What is Business Risk? Types, Examples, Strategies

Risk is an integral and necessary part of running a small business.  It is often accepted by business owners as the cost of innovation and opportunity – for without risk there is no reward!

If you are a small business owner, it’s important to calculate your business risks and understand the strategies to deal with them accordingly.

This blog aims to define what business risk is and will look at different ways one can manage them in their day-to-day business activities.

Hopefully, by the end of it, you will be equipped with the knowledge that could help you mitigate the risks that threaten your business.

Business risk definition

Before exploring the various strategies for managing risk, it is important to understand what risk means to your business and how to recognise it before it happens.

Business risk can be defined as a potential event or circumstance that could lead to an adverse consequence for the business.

These five elements are essential to consider when calculating your business risk:

  • The event – Will the event, if it occurs, have unexpected consequences?
  • Triggers – What factors are most likely to cause the event?
  • Probability – Is this an event that is likely to occur?
  • Impact – What are the possible consequences of this event?
  • Timeframe – How long can the event go on? What will the effects be?

These elements can help you determine the severity of the risk, helping you choose the right strategy to mitigate it.

Different types of business risks

There are many different types of risks that threaten small businesses. Knowing what type of business risk you face will help you put it in context and provide a solution.

Although risk profiles can vary from one business to another and from industry to industry, the majority of risks can be grouped into one of these four small business risk factors:

  • Strategic risk – the risk associated with the decision-making process that aims to achieve business goals and objectives.
  • Operational risk – Risk that arises from the day-to-day operations of a business.
  • Reputational risk – The risk of how your business is perceived by its stakeholders (customers, employees, the general public etc.).
  • Compliance Risk – The risk of not complying with the rules and regulations that govern your industry.

While some of these risks will overlap with each other, it’s important to define the context of the risk you come up against to provide an appropriate strategy.

Risk management strategies

Once you’ve analysed and identified the risk to your business, the next step is to devise a strategy in order to mitigate it. Below are three common strategies for risk management in small business:

Removing the risk (risk avoidance)

One of the first risk mitigation strategies is to simply remove the risk. If you remove the risky activity or thing from the situation, then the consequences of that risk cannot happen.

Another way to look at this is to practice risk avoidance. Under risk avoidance, a small business owner will avoid doing something that puts their business at risk, thereby avoiding the risk to materialise.

This is a strong strategy, especially if the risk has potentially devastating consequences.

Risk reduction

A risk reduction strategy aims to reduce the likelihood of a risk occurring. This can be done by reducing the risk triggers and putting an action plan in place to decrease the probability of the risk happening.

Risk reduction is a practical strategy that can be implemented for most identifiable business risks. However, it’s important to remember that the risk is still there no matter how small, and you will have to deal with the consequences if it occurs.

Recommended reading: Risk Reduction vs Risk Avoidance: What’s the Difference

Reducing the consequences

This strategy aims to reduce the severity of the risk’s consequences. In some cases, this can be done simultaneously with a risk reduction strategy. This is often a great outcome as you would’ve reduced the likelihood and consequences of the risk, minimising its potential.

However, the consequences can’t always be controlled by the small business owner. In these situations, it’s about controlling the impact to your business.

This is where business insurance is important as it provides a financial safety net, reducing the financial consequences to a small business.

Example of risk strategies in action

Let’s look at an example of business risk in action. In response to the scenario, this section will start by analysing the five elements of the risk and then identify the type of risk affecting the small business.

It will then look at how the risk outcome would look under each risk strategy.

 You run a barbershop, and your business faces the risk of a customer slipping over and hurting themselves in your store.

Five elements

  • The event – Someone slipping or tripping over and injuring themselves
  • Triggers – Wires, spilled product, loose hair or anything else someone could slip or trip over
  • Probability – Dependent on the environment and how many staff and customers are on the scene. Probably somewhat likely.
  • Impact – Someone could get injured, and your business could be liable.
  • Timeframe – The lawsuit could go on for a long time.

Risk type

  • Operational risk – The risk could occur during everyday activities
  • Reputational risk – If the risk did eventuate, it could damage your salon’s reputation.

Risk strategy

Removing the risk

Removing the risk in this situation would involve avoiding operating from a store or not interacting with customers.

As a hairdresser, you would likely need to interact with clients within a physical environment. Removing the risk in its entirety would be a difficult strategy to align with your business goals.

Risk reduction

There are plenty of ways to reduce the likelihood of the risk occurring. You could invest in cordless equipment, train staff to look out for risk, and reduce the need for people to walk around in your salon.

Reducing the consequences

You could install extra-thick, protective mats to prevent the severity of the injury if someone falls over. You could also train staff to ensure that they are adequately trained to respond to the consequences of the risk.

Under this strategy, you could reduce the impact of the liability claim against your business by getting a Public Liability policy.

A type of business insurance, Public Liability cover is there to provide protection if someone makes a claim against you, your business or your employees. Claims from the customer can be for personal injury or damage to their property caused by your business activities.

A real-life example

While the above scenario is great from a hypothetical perspective, is this risk real and would it play out that way in real life?

As it turns out, yes.

A hair salon had this risk happen to them when a 70-year-old customer slipped on some cut hair after getting out of his chair**.

The man allegedly injured his right shoulder, and a claim was filed against the small business.

Luckily, the business owner reduced the consequences of this risk beforehand and took out a Public Liability policy.

This business risk strategy reduced the impact on the business as the insurer paid for the $75,000 settlement of the claim plus an additional $10,000 in legal fees.

Without it, the business owners may have had to foot the bill themselves.

Key takeaways

There are many risks in doing business. The key is to know how to identify and mitigate it before it occurs.

Hopefully, this business risk assessment checklist will serve you in the future and allow you to calculate a strategy for your business risks.

This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording.
© 2022 BizCover Pty Limited, all rights reserved. ABN 68 127 707 975; AFSL 501769
ABN 68 127 707 975; AFSL 501769

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