17/12/2019 What are the different sources of business risk?

TRADING SKILLS & ESSENTIALS RISK MANAGEMENT

What are the different sources of business

risk?

By J.B. MAVERICK | Updated Oct 26, 2018

A certain risk level is inherent in running a business. A company cannot completely eliminate
risk, but it can control or at least successfully manage risk. A company's management has to
make decisions and choices regarding acceptable risk levels, especially in terms of financial
issues. The key to successful risk management is maintaining a good balance between risk
and reward, carefully weighing potential profits against potential problems or threats to
operational stability. A company must inevitably assume some level of risk to generate
returns on investments that will be satisfactory to its stockholders. There are a number of
sources of risk for any business, including risks from the marketplace, employee-related
risks and financing risks.

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Having a Contingency
A large part of risk management is awareness of potential risks and having contingency
plans in place to deal with problems that may arise. For example, if a company's
management knows it will need additional financing to complete an expansion project,
good risk management is having a backup source of financing available if the company's
primary financing source is unwilling to extend the company additional credit.

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Operating Profit
The marketplace in which the company operates is a primary source of risk. Many
marketplace-related risks cannot be directly controlled; they can only be managed and dealt
with as best as possible. There is a risk that consumer demands or desires may change,
resulting in less demand for the company's products. There are risks that the company's
products could injure someone and result in a lawsuit. There is the risk that a competitor
may introduce a product that makes the company's product less desirable to consumers, or
that a competitor may offer a competing product at a substantially lower price, threatening
either number of sales or operating profit margin. There is always the risk of a general
economic downturn that makes consumers less able to purchase the company's products,
resulting in fewer sales.

Cash Flow
Numerous business risks are associated with financing and cash flow. A company may be
unable to obtain the necessary financing for an expansion project. The company's customers
may experience financial problems that make them unable to pay invoices on a timely basis,
disrupting the company's cash flow. Suppliers may unexpectedly raise prices, creating
working capital or cash flow problems for the company or causing it to have inadequate
inventory on hand when needed.

Employee-Related Issues
Employee-related issues are another source of business risk. Labor problems may arise that
impact a company's production. The need to retain certain key personnel may result in
increased wage costs. Loss of key personnel can affect the company's performance and
profitability – for example, if one of the company's top salespeople takes a job with another
firm, or if the company loses a key product designer. Included in this risk category is
management risk – the risk of bad management decisions for a company.

If a company does business internationally, then there are risks of political problems,
changes in tariffs or import/export laws, and risks associated with fluctuating currency
exchange rates.

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Related Terms
Unsystematic Risk
Unsystematic risk is unique to a specific company or industry and can be reduced through
diversification. more

Financial Risk: The Art of Assessing if a Company's a Good Buy

Financial risk generally relates to losing money. It can refer to the possibility that corporate
stakeholders will incur losses if the company's cash flow proves inadequate to meet its obligations. It
can also refer to a corporation or government defaulting on its bonds. more

The Ins and Outs of Business Risk

Business risk is the exposure a company or organization has to factor(s) that will lower its profits or
lead it to fail. more

Understanding Risk Control

Risk control is a technique that utilizes findings from risk assessments within a company to reduce the
risk found in these areas. more

Risk
Risk takes on many forms but is broadly categorized as the chance an outcome or investment's actual
return will differ from the expected outcome or return. more

Credit Risk Certification

Credit risk certification is a professional certification awarded by the Risk Management Association
(RMA). more

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