The operation of a business at any level, in any department, involves risk. Therefore, it is crucial that every person in an organisation understands the various risks associated with their range of responsibilities and becomes involved as the company deals with these risks, together.
We get it, that's a pretty big cross to bear. For now, let's just tackle an area of confusion for many - business risk and financial risk.
Recognising what separates these risks will help any organisation better understand their business environment. Conversely, how the two risk domains work parallel to each other is especially relevant for maintaining business continuity.
Also, risk assessments play a crucial role in gaining a comprehensive understanding of various risks, potential risk events, and the potential harm they can cause. By conducting thorough risk assessments, organizations can effectively optimize their company performance while minimizing and mitigating unnecessary risks.
Below, we will unpack the two, highlight some of the key differences and provide potential solutions to address them both.
Business risk relates to the uncertainties and potential drawbacks inherent in a company's operations and industry environment. It encompasses a wide range of factors that may impact a company's ability to achieve its objectives and generate profits. Some key points about business risk include:
To make this exciting area even more fun, business risk happens to be divided into two other categories. Systematic and unsystematic.
To reduce such risks, large organisations tend to diversify their portfolios, i.e. when one company is experiencing a downturn, it can be overcome by the favourable performance of another.
Investing and running a business always come with inherent risks. Financial risk, specifically, is a type of risk associated with investments and refers to the possibility that a company's cash flows may not be sufficient to meet its financial obligations, as explained by Dun and Bradstreet.
Financial risk refers to the possibility of loss or negative impact on a company's financial position or its ability to meet its financial obligations. It is primarily associated with the structure of a company's capital and its financial decisions.
Financial risks encompass a range of factors, including credit risk, funding liquidity risk, asset-backed risk, foreign investment risk, profitability risk, third-party risk, regulatory risk, and economic risk. These risks have the potential to significantly affect a business's profitability. Liquidity, asset-backed, and foreign investment risks, in particular, can have a direct impact on the financial well-being of a company.
Based on this, financial risk can be categorized into different types, including market risk, credit risk, liquidity risk, operational risk, and legal risk, based on the factors mentioned earlier.
Some key points about financial risk include:
When we say that business risk cannot be avoided, we mean 'completely', obviously. Sometimes the cause of a risk is external to the company. As for being completely debt free and avoiding 100% of financial risk, if you manage to do it, let the rest of us know how won't you?
Here's an example of the difference between a business risk and financial risk.
For both of these key risk domains, there is certainly a lot you can do to start at least giving yourself the best chance possible to mitigate them.
And here it is. Start with a comprehensive risk review. Our mobile app puts a well-timed grenade under the tediously boring and not to mention damaging old-school methods of risk reviews. Also, we believe it is the only real way to get a solid review done that represents the true risk landscape of your business.
You can access risk libraries curated by industry experts, or simply drive risk awareness with our tailored newsfeed based on your risk profile with 6clicks Pulse.
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