How to identify and manage common business risks

Every business faces risks that can impact its success and ability to reach its goals. This includes everything from compliance and operations to reputation and strategic decision-making. While often unavoidable, there are some ways you can minimize and fortify against the negative impacts of internal and external business risks.

Let’s take a closer look at some common risks you should know about so you can act quickly to protect your organization, if necessary.

Key takeaways

• There are multiple types of business risks, including compliance, operational, reputational and strategic.
• Some of these risks are internal and others are external, with varying levels of controllability.
• Determining potential business risks can help you mitigate the potential negative impacts on your company. 

Business risks are internal or external factors that may impede your company's financial goals. They may include political or regulatory changes, natural disasters, loss of reputation or consumer demand, private or public health emergencies and economic downturns.

If you're unprepared, any of these factors may cause you to restructure your business, halt or delay operations, lose investors or consumers, jeopardize professional partnerships or face other challenges.

The four main types of business risks are:

• Compliance
• Operational
• Reputational
• Strategic

Additional risks your company may face include technology/cybersecurity, competitive, human and physical risks. The first step to mitigating these risks is identifying them and their potential impact on your business. 

Take a deeper look at how you can manage common business risks and continue propelling your company’s growth and success.

Your business might face compliance risks if you fail to abide by federal and state laws. Violating any of these, even unknowingly, may result in legal consequences like fines and damaged standing with consumers or investors.

Examples of laws and regulations that require compliance include:

• Workplace laws
• Consumer protection laws
• Health Insurance Portability and Accountability Act regulations
• Industry regulations
• Business contracts

Compliance management is an important way to reduce organizational risk. While specific requirements may vary depending on the business structure, here’s what you can do to help manage these risks:

• If your business is a corporation: Consider holding initial and annual director and shareholder meetings. Then record those meetings’ minutes, adopt and maintain bylaws, issue stock to shareholders and record stock transfers.
• If your business is a limited liability company (LLC): Consider holding annual meetings. Create and maintain a current operating agreement, issue membership shares and keep records of membership interest transfers.
• If your business is neither a corporation nor an LLC: Document important business decisions, record minutes for important meetings and keep detailed records of key transactions or business reports. 

Larger businesses, like corporations, may also consider employing legal professionals to monitor and maintain legal, regulatory and contractual compliance. Businesses of all sizes often benefit from HR staff and compliance technology, such as payroll software.

Operational risks arise when daily operations—or something that interferes with them—threaten profits.

Examples include:

• Internal errors, such as a website giving a 5% discount instead of a 10% discount
• External business fraud, like theft by a third party
• Natural disasters, like tornadoes or hurricanes, that halt or impede day-to-day operations

To better manage operational risks, start by regularly reviewing your procedures and operations to help identify and mitigate them. Examples include:

• Ensuring that your business spaces are up to building codes and regulations to better withstand natural disasters
• Developing a contingency plan for when disaster strikes, such as having work-from-home capabilities, to reduce the impact on your business
• Offering comprehensive risk management employee training and implementing internal review processes, like website alerts to detect errors early

Reputational risks occur when a company’s public image is threatened. These threats may be direct, indirect or peripheral.

A poor reputation may discourage consumers, investors and professional partners from engaging with your brand.

Reputational risks may include:

• Nationwide recalls or negative reviews of products (direct)
• Staff being exposed for illegal or immoral actions outside of work (indirect)
• A notable business partner garnering negative attention (peripheral)

Implementing quality control at all levels of your business may help minimize reputational risks. A good place to start is to monitor online reviews regarding your company and partners to identify concerns. Then you can be proactive in taking accountability and addressing them.

You can also consider hiring a public relations specialist to manage your company’s image and reputation. A public relations specialist can help you cultivate how your organization is represented and avoid or navigate potential reputational risks.

