All companies, regardless of their size, age, current position in the market or sector, have to deal with risks of various kinds. There is always the possibility of significant damage, such as flooding in the premises, a major fire in a factory or industrial plant, or significant changes in the market or the financial situation that threaten the viability of the company.
Given that uncertainty is inevitable in the business environment, entrepreneurs and managers of organisations must try to manage the different types of risk to which a company is exposed as well as they can, with a view to avoiding them or minimising their effects.
Main types of risk
Generally speaking, a risk is the possibility of damage occurring in a company in a random and unpredictable manner. The concept is so broad that, in practice, the types of risks a company can face are very numerous and varied, and may be internal or external.
However, it is possible to establish a classification of 8 main types of risk scenario which companies may face at some point:
Incidental risk. This is probably the type of risk we fear most and the first that comes to mind. In this group we can include: fires, floods and all kinds of natural disaster that can damage a company’s assets and even paralyse its operations.
Inherent risk. These are internal risks directly related to the company’s activities and business. Some examples would be: accounting errors, incorrect management of human resources, improper disclosure of information, corporate communication problems, etc.
Market risk. This type covers all possible negative or adverse situations that may affect sales and the company’s own value, in one way or another: significant changes in the price of raw materials, transport or customs duties, changes in foreign exchange rates, or a fall in the price of the company’s shares, among many other factors.
Operational risk. There are a series of human errors, usually committed by company staff or subcontracted personnel, which can cause significant financial losses to companies. This group also includes risks arising from changes in the political, economic or social situation, which may affect the company’s interests.
Strategic risk. These risks are due to the fact that the company’s managers do not have sufficient information and expertise to deal reliably with major changes in the general economic situation in their own country or internationally, or in the conditions affecting the activity in which the company is engaged.
Financial risk. This refers to financial fluctuations that may negatively impact the company: changes in interest rates or access to credit lines, problems with liquidity, cash flow, etc.
Audit risk. Sometimes, external auditors may make mistakes in their analysis of and opinion on the company’s financial statements and other matters that may have a very negative impact.
Technological risk. In an environment where the digital transformation is essential for the survival of any organisation, the misuse of technology and, above all, the absence of cybersecurity mechanisms to protect digital data, can constitute a major setback for any company, one from which it may be unable to recover.
How can a company avoid risks?
The key to managing risks successfully, minimising the likelihood of them occurring and, if they prove to be inevitable, mitigating their consequences, can be summed up in two concepts: strategy and the implementation of realistic, effective action plans.
Identifying and assessing risks
Risk management in a company cannot be improvised, but must respond to a well-defined strategy, in which the first step is to identify the risks as accurately as possible and assess the likelihood of their occurrence and what their consequences would be.
By correctly identifying the different types of risk, we tackle the greatest threat: their unpredictability. Good communication with employees, can assist in detecting risks; they are familiar with day-to-day operations and can foresee possible problems. Interviews, questionnaires and brainstorming sessions should be a frequent, recurring activity with the company’s departments and staff.
Risk assessment should determine the likelihood of the event occurring and estimate the damage that could be caused: financial, operational, reputational, etc.
Implementation of action plans
When the risks have been duly identified and assessed, the risk control strategy should continue with the design of an action plan suitable for each and every risk, taking into account preventive action, any investment necessary, and the protocols and procedures to be followed in the event of an incident.
It is essential for this whole process to be based on appropriate methodology, with external advice if necessary, and for all parties involved to be fully informed.
Finally, we would emphasise that it is important to understand risks not only as a danger, but also as an opportunity for companies to develop, organise themselves more effectively and, sometimes, to displace competitors or achieve a competitive advantage.