CLASSIFICATION OF RISKS

FINANCIAL RISKS

Financial risk generally relates to the odds of losing money. The financial risk most
commonly referred to is the possibility that a company's cash flow will prove
inadequate to meet its obligations. Financial risk can also apply to a government
that defaults on its bonds.

NON FINANCIAL RISKS

This type of risk do not usually have direct and immediate impact on the business. Non-financial
risks include (but are not limited to): • environmental risks (including climate-related risk) •
social risks (including understanding changing social norms) • supply chain transparency and
other supply chain risks • health and safety risks and etc.

TYPES OF FINANCIAL RISKS

MARKET RISK
Market risk involves the risk of changing conditions in the specific marketplace in which a
company competes for business. It is a risk of losses on financial investments caused by
adverse price movements. Examples of market risk are: changes in equity prices or commodity
prices, interest rate moves or foreign exchange fluctuations. Another element of market risk—
the risk of being outmaneuvered by competitors.

NEXT IS CREDIT RISK

Credit risk is the risk businesses incur by extending credit to customers. it refers to a lender’s
risk of having its cash flows interrupted when a borrower does not pay principal or interest to
it. Credit risk is considered to be higher when the borrower does not have sufficient cash flows
to pay the creditor, or it does not have sufficient assets to make a payment.

LIQUIDITY RISK
Liquidity risk includes asset liquidity and operational funding liquidity risk.
Asset liquidity refers to the relative ease with which a company can convert its assets into cash
should there be a sudden, substantial need for additional cash flow.
Operational funding liquidity is a reference to daily cash flow.

LASTLY, IS THE OPERATIONAL RISKS

Operational risks refer to the various risks that can arise from a company's ordinary business
activities. The operational risk category includes lawsuits, fraud risk, personnel problems, and
business model risk, which is the risk that a company's models of marketing and growth plans
may prove to be inaccurate or inadequate.

LET US NOW MOVE ON TO THE TYPES OF NON FINANCIAL RISKS

FIRST IS THE STRATEGIC RISK

Strategic risk refers to the internal and external events that may make it difficult, or even
impossible, for an organization to achieve their objectives and strategic goals. Sources of
strategic risk can be any of the following: mergers, acquisitions and other competition, market
or industry changes, changes among customers or in demand.

NEXT IS COMPLIANCE RISK

Compliance risk is an organization's potential exposure to legal penalties, financial forfeiture
and material loss, resulting from its failure to act in accordance with industry laws and
regulations, internal policies or prescribed best practices.

FRAUD RISK
the risk of unexpected financial, material or reputational loss as the result of fraudulent action
of persons internal or external to the organization. Though types of fraud vary by business line,
internal frauds include embezzlement and misappropriation of assets, while external frauds
include hacking and theft of proprietary information.

REPUTATIONAL RISK
The damage that can occur to a business when it fails to meet the expectations of its
stakeholders and is thus negatively perceived. It can affect any business, regardless of size or
industry.

TRANSACTION RISK

Transaction risk refers to the adverse effect that foreign exchange rate fluctuations can have on
a completed transaction prior to settlement. It is the exchange rate, or currency risk associated
specifically with the time delay between entering into a trade or contract and then settling it.

DISASTER RISK

the likelihood of loss of life, injury or destruction and damage from a disaster in a given period
of time. the consequence of the interaction between a hazard and the characteristics that make
people and places vulnerable and exposed.

REGULATORY RISK

The risk that a change to the laws or regulations will hurt a business or investment by affecting
that business, sector, or market.
In extreme cases, such changes can destroy a company's business model.

Last is the TECHNOLOGY RISK

technology risk refers to the likelihood of software breakdown that can impair a company's system
landscape.
Companies face many types of technology risks, such as information security incidents, cyber
attacks, password theft, service outages, and more.
TOP WAYS TO MANAGE BUSINESS RISKS

1. PRIORITIZE
The first step in creating a risk management plan should always be to prioritize risks
and threats. You can do so by using a somewhat universal scale based on each risk's
likelihood of happening.
a risk that falls into the top category should take priority over the others, and a plan to
prevent, or at least mitigate, these risks should be put into place. However, there is a
catch. If a risk falls into a lower rung yet presents the potential for more financial
damage, then it should take priority.

2. BUY INSURANCE
Assess liabilities and legal regulations to determine what types of insurance
will be required for your business. This might include:

 Life insurance
 Disability insurance
 Professional insurance
 Completed operations insurance

Buying insurance allows you to transfer your risk to insurance companies for
a small cost, especially when compared to the potential cost of uncovered
risk.

3. Implement a Quality Assurance Program

A good reputation is imperative if you want a sustainable business. Customer service is
key to success. Be sure to test your products and services in order to assure the
highest quality. By testing and analyzing what you’re offering, you will have an
opportunity to make necessary adjustments. Also, strongly consider taking it a step
further by evaluating your testing and analyzing methods.
4. Limit High-Risk Customer
If you’re just a newly built business, immediately implement a rule that customers with
poor credit must pay ahead of time, which will avoid complications down the road. In
order to do this, you must have a procedure to identify poor credit risks far in advance.

5. CONTROL GROWTH
if you’re selling products and/or services and you set lofty goals for employees, they
might be tempted to take unnecessary risks, which can lead to a bad reputation for your
company. Instead, train your employees to focus on quality, not quantity. By doing so,
you will avoid the risk of declining sales due to high-pressure sales tactics that
customers don’t appreciate.

On a related note, while innovation is a key to success, you don’t want to innovate too
fast. If your company is constantly relying on the next innovation for growth, then a
hiccup is inevitable because not all new products and services will be successful.

6. APPOINT A RISK MANAGEMENT TEAM

If you want to save capital by not having to hire an outside firm, and there is time
available, you can appoint current employees to head a risk management team.
However, this would only be wise if someone within the team has experience in this
area and can act as a leader.
Otherwise, paying for an outside risk management team will be a worthwhile
investment. They will be able to map out all the risks to your company based on your
type of business and set up strategies to implement immediately if any of those risks
become a reality. This should lead to the prevention, or mitigation, of those risks and
threats. 

7. RISK REDUCTION
Businesses can assign a level at which risk is acceptable, which is called the residual risk
level. Risk reduction is the most common strategy because there is usually a way to at least
reduce risk. It involves taking countermeasures to decrease the impact of consequences.