D1 Classification of Business Risk
Business risk is any factor that can prevent a business from achieving their goals. This can be internal, such as management decisions, or in the external environment. Business risks can lead to lower profits and bankruptcy. Managers should routinely evaluate potential risks and take action to mitigate them.
Tools that can support managers evaluate risks include SWOT analysis, STEEPLE analysis, what if scenarios and evaluation of company data.
Legal
Financial
Reputation
Legal risk refers to the threat of legal action as a result of business activity. Businesses may breach of legal requirements consciously in order to reduce costs or production time. However, legal implications can result from misunderstanding of regulations, lack of awareness to changes in legal requirements or poor training and supervision of staff. Legal implications include fines, investment in changes to working practices and business closure.
Reputation risk is the potential damage that can be done to stakeholder perceptions of a business as a result of their business activity. The implications of a poor reputation include lower revenue, higher employee turnover and lower confidence from suppliers, investors and lenders. Business activity that can lead to a damaged reputation includes poor quality or dangerous products, poor treatment of employees, poor data protection, tax evasion and misconduct of senior staff.
Financial risk is the likelihood of a business being unable to fulfil their financial obligations. Factors that can lead to financial risk include market volatility, credit issues, liquidity and operations.
Market volatility can lead to fluctuating prices making it hard to make financial predictions and to set prices at a profitable level.
Credit issues include the costs of owing money to a creditor such as interest and late payment charges as well as the cost of giving credit to customers such as the risk of non payment.
Liquidity is the ability of a business to meet their short term debts.
Operational risks are those that can arise from day to day business activity including fraud, equipment failure and staff issues.
