Risks in Business - Joel Patterson

Risk in Business: How to Understand, Evaluate, and Utilize It

Risk is inherent in running a business. Without it, there would be no forward motion, but the results could be devastating if you take on too much. While many large corporations have extensive risk management departments, smaller companies usually don’t have the resources to allocate solely to analyzing potential risks. Even without a dedicated risk management department, small and medium-sized businesses can still take steps to understand, evaluate, and utilize risk.

There are two broad categories that almost all risks fall into external or internal. External risks are things like natural disasters, emerging market competitors, economic fluctuations, etc. In many cases, these are risks that you can’t control but can react to strategically and produce a more favorable outcome. 

On the other hand, internal risks are present within the business’s operations, so they are easier to identify and therefore prevent. Compliance risk, operational risk, financial risk, and reputational risk are all examples of internal risks. In this article, I’m going to focus on identifying and analyzing these internal risks, as well as steps that can be taken to prevent their effects.

Compliance risk refers to anything that could be affected by industry and government regulations. One common compliance risk in the U.S. is tax audits. It’s important to keep thorough documentation in case your company is audited. A cloud-based software system like NetSuite can help you keep track of all the data necessary to support an audit in one place.

Operational risk has to do with the way you run your business from day-to-day. Technological shortcomings make up a large portion of operational risks. For example, if your software systems fail to communicate with one another and cause a delay, this costs you time, money, and possibly valued customers, too.

Financial risk has to do with any funds flowing in and out of your business. These risks include things like outstanding debts (company or customer), employee fraud, risky investments, etc. Having a thorough, automated system for keeping track of your financial standing is crucial to keeping your financial risk in check.

Reputational risk has to do with anything that relates to you, your employees, and your company’s overall reputation. Poor customer service, low-quality products, or a marketing misstep can all eventually lead to reputational risk. By having data to monitor all of these areas of potential risk, you can decide which parts of your company require improvement before any bad press comes flowing in.

With all these potential risks lurking, it’s essential to have the best possible defense tools on your side. By having a comprehensive business management software system, such as NetSuite, you can gather the data necessary to identify your business risks. You can then use this to create a prevention plan and utilize safeguards that can prevent many risks from occurring as frequently.