If you dream of setting your business then you must be aware of some of the basics of business. Business risks are some of the basic things you must consider before setting your own business. A fair idea of business risk will not only help you identify these tricky scenarios but will also enable you to take the right decision, access the problem and solve it.
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Let’s start by analysing the different types of risks experienced by a business. While some business risks can be assessed while others cannot be treated or managed in the same way:
Every business decision comes with a strategic risk. Strategic risk is mainly experienced when the business decision becomes less effective and the business is unable to reach its goal. A successful business requires a well-planned and effective business strategy. But a well-thought business plan can swiftly become outdated due to changes in technology, a powerful competitor, hike in the cost of raw materials, decrease in demand and other large scale factors like poor execution or lack of resources.
This is the most common type of risk faced by every business. Businesses experience competitive risk due to the presence of competitors in the market. Competitive risk may sometimes work in favour of businesses as it may encourage growth and innovation to lure customers. However, competitive risk can also come in the form of a decrease in the market share, or businesses incurring lower cost to produce the same product etc.
Since businesses functions within economies, the change in the economic conditions poses certain risks on a business or trade. Thus there is an enormous possibility that changes in the economy may increase your cost of production or decrease your sales. Thus the risk associated with an Economy is termed as Economic risk. Economic risk includes changing economy due to global influences, industry slowdown due to inflation, government measures such as an increase in taxation.
Operation risk is one of the common risks experienced by businesses as there is a possibility of failure of its day-to-day operations. Thus failures like customer service process error, internal process error, breakdown of key equipment or operational failure of the supply chain poses an operational risk. Operational risk is present at each step of the business process, especially in businesses that are associated with manufacturing or managing an inventory.
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There are possibilities that a change in the regulations or legal dispute may disrupt your businesses. Legal risks are the obstacles in the path of businesses as the business may have to incur losses to settle the dispute. It may arise from lack of awareness, ambiguity or misunderstanding of the way law and regulations apply to a business.
Most of the established and key market players have a core customer base because of their market reputation. A market reputation is important for establishing any kind of business and it gives an idea to the investor about its credibility and its quality. A declining reputation may result in huge losses and can mainly happen due to product failure, product non-compliance or a general dissatisfaction from the entire customer base which causes the company to lose its reputation.
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For the majority of the businesses, credit risk means the account receivables risk. The risk arises due to borrower’s failure to pay the debt or meet the contractual obligations. The risk mainly arises mainly from the products that the company supplies to the distributors. If the distributor is unable to make payments for the products then the business runs into credit risk. Credit risk is also experienced when the product sales go down and the customer is no longer interested in buying the product.
This risk applies to the innovation and the research and development segment of businesses. As we know, businesses invest a significant amount of funds in the research and development department. However, a business may run into an innovation risk if the product does not work. Sometimes innovative products do not work due to wrong market timing and lack of acceptance from the customers.
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There are a large number of ways a business can undergo a financial risk. Financial risk is driven by both internal and external factors such as investors seeking returns on investment, fluctuations in the financial market or on exchange rates. For example, a downward trend in the share market can impact business transactions. Financial risk can be assessed based on the nature of the organisation, industry growth and product quality.
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