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Types of risk your business might face and how to prepare

Reasons to choose Wilson Browne

Risks in business are factors which have the potential to threaten the profitability, or even survival, of a company or organisation.

The greater the number of this type of issue that applies, the greater its business risk is said to be.

Organisations can find themselves exposed to both internal (caused, for example, by a failure to invest in new technology; poor cash flow; and inadequate safeguards against cyber threats) and external (resulting from occurrences like rival businesses entering the market or the introduction of new environmental legislation by the Government) risks in business.

While it is not possible to completely eradicate all risk in business, there are practical steps that a company or organisation can take to reduce the likelihood of problems arising and to minimise the disruption caused if they do.

Such responses are termed risk management plans and see companies putting in place effective policies and procedures to reduce the level of risk in business they face.

It is generally more straightforward to respond to internal business risks because this often involves addressing factors within the organisation’s direct control.

In the case of both the internal and external risks of a business, however, it is possible to mitigate the dangers faced with an effective risk management plan.

Wilson Browne’s expert corporate and commercial law team of solicitors has a wealth of experience in all areas of risk in business and works with you to put in place measures to ensure the long-term stability and prosperity of your organisation.

What are the different types of business risk?

The most common types of business risk include:

Strategic risk

These types of business risks are defined as threats which have the potential to prevent a company from achieving its strategic objectives. Strategic risks may be the result of internal or external factors and, in general terms, can range from issues such as a poor corporate structure and decision-making processes to a lack of responsiveness to industry changes.

Specific strategic risks include:

Increased competition

This can result from new companies entering the market (including overseas competitors) or mergers and acquisitions which strengthen existing businesses by enabling them to take advantage of increased market share and economies of scale.

Regulation and legislation

The introduction of new requirements by an industry regulator or Government legislation can have a profound effect on an organisation and the type of business risk it faces. Having to comply with new environmental standards, for example, may increase a company’s production costs and put it at a disadvantage relative to overseas firms that are not affected by the changes.

Reputational damage

Following on from the above point, a company that fails to comply with new legal requirements may suffer significant damage to the regard in which it is held by the public – especially if its transgressions receive substantial media coverage. Such reputational damage could also occur in a range of other ways including: HR issues, obtaining raw materials from unethical sources, and providing defective products and poor customer service.

Changes in customer demand

The types of products which consumers wish to purchase may change over time due, for example, to technological advances (e.g. mobile phones) or for reasons of fashion (e.g. clothing). A company that is unable to anticipate and cater for such changes in the nature of demand may well suffer a downturn in profitability.

Supply-side issues

In order to be able to supply products to consumers at a profit, a business must itself have a reliable supply of the item (or the raw materials required to make it) at an acceptable price. Recent years, for example, have seen the failure of numerous energy providers as the increased wholesale price of gas and electricity left them unable to supply their customers at the agreed terms.

Internal disruptions

Occurrences ranging from vital equipment breaking down to major IT failures can have a devastating short-term effect on a company’s operations and its ability to make a profit.

Financial pressures

In the case of the disruption mentioned above, it would be crucial for a company to have adequate financial reserves to enable it to cope with short-term disruptions without being in danger of becoming insolvent. Likewise, a business seeking to adapt to new market conditions caused by external factors would be at much greater risk of failing if it did not have a financial safety net on which to rely.

Compliance or regulatory risk

This is the financial, legal and reputational risk that a company faces if it does not follow legislative and regulatory requirements.

An organisation has a duty to set up robust procedures to ensure that it meets all of its obligations – failure to do so can have severe consequences including fines, civil and criminal prosecution, and adverse publicity. All of these have the potential to cause considerable damage to a company.

In the modern workplace, one of the most common areas of compliance risk concerns data protection. Any organisation which stores data has a legal obligation to ensure robust procedures are in place to prevent leaks, that staff are fully trained with regard to their responsibilities and that effective monitoring is carried out to identify and guard against any potential cyber threats.

Another area of compliance or regulatory risk concerns anti-money laundering procedures. Many companies operating in the financial sector (e.g. accountants) are required to have effective processes in place. Such organisations will be monitored by an industry body or HMRC and can face severe consequences if they do not comply.

Financial risk

This relates to the risk of a company losing money as a result of an investment (e.g. buying new manufacturing equipment) or business venture (e.g. launching a new product). In some cases such an occurrence could lead to an organisation becoming insolvent; alternatively it could place significant financial strain on a business, leading to, for example, job losses.

