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5 Types of Business Risks You Should Understand

Business risks is inherent when it comes to owning and operating any business. Whether it be a small business or a large corporation, no business is completely immune to the various types of business risks that exist. It is critical that every business owner remains mindful of the many types of risk that exist and ultimately use their knowledge to effectively mitigate those risks as much as possible. In this article, we’ll explain five of the most common types of business risks.

Operational Risk

One risk that a business may face is operational risk. As opposed to risks caused by external factors, such as politics or economics, operational risk is the result of disruptions that take place internally. A business may experience operational risk if they are met with challenges pertaining to internal procedures, policies, or even staff, for example.

Operational risk can affect the day-to-day operations of a business, thus resulting in significant financial losses over time, if a business fails to effectively mitigate internal disruptions. Operational risk is a type of business risk that can affect any business, big or small.

Legal Risk

Legal risk, also referred to as compliance risk, is another type of risk that business owners should be mindful of. Legal risk may be present for a variety of reasons. In some instances, business owners may simply be unaware of the laws and regulations that apply to their business. Or, a business owner may be indifferent or display a lack of concern for the laws and regulations that they must legally abide by. Regardless of why a business owner may not be fully abiding by the laws and regulations that have been set in place at a domestic and international level, legal risk has the potential to cause significant harm to the well-being of any business. 

There are serious consequences and penalties that a business must endure if they do not comply with all of the necessary legal requirements put in place for its particular type of business. Legal risk may ultimately result in financial and repetitional losses for a business. Given that the legal landscape for every business is constantly changing and evolving, it can be difficult to ensure that every requirement is being followed. Regardless, legal risk is not something that should be taken lightly and business owners should strive to minimize legal risk as much as possible on a daily basis.

Reputational Risk

Another potential business risk that owners may experience is reputational risk. Reputational risk is directly affected by how satisfied a business’s clients and customers are with the products and services that they offer. If a business does not effectively meet the wants and needs of its clients and customers, it will inevitably be affected by reputational risk. And if clients and customers are continuing to be unsatisfied with the products and services that they receive from the business, they will eventually stop relying on that business altogether.

There is a multitude of potential reasons why a business may experience reputational risk, including failure to comply with laws and regulations, failure to protect the privacy of clients and customers, and failure to provide clients and customers with consistently good experiences. Ultimately, it is important that clients and customers trust the businesses that they are working with because building trust goes hand-in-hand with maintaining a good reputation.

Security Risk

Security risk is a type of business risk that can occur as the result of internal or external factors. For instance, if one of your employees decides to give confidential information to a competitor, then your business will experience security risk as a result of an internal factor. Or, an employee may fail to correctly follow a business’s policies and procedures, thus compromising the security of other employees and potentially even the customers that the business services.

Besides internal threats to security, there are a plethora of external factors that could compromise the security of a business as well. External threats, such as phishing and malware, can not only compromise the safety of a business at large but also the customers that buy a business’s goods and services. In order to effectively reduce security risk as much as possible, business owners must train their employees well and have a detailed security plan in place.

Competitive Risk

Competitive risk is another type of risk that every business owner should be mindful of when operating their business. Regardless of the type, every business exists within a market alongside other competitors that offer similar goods and services. Given that every competitor within a given market wants to succeed and set themselves apart from the rest, it can be challenging for every business within a highly competitive market to succeed. 

In order to minimize competitive risk, business owners must differentiate their business from other businesses that are offering similar goods and services. Having a strong understanding of the competition that exists is important. Also, developing a good understanding of the customers that exist within a given market is crucial for any business that wants to reduce competitive risk. At the end of the day, competitive risk will always exist. What matters most is how a business owner chooses to react to and mitigate the risk on a consistent basis.

Conclusion

Whether it’s internal or external factors, every business is constantly faced with a variety of risks and challenges. As a business owner, it is important to learn about and remain mindful of the various types of business risks that exist. Operational risk, legal risk, reputational risk, security risk, and competitive risk are just some of the many types of business risks that exist. Every business, big or small, must address all of these risks on a consistent basis in order to ensure the stability and well-being of the business in the long run.

Now that you understand a few of the more common business risks, check out our article on 8 ways to lower business risks.

Melissa Leyba on Linkedin
Melissa Leyba
Melissa Leyba is an educator and freelance content writer based in Los Angeles, California. She has a passion for learning and sharing her knowledge on a variety of topics, including business, education, and international relations. In her free time, she enjoys making music and traveling.

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Melissa Leyba is an educator and freelance content writer based in Los Angeles, California. She has a passion for learning and sharing her knowledge on a variety of topics, including business, education, and international relations. In her free time, she enjoys making music and traveling.

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