A company is considered a high risk company because of two conditions: it operates in a high risk industry and there is a risk of financial failure. Either or both of these conditions can apply. The first condition is concerned with health and safety issues and the second condition is concerned with the profitability of your business (continued profitability). However, both of these circumstances can affect your company’s ability to acquire finance, insurance, and business accounts.
Business risks can be internal (like your strategy) or external (like the global economy). You must not handle or treat all types of risk in the same way. You need to understand the type of risk you are facing before considering how to deal with it.
Importance of understanding risk
Risk is usually represented by an event, a change in circumstances or its consequences. A common definition of risk suggests that risk is the effect of uncertainty on meeting or exceeding business goals. This effect can be positive, negative or a deviation from expectations, for example in forecasts and projections.
Without identifying the risks, it is difficult to successfully define your goals and develop strategies to achieve them. Integrating business risk management into your strategy formulation and business planning processes has proven its worth.
Understanding and managing risk enables you to control and often avoid the financial, organizational, legal, and other effects associated with risk. Here are the major types of risks involved for businesses in high risk industry.
Market risk is the risk associated with the changing conditions in your marketplace in which your business competes with others. An example of market risk is the possibility of customers to buy online and avoid the brick and mortar stores. The retail businesses that run physical stores are presented with various challenges related to the market in which they operate.
One market risk is the risk of being overmaneuvered by your competitors. In a global competitive marketplace, and reducing profit margins, the most successful businesses are most successful in delivering a unique value proposition that helps them stand out in the market and create a sound marketplace identity.
The economy is constantly changing as markets fluctuate. Some positive changes are good for the economy, resulting in an expanded shopping environment, while negative events can reduce sales. It is important to monitor changes and trends to identify and plan for a possible economic downturn.
To neutralize financial risk, save as much money as possible to maintain stable cash flow. Plus, work as part of your business plan with a tight budget and low overhead in all business cycles.
Business owners face a plethora of laws and regulations that they must comply with. For example, current compliance with data protection and payment processing may affect the way you handle certain aspects of your operations. By staying abreast of applicable laws from federal agencies such as the Occupational Safety and Health Administration (OSHA) or the Environmental Protection Agency (EPA), as well as state and local agencies, you can minimize compliance risks.
Failure to comply can result in significant fines and penalties. Stay vigilant in tracking compliance by joining an industry organization, periodically reviewing information from government agencies, and requesting assistance from experienced compliance advisors.
This business risk could include customer loans or your own business debt. Interest rate fluctuations can also pose a threat.
Adjusting your business plan will not affect your cash flow or cause unexpected losses. Keep debt to a minimum and create a plan that will begin to reduce your debt as soon as possible. If you depend on one or two clients for all of your income, your financial risk may be significant if one or both of you stop using your services. Start marketing your services to diversify your base so that losing your services doesn’t hurt your bottom line.
Credit risk is the risk that companies take when they make loans to their clients. It can also be related to the credit risk of the company itself with suppliers. A company assumes a financial risk by offering its clients financing for the purchase, since a delinquent client is possible.
A business must meet its own credit obligations and ensure that it always has enough cash flow to pay its bills on time. Otherwise, suppliers will no longer be able to lend the company or even do business with the company.
This business risk can occur internally or externally, or it can involve a combination of factors. Something can happen unexpectedly and cause you to lose business continuity.
This unexpected event could be a natural disaster or fire that damage or destroys your physical business. Or it could be a server failure caused by technical problems, people, or a power outage. Many operational risks also relate to people. An employee can make mistakes that cost time and money.
Whether it’s a personal or process failure, these operational risks can affect your business in terms of money, time, and reputation. Operational risks can be addressed with a business continuity plan and training. Both of them helps businesses think about things that may go wrong and create a backup system or proactive measures to ensure operations are not affected.
Liquidity risk means the risk of loss of assets and operational financing risk. Asset liquidity is the easiness with which a business can turn its assets to cash when there is a sudden and significant requirement for cash flow. The liquidity of the operating financing is related to the daily cash flow.
Overall or seasonal loss of income can be a significant risk if a business suddenly runs out of money to pay for the basic expenses it needs to run its business. Cash flow is important for success of a business that is why analysts pay attention to metrics like free-cash flow while evaluating a company’s equity investments.
Summing UpSo, these were the major types of risks that put a business in the high risk business category. Organisations need to consider these risks and have a backup plan to deal with them and retain in the downtimes that can occur due to any of these risks.