There are a number of specific types of financial risk to which an organisation may find itself exposed.

Credit risk

Also known as default risk, this relates to instances where a company borrows money (e.g. from a bank) in order to invest in the business. The risk involved is the possibility that the company will not be able to repay the loan, thereby putting itself in danger of becoming insolvent.

Liquidity risk

In this scenario, a business which appears to be financially stable could find itself unable to pay short-term debts and so find itself in danger of failing. It could be, for example, that the company is not able to convert its assets into cash quickly enough to meet its obligations. Alternatively, there may be a cashflow issue – such as a delay between supplying a product and receiving payment for it – which results in the business being unable to pay its debts.

Operational risks

These are risks in business that relate to the threat to the smooth running of a company’s day-to-day operations. There are a number of factors that can result in operational risks:

Human resources

Many operational difficulties arise simply because an employee has made an error – for example, using a piece of equipment incorrectly, causing it to malfunction. Alternatively, a company may lack staff with the necessary skillset for a particular project (e.g. a company’s sales team may not have anyone able to use a new software program that could help identify potential customers) or insufficient employees to cope with peak periods of demand.

Operating procedures

Large companies often have complex operating procedures with the overall success of the business being dependent on each stage of the process being carried out correctly. This could lead to problems, for example, in a business with a high staff turnover where some employees may not be sure of their responsibilities. Likewise, if a business acquires or merges with another there may be uncertainty over particular areas of responsibility in the resulting enlarged organisation.

One area where operational problems can arise is in IT where new employees may have difficulty using internal systems while in the case of a merger or acquisition, the systems of the previously separate companies may not be compatible.

External factors

We have seen above how risks in business often result from issues within a particular company. In some cases, however, threats to the business’s profitability arise due to outside occurrences. These could range from a supplier or customer going out of business and so being unable to fulfil their obligations to the company, to civil war breaking out in a prime export market.

Reputational risk

This type of business risk often overlaps closely with other threats. A vital piece of equipment malfunctioning may pose an immediate operational risk, for example, but this could lead to a reputational risk should the organisation be unable to meet customer orders as a result. Likewise, a financial risk resulting from a failed product launch may lead to reputational risk if the company has to make employees redundant as a result.

Risks in business: summary

In considering the issue of business risks, it is important to be aware of the following points:

  1. Risks in business are an unavoidable aspect of running a commercial enterprise. Whenever a company borrows money to expand its activities, it runs the risk that it may not be able to repay the loan. Whenever it buys a new piece of equipment or launches a new product, there is a danger that the move will not be successful. The objective for any organisation, therefore, should not be to eliminate risk altogether, but to minimise it and ensure that potential gains from a venture justify the level of threat.
  2. Although a company is more able to address internal risks, there is still often much that can be done with regards to external threats. An organisation, for example, is obliged to adhere to legislation that the Government introduces. It could, though, seek to prevent the law from being introduced (or at least lessen its impact) by lobbying ministers. Likewise, a business cannot prevent a rival from entering the market but, through operating in the most efficient and innovative way possible, can give itself the best chance of remaining profitable in the future.

What is a Business Health Check?

Risks in business have the potential to cause serious financial, legal and reputational damage to a company – possibly even leading to it becoming insolvent. It is imperative, therefore, that all organisations have in place rigorous and effective policies and procedures to identify and mitigate threats to the smooth running of their operations.

It is also vital that the company ensures that its plans for addressing risks remain fit for purpose over time. Internal changes to an organisation, the introduction of revised Government legislation, and increased competition within the sector, for example, can all affect the nature of the risks facing the business and necessitate a new response.

Wilson Browne Solicitors are delighted to offer a Business Health Check to ensure that your operations and systems evolve where necessary to meet the needs of your commercial and regulatory environment. As part of our commitment to providing a bespoke service and excellent value for money, we offer a range of items allowing you to select the ones most appropriate for your business.

We will take the time to get to know you and your company so that we can provide the tailored advice you require to ensure the long-term prosperity of your organisation, and will work at all times with the highest standards of integrity and confidentiality.

Our initial one-hour chat with you is free and we will always be totally transparent about future costs.

With offices in Corby, Higham Ferrers and Rushden, Kettering, Leicester, Northampton and Wellingborough we can offer a friendly face-to-face meeting at a convenient location.

For more information on how we can help you build an effective response to risk in business please call our corporate and commercial solicitors on 0800 088 6004 or complete our online contact form.