Managing and planning for business risks

Business risk is inevitable due to the ever-evolving nature of world markets and political landscapes. Prepare by setting up a risk management plan.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Road sign warning of a risk ahead

Image source: Getty Images.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

‘Business risk’ is a term owners need to familiarise themselves with whether they’re in the early days of a startup or eight years into their third business. For businesses, risk involves any event that can cause the business to lose some steam or completely shut down.

There’s no avoiding risk entirely, as some factors are dictated by matters beyond a business owner’s control. Planning for these risks and managing them allows companies to be prepared for events as they happen.

[top_pitch]

Understanding business risk

Business risk is any factor that may affect a business’s ability to generate revenue or stop its operations entirely. These factors can be both avoidable and unavoidable, and they can be definable and indefinable. They can originate within or outside the business.

The bottom line is, a business will face risk at some point in its journey. The only way to mitigate that risk is to plan for it.

Types of business risk

While the list could be longer, there are around 20 well-known business risks that a business may have to face in its lifetime. Some risks trigger further risks to create a risk cycle.

A typical example is how natural disasters such as the pandemic can cause operational risk (business operations are halted or limited). This then leads to legal risk (new laws govern how economic activity can commence). And then, of course, there’s economic risk (the economy is strained as a result of reduced economic activity).

Other risks include:

  • Exchange rates, taxation and interest rates risk: Companies often rely on margins to meet their financial goals. These risks can mean the difference between profits or losses.
  • Process, programme, innovation and project risk: Any time a company has to implement a change, there is a margin of risk. It can result in downtime due to learning, or stakeholders not accepting all the changes.
  • Country and political risk: The location of the company can determine whether it faces increased levels of risk. This is based on that location’s unique factors.
  • Quality and resource risk: A drop in quality can cause loss of revenue, and so can the loss of a viable source of resources.
  • Credit and financial risk: Companies often need access to funding to scale or to manage their cash flow. Without this access, the business can fail.
  • Compliance, security and fraud, and reputational risk: Companies have an obligation to keep up with the laws that govern their operations. Failure to meet these terms may lead to closure or loss of revenue through penalties and fines. Reputation damage can also lead to loss of revenue as consumers vote with their money.
  • Competition or comfort risk: Not planning for potential competition can lead to stagnation. When competitors overcome barriers to entry, it might be too late for innovation.

[middle_pitch]

How to successfully implement a risk management strategy

The old adage that ‘failing to plan is planning to fail’ applies in business. A risk management strategy works out all the kinks before they arise. It does so in much the same way as setting up a business plan before you start up.

  • Research potential areas of risk of the business.
  • Formulate a plan to address risk matters as they arise. For instance, set up a savings account for your business to manage financial risk.
  • Adjust your risk management responses to match your business needs.
  • Implement a monitoring and reporting framework through a regular review. Keep yourself in the loop to ensure that the current risk is under control.
  • Strengthen safeguards to prevent future losses due to these risks.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »