We get in our cars everyday knowing that there is a high chance that we’ll get into an accident at least once (if not multiple) times during our lifetime. While driving is dangerous, for many people it’s an acceptable risk.
The consequences of owning a business are arguably more financial than physical. (unless you have some angry customers) Understanding, analyzing and possibly even lowering your business risk can potentially save your company from detrimental financial consequences.
What is business risk?
Business risk refers to the possibility that your company will not succeed financially due to its exposure to different factors. In other words, it’s anything that could pose a risk to your company’s goals.
Risk comes with the territory of owning a business, but some companies have higher business risk than others.
The good news is that risk can be minimized and consequences mitigated through analysis and planning.
What factors influence your business risk?
A change in demand for your item or service
Some companies are more susceptible to this risk than others. For example, a company that sells books is more likely to experience a change in demand than a company that sells groceries.
Demand forecasting is a great way to predict future demand of your product or service over a specific time period.
Causal is a Monte Carlo simulation tool that can help you build a quick custom demand forecast, so you can tell whether change in demand could possibly be detrimental to your business.
An oversaturated market
Not many people like the DMV. It’s often crowded, cramped and slow. It also has no competition. No matter what, the DMV can expect customers because there is nowhere else to go.
But what if there were other companies that could offer the same services in a faster, more customer-friendly manner? The DMV would be forced to adapt or face financial ruin.
Competition can be a big factor in predicting a company's risk. If a business is in an oversaturated market with tons of competitors, customers may not stick around should something go awry.
A good way to understand this form of risk is to perform market analysis. Market analysis is the process of using data to understand the market in your industry so your company can be competitive.
Causal can help you perform market analysis by tracking your campaigns and building interactive forecasts. Our modelling makes it easy for you to keep your entire team on the same page.
Complex and changing industry regulations
This affects all companies, and poses the consequences of a loss in reputational status, financial fines or even lawsuits, however this risk is higher for certain companies.
While a food company most certainly would not want to get shut down by the FDA, industries like the financial sector have high compliance risk due to complex and changing regulations.
Types of business risk
Not all types of risk are the same. Understanding which forms of risk are most dangerous to your company essential to protecting against it.
Compliance risk is the threat posed to your company by a change in or violation of rules and regulations. This type of risk pops up in highly regulated industries, such as the financial industry.
Compliance issues often lead to fines and a loss of reputation. A compliance issue can even bankrupt or close a company. This type of risk can plague a company with legal issues, making a long-term financial drain.
Strategic risk refers to factors that could make executing a company's goal difficult or impossible.
If a business plan is derailed, this could be financially detrimental to a company. Strategic risk from a bad strategic decision is common, and can impact company morale, reputation, and revenue.
Operational risk sometimes gets confused with strategic risk, however this form of risk stems from failed procedures, systems and policies. This risk comes from internal instead of external factors.
The consequences of operational risk include a loss of productivity, possible financial consequences, and a loss of reputation. Operational risk has caused media disasters, such as the Facebook data breach that allegedly exposed 530 million users.
Reputational risk comes from factors that put a company's reputation at risk.
Minimizing Business Risk as a whole using Causal
With a good business plan your company can spot and minimize risk. There are several strategies to minimize risk.
Hiring a team or an individual dedicated to risk management
Plan for all outcomes
Causal allows you to forecast for a range of scenarios, not just one, so you’re able to plan for anything. Our built-in scenario analysis will help you see the outcome of any “what if” scenario so you can plan for the worst, while working toward success.