcing others to have a physical threat and also passing bad reviews on the status of the company to others might arise the risk of fraud. It arises because of a lack of background checking by the HR department of any business and also due to rigorous training of staff (experian.co.uk, 2020). [Referred to Appendix 2]

Causes and impact of Risk in Business

Various causes lead to the risk in business that is evaluated as below

Natural Factors: There are various factors of nature that can create risk in the operation of any business. It is mentioned by the author (Bertrand and Parnaudeau, 2019), in their journal that almost 70% of the business is affected because of weather risk. There are many factors like flood, earthquake which mostly affects or disturbs the supply chain of business.

High Competition in the market: The increase in competition in the market creates a high risk to a business and it is the reason where the company started cutting down the price of goods to attract customers but ended up with the financial crisis or economic risk.

Use of modern technology: It is good to include new technology but what if the staff is not trained properly because of the high cost of training and development. This might leads to poor implementation and give rise to operational and technological risks. The cyberattacks might attack if the staff is not aware of having skills to handle the confidential data of business and the company might also get bankrupt if the financial data is stolen by hackers or any third party.

Change in Demand of product or service: With the increase in the number of businesses in the market the customer always wants to get better service and buy products from the stable business. Thus there is some retail business that failed to manufacture or deliver products as demanded by a customer and it leads to market risk or operational risk.

Change in Policy of Government: If there is a sudden change in the policy related to the operation of a business, then it can be unfavorable for the business. This might cause a huge financial crisis or bad cash flow which results in financial risk.

Mismanagement with staff: The mismanagement is one of the critical issues of business that can create human risk as well as operational risk. The improper planning between staff and high management as well as if any of them is not aware of objective for business then the chances that the business can subject to loss or change in behavior of staff towards work (corporatefinanceinstitute.com, 2020).

Ways to manage risk in business

The Risk-management helps the company to avoid any disruption or obstacles that are occurring in the business. Risk management can be used to educate staff of the business to make them aware of corporate risks which enhance business productivity. The process of evaluating the range of responses for risk and deciding the most appropriate one from it for each risk lies at the heart of risk management (Hopkin, 2018). Through risk management the business will be able to overcome market risks and maintain market share as well as reduce technological risk by preventing access of information to others by effective training (Sadgrove, 2016). The ways to manage the risk can be done through following steps which are discussed as below

Write a Risk Management plan: It is better that whenever the business is established the owner or management team it must prepare the risks that can occur in business which explains the steps to solve risk if it occurred. For example, considered that if the business is located in an area where the market is not established much then the risk management plan must have measures to prevent a business from it.

Calculate the financial status of a company using financial tools: To get a better idea about the status of the company's financial status, it needs to be analyzed through different applications or tools. The break-even analysis, as well as the liquidity ratio, needs to be calculated after every investment so that it can predict whether a company is in a position to invest more in the market. The calculation of standard deviation needs to be done so that the annual rate of return on any investment can be generated and the company can get protected from any marketing risks.

Effective HRM in business: Effective HR management must be done in business so that the right talent can be hired only. The Human-resource department of business must not avoid background checking or do it accurately as it can reduce the human risks that can occur in the future.

Utilization of Risk assessment tools: There are various tools implementation of which the business risks can be calculated or measured like Risk Register, Probability and Impact matrix, Root Cause Analysis, SWOT Analysis of organization, and many others.

Appoint Risk management expert: It will good if the risk-management experts are hired for taking care of risks that occurred in business. It will help in the timely estimation and removal of risk and hence also protect the business from getting any loss in market or removal from the market position.

Accurate training of employees: The employees must be trained properly through the adequate use of resources. For example if the business deals with the marketing or retail sector then there might be high chances that information on inventory or finance can get hacked by any third party or attackers. Thus the company must assured that each of them knows whom to provide access to company data and how to use Big-data or other applications properly to prevent data loss. They must also get assured through training that staff can manage inventory of stocks as any error on it can lead to failure of service (smallbusiness.chron.com, 2020). [Referred to Appendix 1]

Recommendation

There is a higher necessity of risk-management as it helps to protect from any threats in business. Therefore it is recommended to have some changes in the management of risk within the different businesses like internal audit must be done in the business as it protects from any internal risks. The risk analysis must be done properly before investing in the market or planning to expand business in the market. This will be useful in protecting the business from major risks like financial crisis, market risk, and many others. The risk analysis might be able to show the continuous improvement cycle from which the business can predict whether they are performing better or falling as compared to other competitors in the market. The business must do the continuous monitoring of transactions to spot any irregularities or negative trends within the business. The internal auditors must be able to handle the risk assessment properly and capable to answer which risk can bring a competitive advantage to the business. Most of the businesses are using traditional or manual approach to calculate the ratio or cash flow for a financial assessment. It must be done through an upgraded application like SAP or many others as it will provide or show better visualization (investopedia.com, 2020).

Conclusion

The risk like financial risk, market risk, and technological risk is common in every business, but it needs to be managed properly in accurate time to avoid any threat in the future. The business must be able to utilize proper risk management plan that includes early detection of all the risks occurring in business and prioritize according to the level of danger or threat. The technological risk like cyber crime or loss of data might be a major threat for business if it cannot be resolved with appropriate measures. There are various risk assessment tools like risk register which can be used in detection of risk existing on the business.

Reference List

Book

Hopkin, P., 2018. Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Asia: Kogan Page Publishers.

Sadgrove, K., 2016. The complete guide to business risk management. UK: Routledge.

Journals

Bai, X., Krishnan, R., Padman, R. and Wang, H.J., 2013. On risk management with information flows in business processes. Information Systems Research, 24(3), pp.731-749.

Bertrand, J.L. and Parnaudeau, M., 2019. Understanding the economic effects of abnormal weather to mitigate the risk of business failures. Journal of Business Research, 98, pp.391-402.

Kozubikova, L., Homolka, L. and Kristalas, D., 2017. The effect of business environment and entrepreneurs’ gender on perception of financial risk in the smes sector. Journal of Competitiveness, 9(1).

Miller, H. and Griffy-Brown, C., 2018. Developing a Framework and Methodology for Assessing Cyber Risk for Business Leaders. Journal of Applied Business & Economics, 20(3).