By Steven Imke
stevepb / Pixabay
Broadly speaking, a businesses’ risk can be grouped into three large categories – Operational Business Risk, Financial Business Risk, and Governmental Business Risk. This post will focus on operational business risk, and a future post will look at financial and governmental business risks.
We can all agree that some business ventures are inherently riskier than others. A product-based business focused on a new product in a brand-new category is far riskier than, say, a service-based cleaning company that operates in an established service category. Small business risk comes in many different forms. Some you’ll be able to prepare for, and there are others you can’t.
A PESTEL analysis allows a business to consider macro-environmental conditions, while Porter’s Five Forces allows a business to consider the micro-environmental forces that can alter the risk profile of a business.
That said, it is always a good idea to review your risk exposure from time to time and develop a plan to deal with anything that comes up before you are forced to deal with them during a crisis.
Operational Business Risk Defined
Operational business risks are failures related to day-to-day operations that can impede a company’s ability to earn revenue. Often operational business risks are the result of insufficient or failed processes. An example of a few operational business risks might be:
- A clogged toilet in your restaurant necessitates that the business closes until it gets it fixed.
- Your web hosting company goes offline for several hours making access to your company’s e-commerce site unavailable, thereby causing you to lose sales.
- The flu epidemic hits your business, resulting in high absenteeism and causes the company to miss a deadline.
Operational business risk can be broken down into six types of risks.
Strategic risk is where a business has risk associated with taking on or changing the businesses strategy direction. Strategic risk involves the owner weighing the pros and cons of taking the business in a new direction. Here are three common examples of strategic risk.
- You have a successful business in one part of town. You are thinking about opening a second location across town to grow your business. Will this new location add to your already successful business or cause you to fail?
- You have outgrown your current physical space requirements. You are considering signing a new lease on a much larger space which is a little bit larger than your current space requirement today but may serve for growth in the future. Will moving to a much larger space increase your operational capacity or will the increased rent cause more financial risk