Don’t Ignore Business Risks

Recognize business risk when you see it

December 17, 2012

Generally, if you are in business, big or small, you face risks. These may be reflected in the day-to-day management of the business or in a specific project, for example.

Business risk is largely under the control of management of the business, whereas industry risk, external risk impacts, are largely outside its control.

Business risk analysis is the foundation of all aspects of decision-making. Understanding these risks, whether you are managing a project, a portfolio or even as a lender to a business is critical.

Risk analysis/assessment may be largely qualitative but it helps to interpret quantitative financial information. The analysis assists comprehension of and management of business risks and anticipation of trends in financial dealings.

There are seven critical business risks.  They are:

Business Characteristics – business size, business experience, competence, integrity, reputation, maturity, diversity

Complementary Markets – products, product lifecycle stages, market penetration, market risk, market forces, product differentiation

Raw Materials/Inventory Supply Availability – purchasing, price, continuity, supply channels, influence

Production – quality, consistency, technological risk, completion risk, disaster vulnerability, employee relations

Product Distribution Channel – network, reliability, market coverage, control, flexibility

Sales – sales mix, competition, demand, market concentration, target market, bargaining power

Control/Management – board of directors, management experience, depth, breadth, integrity, track record

Some risks impact others. Business characteristics and management (think length of experience, exposure to markets, etc.) are examples.

Others may stand alone.   Sales mix and target markets, if not well defined may expose the business to unexpected sales impact (good or bad).

Risk can be defined, measured, may be fluid but is often overlooked. Thinking about the risk in your business can help anticipate both opportunities as well as potential pitfalls.

 

 

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