Business Risk: Why is it the biggest issue in the global world of 2019?
- According to BCC Research, the global risk management market is expected to reach $17.1 billion by 2021 from $11.0 billion in 2016 at a compound annual growth rate (CAGR) of 9.2%, from 2016 to 2021
- The global industries of 2019 have approached to different way of risks in comparison to traditional industries who had less ideas on risk management tools and strategies
- Companies are unable to control the external factors that pose great threat and challenges in their sustainability including Political, economical, technological or environmental issues
- Businesses use various tools, techniques, steps and strategies to mitigate the level of risk so that they could increase their market share and profitability
Businesses during their early stages face a lot of risks when they are unable to cover up their operating costs or compete in front of big established companies.
According to Bill Gates “Business is a money game with few rules and a lot of risk.” Businessmen like Bill Gates and Mark Zukerberg are great businessmen who changed the approach to risk by developing great business enterprises such as: Microsoft and Facebook.
In the world of finance, businesses identify risks in advance and take precautionary measures to minimize them. However, expected risks so calculated is not exact because market is volatile and there is several variables affecting the risk and return in any company. Therefore investors need to identify the nature of financial instrument whose risks may be in the form of high inflation, volatility in capital markets, recession, bankruptcy and more.
Types of Business Risk
The main types of business risk include:
1. Strategic risk:
This is a type of risk where your business strategy becomes less effective. As a result, your company is unable to reach its goals as per the plans. This risk might arise due to technological changes, shifts in customer demand and increase in costs of raw materials.
2. Compliance risk:
The risks that businesses face due to change in country’s laws and rules are identified as compliance risk. In extreme cases, a compliance risk becomes strategic risk affecting businesses future.
3. Operational risk:
This type of risk result from the failure of the company to manage day-to day operations. It could be technical failure, miscommunication, ineffective team work or lack of security mechanism.
4. Financial risk:
It is categorized as the cash flow in businesses and inability of the company to maintain its liquidity position (current cash in hand) resulting in a sudden financial loss. However, having a lot of debt also increases the financial risk.
Besides, reputational risks are also emerging in the global businesses due to various scandals and active involvement of media to bring unethical issues on light.
According to business insider, 45% of respondents have identified Businesses Intelligence (BI) being the top risk followed by 33% (cyber risk) and 28% (new technologies.) According to Online Trust Alliance, no. of cyber attacks worldwide doubled in 2017 to 160,000. Similarly, according to Statist a, environmental concerns accounted for 3 of the top 5 risks by likelihood and 4 by impact. Also, the World Wildlife Fund report highlighted the extent of the challenge faced by businesses due to loss in vertebrates averaging 60% between 1970 and 2014.
Risk Management Process
The 5 major steps to mitigate risks include:
- Identify:Risks can pose greatest threat if left uncovered. Therefore, the first step of the businesses is to identify the businesses risks on the basis of size, nature and structure of businesses.
- Access: The second step of the risk identifier is to how likely be each risk to happen and what would be the potential impact of the risk. One has to access the nature and severity of each risk.
- Control: Companies must try and control and mitigate those risks in this step. Risks cannot totally be avoided but other steps can be taken to lessen the risk and the potential harm they can cause.
- Monitor: Every time education and skills may not work to mitigate the risk. Best practices have to be recognized on the basis of situation which is identified through experiences. There must be someone in an organization that upholds the rules to employees and helps in effective supervision.
Besides, companies use various tools or techniques to manage risks in their organization.
- Managers try to avoid the risk by thinking of several other alternatives
- In case of deemed risk, organizations act to prevent it from happening
- Companies choose to retain said risks by putting safety measures
- Companies conduct financial analyst training program so that risks are pre-measured and preventive measures could be taken accordingly.