How to Determine the Risk Level of a Business

Setting up and running a business can be tasking for any person, and this is because there are various risks involved in a business. The business environment is filled with uncertainties and these risks, and sometimes, it can lead to despair. The usual question in the mind of a business owner is how do I determine the risk in this business? Once the risk level of a business is ascertained and the process of handling it is provided, there is little or no much issues to think about in running a business.

What is Business Risk?

Business risks are factors that have the potential to affect the business by lowering its capacity to make profits, resulting in consistent loss, or they can lead to the failure and closure of that business. These risks are of different types, levels and kinds.

In business, all risks aren’t the same. There are those resulting from within a business and there are those coming from outside the business. These risks also affect the running of the business in various levels and ways; there are some risks that are more devastating than the others. Nevertheless, the important thing you have to note here is how to eliminate or reduce the risks surrounding your business.

Types of Business Risk

Business risks are classified into two major types or groups of factors. There is the internal and external risks of business. These two major types are further broadened into other factors.

I. Internal Risks

These are the risks are factors within the business that may affect the running of the business. Risks are generally called or noted to be potential risks, because they are yet to affect the business. Thus, internal risks are potential factors in your business that can affect your business and lead to an irredeemable loss in the business.

These internal risks are widely spread and include several factors within the business.

  1. Lack of Proper Planning: This is the foremost factor responsible for the potential failure of a business. The owner(s) of the business makes no concrete plan of the process of running the business. Without the right plan and foresight of the likely causes of business failure, there is higher probability that your business would fail.
  • Financial Inadequacy: If you set out to do a business with limited capital and money, there is bound to be serious challenges in running that business. In business, funds are needed in the day-to-day operations; if it is starved of funds, the output and performance would be poor.
  • Marketing Challenges: This is also a bad risk in business. There is no way you would make profit and keep the company in operation without marketing and sales. When you put up a marketing structure and campaign, and it does not come up to meet the need of your business, your establishment would encounter serious challenges. Persistent poor sales will likely lead to the death of the business.
  • Operational Risks: This is based on the daily running of the business, the risks involved in it. If they are not properly checked and considered, it would lead to a disaster for your business.
  • Labour Risk: The kind of people you employ and how they work also plays a role in determining the risk level of your business. If you have nonchalant and impassioned workers, your business stands a great risk of failing. There are not enough workers to give your business the push it needs.

II. External Risks

Unlike the internal risks, this group of risks are factors outside of your business, often involving government policies, that can affect the running of your business. While internal risks can be controlled according to your capacity and understanding of business, external cannot be controlled.

  1. Government Rules/Policies: This is the prominent external risk in a business. The business environment and the economy is affected in a lot of ways by the government. It is the government’s policies that often determine the economic environment of a country in terms of economic, political and infrastructural risks. A government riddled with bad policies would affect the running of your business.
  • Economic Change: The economy of your location country may also take a drastic turn for the better or for the worse affecting the business. If the economy changes for the worse, then there is higher probability that your business may fail. In the case of the worse economic change, there are factors of inflation, low buying power, increased poverty and all that is associated with bad economy. Thus, your business would not make much sales to keep up with your production capacity or rendering of services.
  • Business Competition: Competition is often seen as a vital aspect of business and capitalism. Thus, if you are setting out for business, you are encouraged to learn how to deal with competition. However, competition can be a big potential risk if your business encounters enormous competition. You can also be running a business that is filled with business owners who have large capital and would put much of their capital to bully you out of the market. This is a big business risk you have to duly consider.
  • Consumer Changing Taste and Demand: This risk can be noticed if your company continues on a constant study of the consumer market. As time goes on, the consumer market continues to change, and the people adapt to new realities and changes. You have to take note of consumer changing taste or you are kicked out of the market. This is an important risk in business, because if consumers find your products and services not meeting up to their taste, your business and services are abandoned.
  • Cost Risk: This risk has to do with the cost it takes in the production going on in your business and the cost of similar products and services of your competitors. The issue of cost can affect your business greatly. On the issue of your production and service cost being on a high side, it might not be what your consumers can afford and your prices may not be competitive among your colleagues in business.
  • Nature Risk: This has to do with negative effects of nature on business like earthquakes, tsunami, flood or tornadoes. These natural problems are often unforeseen and have drastic consequences in business. You have to put this into consideration when studying the risks that may affect the running of your business. Of course, the probability ratio of it to occur is less than the other risks stated here, but they do occur and are more devastating than the rest.

How to Calculate and Determine Risk in Business

There are simple ways you can calculate and determine potential risk in your business. Having noted the types of risks and how they can affect your business, it now comes to how you can calculate the probability and the impact of these risk. How probable is it for these risks to affect your business? How much impact can these risks make in the running of your business?

This calculation is done using two factors or modes or features. The probability and impact factors.

  1. Probability: This is when you calculate the risks based on how often the risks would affect your business. You have questions in mind like how often would these risks occur or would they occur at all or in what ways would they occur?

For instance, the risk of bad government policy and economy has higher probability than nature risk. A person living in a failed state would have higher probability of bad government policy than someone living in a working state. You can use this to calculate all these risks and sum it up, knowing the possibility of continuing the venture or stopping before you even start.

  • Impact: The level of impact your business suffers with these risks is different according to each risk. The impact often made by nature risk is more devastating than all other risk even though the probability of it occurring is lower. The impact made by bad government policy is higher in impact than consumer changing taste and demand; at least as a business owner you have the better capacity to control consumer taste than you can control bad government policy. Bad government policy can easily push you out of business.

You should calculate the risk your business can encounter using these indices. You can either calculate each risk with the indices and add it up later knowing in whole what your business encounters or you can do it individually and evaluate the risks based on their individual capacities to occur frequently or in what ways they can affect your business.

Conclusion

You have to note that risks are to be treated as potential risks and be taken seriously until they occur. There are different types of business risks and they have varying impacts. When checking and calculating them, do it well and make sure you get it right. Make good business plans, too, because if you don’t plan well you are bound to fail.

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