1. Financial risks
Your growing business needs to make enough money not only to pay its expenses (eg wages and rent), but also to make the interest payments on any loans that were taken out (eg in the business’ original financing).
In any business, there is a risk of financial loss, whether from mismanagement of funds or a sudden and unexpected event. This could end up leading to insolvency and the end of your business. A higher level of debt financing could put you at a higher level of financial risk.
Types of financial risk include:
Currency risk (or ‘exchange-rate risk’) is about the risk of a change in the price of one currency compared to another. For example, take a British business selling products to an American business for a specific number of US dollars. If the value of the dollar rises very suddenly at the time of delivery and payment, the British business will lose money as buying dollars now requires more pounds than before.
Credit risk refers to the potential risk a business faces when it grants credit to customers due to the chance that these customers could stop making payments. Credit risk is also a consideration when a lender provides business credit for purchases. If a business lacks sufficient funds to repay these loans, it could default
Liquidity risk is when a business faces challenges in converting its assets (ie property) into cash. This usually happens when there is an urgent need for large amounts of money for short-term debt obligations. For example, a real estate business that needs to generate cash quickly may struggle if there are no buyers interested in its properties.
2. Operational risks
Operational risks refer to things that can go wrong with the operational processes within a business, whether these are internal processes and systems, human errors or large-scale external events.
Examples of operations risks include:
employees making mistakes (eg inputting the wrong phone number into their contacts platform, giving the wrong change to a customer or arriving late to work)
process failures (eg inaccurate inventory tracking, resulting in stockouts, overstocking and lost sales opportunities)
supply chain disruptions, which can easily have a knock-on effect on the rest of the business’ processes and affect client-business relations)
force majeure events (eg natural disasters, such as floods and fires, or external events such as economic collapse)
3. Legal risks
Every business needs to adhere to certain laws and regulatory standards. Failing to comply with these can expose you to legal risks. It’s best to begin complying with legal requirements before you even start a business.
Businesses have to comply with all kinds of rules, including taxation requirements, minimum wage laws, data privacy regulations, environmental impact requirements, equal opportunities laws, and financial regulations. As an employer, it is also your job to make sure your staff have a safe work environment.
Fines and even imprisonment for executives (eg company directors) can result if laws are broken.
To protect your business from legal risks, you should adopt all relevant employment policies and operational policies. Consider adopting an Employee handbook to help cover your bases. Consider following our HR policies checklist to ensure you adopt all relevant procedures and protect your business.
4. Cyber security risks
More and more businesses are venturing into the digital space (eg by running websites, providing mobile app access, allowing online payment options, and relying on electronic data storage). While this offers numerous benefits, it also comes with certain risks.
Businesses may be targeted by cyber attacks (eg hacking to access customer or staff data). As a result, it is crucial that you keep all personal and financial data safe from breaches, identity theft, payment fraud and more. Not only does this protect your workforce and customers, it also protects your reputation.
For example, if you’re using an automated receptionist, consider:
if you transfer data outside of the UK, are you complying with all relevant data protection regulations? It’s crucial to prioritise cyber awareness and implement robust cyber security measures to protect sensitive information. By staying vigilant and proactively addressing potential cyber threats, you can maintain the trust of your employees, customers and stakeholders.
For more information, read Information security and cyber security, What are cyber attacks and their risks?, and Data protection for businesses. In all circumstances, you should consider adopting a Data protection policy and an Information security policy. If you need help with data protection compliance, seek GDPR compliance advice.
5. Reputational risks
Reputational risks refer to the potential threats that can harm a business’ image, brand or overall reputation. Examples of reputational risks include:
cyber security issues (eg repeated hacking incidents)
frequent late deliveries
scandals (eg the discovery of problematic statements made online by a company director or the use of child labour somewhere in a supply chain)
environmental incidents (eg pollution of rivers)
staff mistreatment (eg harassment)
In this age of information being so easily shared, stored and discovered, any unethical behaviour inevitably comes out to haunt you. The solution? Be careful with who you hire and stick to the most ethical practices possible.
So do not pollute the waters, mistreat staff, or side with bigots on social media. Do offer training to staff to carefully outline your business’ values and ethics and how these can be upheld in practice.
What should I do next to manage business risks?
Risks are inherent to any business, whether the business is well-established or just starting up and at every stage in between. Mitigating those risks is often the only course of action. If you are worried about potential business risks, consider making a Business continuity plan to ensure your business continues to operate even when faced with challenges.
Do not hesitate to Ask a lawyer if you have any questions or concerns about the risks your business may face.