Risk is defined as the possibility of a business making less profit than originally expected. Every kind of a business has to face several risks. It is mainly because the business world is uncertain.
The biggest problem is that the risks a business face can not be totally removed. There are tools, strategies, and software available to assess and minimize the risk. However, completely eliminating risks is very difficult.
Nevertheless, in order to tackle it better, it is important to be well-aware of all the types of risk. For a better understanding, explained below are two main categories of risk.
The risks that arise from the basic decisions that managers take concerning a business’s objectives are called strategic risks. Essentially, the failures to achieve these business goals are strategic risks.
There are ‘business’ and ‘non-business’ strategic risks. They are mainly decided by the board’s decision. This is why all the decisions should be taken after a good amount of research and planning.
Businesses must bring into consideration the inside and the outside factors (the technical, commercial, and economic environment) when making a decision. This is why it is very important for the board to be competent and skilled.
A business must take strategic risks to continue to grow and expand its horizon. It cannot flourish and achieve its aim until it is willing to take risks.
For example: The risk of developing and launching a new product in the market is huge. There is always a danger of facing stiff competition from competitors. The technological market is another big factor, as new technology might have arrived by the time the company launches its product.
The best practice is to engage in comprehensive planning and make fool-proof plans keeping everything in mind.
Risks connected with the internal employees, processes, systems, and resources of the organization are called operational risks.
Some operational risks, such as the failure to receive material on time, can be very hazardous for a business. It is important to control them for the business to run smoothly. Understandably, the board cannot control all the operational functions. However, it is the board’s duty to make sure that there are managers or workers to make sure that everything runs smoothly.
Most big companies have a risk committee to monitor and assess risks to help control them. This includes liaising with internal audit and setting control system. It is also very important to set priorities right, and never to neglect any issue.
Due to the wide variety of operational risks, it often becomes very difficult to keep things straight. This is why organizations should have a contingency plan in place, just in case an emergency arises. Planning well and having a back-up plan, in case something goes wrong, are the best practices to control operation risks.
These are the two most major categories of risks. It is very important to understand them well and take measures to minimize the risks associated with the business.