Every business and investment involves a certain degree of risk. While you might hire an experienced accountant for managing finance, a risk management plan is required to handle and manage business risks. Identifying, evaluating, and prioritizing these risks to prevent them is called risk management.
Developing an appropriate risk management plan to handle efficiently and manage risks in difficult situations is one of the many starting steps you need to take to set up your own business. If you have a business up and running, you must have a thorough knowledge of types of risks and risk management in place.
Types of risks
Having a detailed knowledge of all the types of business risks will help you develop the right risk management plan for your business. Hence, we have compiled this list of some of the most common forms of business risks.
Credit and investment risk
Credit risk is when you lend some money to a person who then becomes bankrupt or defaults and does not pay you back as promised. As the name suggests, investment risk is when you lose not only your interest but also the principle for any investment that you have made.
When you have to sell one or many assets without making any profit, and sometimes also at a loss, you are facing a liquidity risk. You might be thinking, why would you sell an asset at a loss? Well, it does happen and often in the business world. For instance, suppose you have bought a property and are planning to have it for a few years and then sell it when the price goes high. But what if, instead of the price going high, it drops down due to some mishap. Now, you would want to sell the property as quickly as possible and at whatever money you can make before the price drops too low. Such risks are known as liquidity risks.
They are a sort of currency risk that usually affect investors. Some common market risk factors include stock prices, foreign exchange rates, commodity prices, and interest rates. But, you can easily manage these risks by dividing your investment into multiple stocks or assets instead of putting all your money on one. Investing in a single asset is a common mistake that most investors end up making. Instead of putting all your money on a single asset, it will be better to divide it. For instance, you can put 35% on real estate, 30% on stocks, 20% on bonds, and the remaining 15% on commodities.
Inflation is the change in the value of money against the products and services. It means that you will not be able to buy relatively fewer numbers of goods and services than you might have without inflation. You might not think much about this risk as inflation is not something that happens often. But, having a risk management plan for inflation risks is as important as for other types.
It is a broad type of risk as it involves all the risks related to business operations. It involves risks arising from any part of an organization or a business, including people, processes, systems, and other aspects. Factors such as weather and environmental risks that affect business operations are also a part of operational risks. Some other factors that are a part of the operational risks are fraud risks, data loss, legal risks, and cybersecurity risks.
As the name suggests, these risks associated with the reputation of your brand. Any processes or business activities that can damage your organization’s reputation are intangible risks.
Interest rate risks
They are related to inflation risks. Changes in the value of money lead to a swing in interest rates of different assets you would have invested in. This can further lead to a decrease in the value of your assets too. For instance, if the interest rate goes high, bonds and other assets that grant fixed income will decrease in value.
Before setting up your business or investing in any stocks or assets, you need to develop a risk management plan for the risks you might face. You can either make a separate risk management plan for each of them or combine some standard principles to form a single plan for all the risks and then have some specific plans for each of them. The approach you take to risk management depends on what risk you are more likely to experience and how you want to handle it. So think wisely and take your time before coming up with a risk management plan.