Strategic business risks aren’t always a bad thing and can end up paying off. But ones that aren’t fully thought through or executed well may impede the success of a business. Some common strategic risks may include:

• A major marketing initiative that fails to overcome the competition
• Investments in research and development that don’t yield the desired results
• A miscommunication impacting the success of a business strategy

To manage strategic risks, develop a business plan that includes an expert review of projects and action items. When considering risky investments, weigh the chances and benefits of success. Then you can ensure contingency plans are ready to mitigate the effects of an unsuccessful investment or strategy.

Financial risk refers to threats to a company’s cash flow, assets and liabilities. If your company has higher debts, your financial risk increases. Debts may become difficult to manage and it could be hard to meet your financial obligations.

Business risk, on the other hand, relates to profitability and the ability to sufficiently cover operational costs.

Both business and financial risks may impact how investors view your organization before making an investment decision.

There’s generally some risk involved in lending funds, as it’s always possible the borrower may become unable to repay the loan. Many business transactions use credit, and credit risk refers to extending credit to clients who may become unable to pay their balance, resulting in lost earnings.

Using a business credit card can help your company reduce the risk of overspending while providing a way to better control and manage your own business expenses.

You can keep funds flowing when financial uncertainties occur. Some best practices are:

• Reducing your operational costs and debts to maximize disposable earnings and maintain a healthy cash flow
• Diversifying and expanding your clientele for sustainable growth 
• Choosing low-interest options when applying for loans or lines of credit
• Minimizing foreign currency risks by conducting business in your country’s native currency whenever possible

You should also be aware of a few additional risks your business may face. Here’s a closer look at them: 

All businesses use technology for day-to-day activities. Issues like power outages or surges may lead to lost production time or damaged equipment. And while the internet allows you to work more efficiently, it’s important to keep cybersecurity top of mind.

Manage technology/cybersecurity risks by:

• Installing backup batteries on computers and surge protection devices to avoid downtime and the loss of important documents
• Using cloud storage for extra protection and backup
• Ensuring employees receive training in cybersecurity best practices, like creating strong passwords, keeping software updated and using multifactor authentication

Competitive risks refer to losing a competitive foothold in an industry or a market. They’re also sometimes known as comfort risks. Businesses that become comfortable in their standing may be less motivated to stay competitive.

You can better manage competitive risks by:

• Staying flexible to accommodate change
• Regularly monitoring industry trends and changes by subscribing to leading newsletters and resources
• Using research to strengthen business strategy
• Soliciting feedback from clients and consumers to improve your products, services and consumer experiences
• Paying attention to your main competitors and offering in-demand products, services or features they don’t

Human risks can affect a business due to internal team members’ actions or circumstances. Some are unavoidable, such as sudden illness or a medical emergency, that require several weeks off for recovery. Other examples include substance use disorders, internal theft or fraud.

Measures that may help minimize human risks and their consequences include:

• Professionally screening new employees
• Having adequate staffing and managerial backups in place to minimize the impact if someone falls ill
• Enabling financial security features to minimize risk, like transaction limits on employee credit cards and thorough review of company transactions by high-level staff

Physical risks refer to damage to physical assets, such as a business’s building or equipment. Maybe there’s a fire on-site or a company vehicle is damaged in an accident. Compensating for the damage or any injuries to employees or bystanders may impact profits and incidents may halt operations.

To effectively manage physical risks to your business, you can: 

• Ensure your business property has necessary safety features, including sprinkler systems, illuminated exits, fire extinguishers, security systems and evacuation plans
• Maintain all equipment and vehicles to keep them in good working order
• Make sure your building complies with safety regulations and codes
• Have emergency plans in place in case of fire, flood or a workplace accident 
• Have staff review these emergency plans annually to ensure they understand how to respond quickly and minimize injury or damage

Understanding the risks your business could face can help you mitigate them. Here are answers to a few frequently asked questions about common business risks:

Identifying potential risks, actively working to prevent them and developing plans to minimize their impact is often the best strategy to protect your business. It may not be possible to eliminate all business risks, but there are ways to control risk variables, manage uncertainties and avoid a business crisis.

Capital One’s business credit cards offer features to help your organization manage its spending and minimize risks. These include spending limits and the ability to see transactions on employee cards immediately. Compare cards and find the right solution for your business today.