Natalie Burg is a freelance writer and editor who covers businesses large and small, cyber and technology, and corporate sustainability. She lives in Ann Arbor, Mich.

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This article contains general information and is not intended to provide information that is specific to American Express, or its products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

Business risks could impact companies of any size across any industry. From extreme weather and reputational snafus to cash-flow shortages and labor disputes, a business risk is anything that could disrupt a company's operations and impact profitability. Economic downturns, cybersecurity threats, supply chain disruptions, and other external changes are all types of business risks.

Business leaders may need to be aware of potential risks that could shake the financial stability of their companies.

This article explores:

What is business risk?
How can leaders identify business risks?
What is risk management in business?
Why is risk management important?

Understanding business risk may help position companies to support their resilience, protect their assets, and prepare for mitigating damage to their brands.

What Is Business Risk?

Business risks are potential threats that could disrupt a company's operations or interfere with its ability to achieve its financial goals. Business risks might stem from internal issues, such as strategic mistakes or poor investments, as well as external factors, like consumer behavior shifts, supply chain disruptions, or natural disasters.

Effective risk management is a proactive planning process that may help support a company's success.

Business risks that could cause severe harm to companies regularly make the news, from economic sanctions to cyberattacks. Some risks may be avoided, but others, like natural disasters, might only be managed. Companies could try to prepare for potential threats by taking advantage of business risk management opportunities, such as remaining vigilant and flexible, proactively identifying potential vulnerabilities, and developing strategies to help protect their financial health and long-term stability.

What Are 4 Types of Business Risk?

Companies regularly face a wide range of business risks, including:

Reputational Risk: A company's reputation may change due to corporate scandals or other negative publicity that threatens the company's relationships with customers, investors, employees, and partners.
Strategic Risk: A business may not be able to meet its strategic objectives for a variety of reasons. Strategic risks could include misalignment between strategy and operations or errors in long-term decision-making.
Operational Risk: Risks that spring from day-to-day company business, like equipment failures or employee mismanagement, may be considered operational risks.
Compliance Risk: Failing to comply with local, state, or national laws and other mandates comprises a company's compliance risk. This could be a major risk category for businesses in highly regulated industries.

How to Identify Business Risks

Protecting a company could start with making a concerted effort to identify potential business risks before they occur by:

Conducting a thorough review of the company's core business processes and relationships. Try to identify vulnerabilities that could put the business at risk.
Staying up-to-date with industry-wide risks. Attending industry conferences and networking with peers may help leaders stay informed of potential external business risks, like economic downturns, technological advancements, and geopolitical conflicts.
Helping employees easily and comfortably report problems that could expose the company to risk, either through anonymous surveys or by open communication.
Implementing a formal business risk management process. Consider employing a structured approach to identifying risks, including audits, data analysis, and forecasting. Try to develop responses to potential threats and evaluate the effectiveness of risk assessment strategies.

What Is an Example of a Business Risk?

Business risks may be as straightforward as a power outage or as complex as geopolitical uncertainty. Examples include:

Reputational Risk Example: A company that primarily serves low-income consumers is exposed to reputational risk when its high-profile CEO flaunts their wealth and underpays. The negative PR might turn customers away, suppress sales, and weaken relationships with partners.
Strategic Risk Example: A business leader interprets a jump in sales as the beginning of a long-term revenue trend and immediately moves to grow staff. When the revenue uptick proves to be a blip, the company is left with payroll that operations can't support.
Operational Risk Example: A shift manager realizes that no one notices when they skip their inspection rounds, so they do them less frequently than policy requires. With less oversight, employees also relax. Productivity may decline.
Compliance Risk Example: A winemaker ships subscription wine boxes to customers in seven states. Business leaders fail to follow legislation in those states and are unaware that one of them has enacted a regulatory change for alcohol shipments. Some non-compliant boxes are caught and returned to the winemaker, and others are overlooked and illegally delivered, putting customers in a precarious position.

How Do You Manage Business Risk?

Learning how to manage risk in business may require navigating uncertainties and using strategy to protect the company. One way to begin developing business risk management strategies is to appoint a dedicated team to regularly monitor and oversee risk management. This team may take key steps toward building a comprehensive approach to business risk management that includes:

Risk Assessment: Businesses may identify potential risks by analyzing internal processes, industry trends, and external factors. Leaders may consider prioritizing those with the greatest potential to cause serious damage. This may help a company steer resources toward preventing problems where they're most needed.
Mitigation Plans: Companies may evaluate various risks and develop a detailed action plan that aims to help minimize damage to the business. For example, if the risk management team determines that the business is vulnerable to a cybersecurity attack, it might recommend implementing strict access controls, such as multi-factor authentication, adopting advanced security technologies like firewalls and endpoint detection systems, and developing a security awareness training program for employees.
Success Monitoring: Regular review of mitigation plans may help leaders measure their effectiveness in preventing threats and identify areas of potential improvement.

Why Risk Management Is Important

The consequences of ignoring potential business risks could be costly, leading to outcomes from financial losses and fines to high employee turnover, decreased sales, and even business failure. Effective risk management is a proactive planning process that may help support a company's success. While businesses can't always predict what will go wrong, being prepared could make a big difference in how a company gets through it.

Comprehensive business risk management strategies may help safeguard a company's assets, protect its reputation, enable sensible strategic decision-making, and increase resilience — all of which could help prepare the company to handle unexpected setbacks.

Understanding Risk Management Strategies

Companies may manage risk in four ways:

Avoidance: Eliminating the risk entirely.
Reduction: Identifying ways to minimize the degree of risk.
Transfer: Moving the risk away from the organization and onto another (like outsourcing personnel risks to an agency).
Acceptance: Calculating the negative consequence of the risk into the cost of doing business.

To begin implementing strong risk management strategies that may help minimize the impact of risks on their organizations, companies might consider:

Appointing a dedicated risk management team: Business leaders may name a chief risk officer to oversee a cross-departmental team. This group could develop a formal risk management plan that detects potential threats, creates response plans for high-priority risks, and monitors the effectiveness of risk management solutions. The company may find it beneficial to provide the team with the resources and authority it needs to put risk controls in place and accurately measure whether the business is meeting its risk management goals.
Strategically controlling business growth: While growth is a primary goal for many companies, sustainable growth is key to long-term success. Prior to expanding into new geographic areas or markets, business leaders may want to consider carefully evaluating the potential risks involved and identifying red flags.
Encouraging employee buy-in: Employees immersed in a company's day-to-day operations may be the first to see signs of risk, yet they may not feel comfortable bringing their concerns to management. Businesses could help foster a risk-aware culture by training employees in risk management, encouraging an environment where reporting potential risks is applauded, and rewarding those who call out impending problems.
Implementing quality assurance programs: The whims of customers may be hard to predict, but companies may help ensure that their products and services are meeting customer needs with a quality assurance program. This could include training employees in quality control, regularly testing products and services, establishing quality control checkpoints, conducting periodic inspections of products, and promptly correcting any defects that are discovered.

How to Help Further Mitigate Damage to Your Brand

Business risks could exist in every company. While it may not be possible to avoid all risks at all times, companies could develop strong risk assessment plans that help position them to avoid or withstand whatever bad luck comes their way.

Photo: Getty Images

The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.

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Learn about business risk and explore risk management strategies to help protect your organization and support long-term stability.

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