Identify Your Business Risks

Identify Your Business Risks - close-up of businessperson stopping dominoes falling on deskA lesson some business leaders learn the hard way is that in today’s global operating environment risks are increasing. It takes only catastrophe for a leader to recognise the importance of making decisions by balancing risks versus rewards.

A leader must maintain a steady focus on business risks. Failure at this could lead to a loss that undoes all efforts to increase the company’s performance and net worth.

A leader must take steps to defend against business risks to protect his or her company’s operational and financial well-being. To do so, he or she must learn to identify and classify each business risk depending on its origin and characteristics.

The Origins of Business Risks

Business risk is the possibility that actual returns will be more or less than expected. A leader takes on business risks the moment a company turns on its lights and opens its doors.

The types and scale of the risks that affect the long-term success of a business will depend on the company’s operations and industry. For example, new competitors, shifts in consumer demand and economic downturns are risks to businesses in the retail industry. On the other hand, companies in the manufacturing industry may have to manages shortages of skilled labour.

Financial Risk

A financial risk can impact your company’s cash flow and income. Because potential purchasers value your business from its sustainable future profits, financial risks also affect shareholder wealth.

Financial risks include liquidity risk, which is where a company becomes unable to meet its current liabilities without suffering significant losses. This can affect retained earnings. Market risk is another financial risk, including changes in commodity prices, exchange rates and interest rates.

Another financial risk is capital structure risk – a company’s debt to equity ratio. This is determined by the way a business finances operations.

Strategic Risk

Your company’s strategic risk is determined by its business functions, investor communications and operating environment. A company’s operating environmental risk is affected by the markets in which it buys and sells goods and services.

Environmental risk also depends on the government regulations and compliance requirements that govern your company’s operations and markets. In turn, unfavourable changes in the supply or demand of products or services also affect a company’s strategic risk, as do the competitors that vie for sales and supplies in your chosen markets.

Operational Risk

Operational risk (process risk and innovation risk) concerns your company’s internal activities. Process risk relates to the availability of resources, such as employees, equipment, materials. It also applies to business processes which support production or affect your company’s continued operations.

In turn, innovation risk depends on the success or failure of improving performance and upgrading business processes. Innovation risk also relates to the business successfully making incremental product improvements and developing new products.


Business leaders consider a number of criteria during a decision-making process, not the least of which is business risk. To ensure a business doesn’t suffer a catastrophic loss that threatens continued operations, a leader must manage business risks. A first step in the process is identifying and classifying relevant business risk, including strategic, financial and operational risks.