Business risk and its factors

The term business risk means any uncertainty or contingencies that affect a firm’s ability to meet its financial goal. In business, risk means any future obstacle that may hamper the firm’s operation and its progress. Thus, it acts constraints for business to achieve its target.

Business risk can be related to several situations, circumstances, action or inaction that affects the future income of the business. The business risk may be related to anticipation of lower profits than expected profit or losses or change in government policies or increasing competition and changing tastes and preferences, etc. These risks impede the ability of the business to provide a considerable return on investment.

However, the risk may not always be under our control. It is influenced by various factors that are classified as external, internal factors and personal factors.

External factors

Include economic, social and natural events that arise outside the firm. These factors neither can be controlled by a company nor accurately forecasted. Thus, it is difficult to reduce the risk associated with these factors.

There are three types of external factors

1. Natural risk factor

   It includes all the natural calamities like flood, earthquake drought etc. that affects the working of the business. For example, an earthquake disrupts the businesses because of the mass destruction of infrastructure and lives. Thus all the activities of the firm get stalled. Although the companies have insurance coverage to cover the financial losses due to natural disasters, it may not cover the loss of revenue due to being shut down or not fully operational.

2. Political factors

   It includes the risk that arises from the change in the political environment of the country or world. The government may introduce new financial policy or may make amendments in existing rules. Or it may change the import-export laws, tariff tax etc. all these affect the businesses.

3. Economic factors

   It includes risk arising because of the changes in the market conditions, rising raw material prices, increasing borrowing costs, competitions, etc.

Internal risk factors

It occurs within the organization in the course of day-to-day operation. These are controllable with reliable forecasting.

Three types of internal risk are :

1. Human factor risk

   It includes the risk of union strikes, employee fraud, ineffective management, failure to meet client and supplier’s payments, bad-debt etc. All this risk arises within the organization. The risks arising on account of the wagers and employees can be reduced with efficient personnel management. Effective empowerment and compensation solve mitigate the risk.

2. Technological risk

   It includes the risks of unforeseen changes in the production, delivery or distribution of product or service of a company. For example, the use of outdated operating systems disrupts the production, supplies and inventory. Thus a proper inspection and investment in research and development help to reduce such risk.

3. Physical risk

   Physical risk is the loss or damage to the assets of the company. A company can mitigate such risk by hedging the exposure to all the three risk factors.

Personal factors

It included additional risk arises due to personal conflicts and complacency. For example, balancing personal and professional life can affect both the business and its employees. Such scenarios occur when key personnel request for time off in the peak hours of work. Complacency can prompt to avoid opportunities for growth and additional profit as they satisfy you with the status quo. If you want to know more information, feel free to talk with us.