A lesson some business owners learn the hard way is that, in today’s global operating environment, risks appear to be increasing exponentially so it is important that you understand your business risks in Perth. It takes only one trial by fire for a business owner to recognise the importance of basing each decision on risks versus rewards.
It’s important that you maintain a steady focus on this to understand your business risks in Perth. This way, you can avoid any activity that is very high risk and avoid a loss that can drastically reduce your efforts to increase the company’s performance, its net worth and the value of the company’s shares.
A business owner must take steps to minimize the impact of potential risks on their business to protect the company’s operational and financial wellbeing. To do so, you must learn to identify and classify each business risk depending on its origins and characteristics.
The Origins of Business Risks
A business owner assumes business risks ( i.e. the possibility that actual returns will be more or less than expected returns) the moment the company’s lights are turned on and its doors are flung open.
The types and scale of the risks that affect the long-term success of a business will depend on the company’s operations and industry. For example, new market entrants, shifts in consumer demand and economic downturns are risks for some companies in the media and entertainment industry. In turn, companies in the mining industry may deal with a shortage of skilled labour and access to infrastructure.
Make sure you identify, classify and understand your business risks in Perth and have strategies in place to minimize their impact. Summarized below are the major types of risks most businesses will face at some point.
1. Financial Risk
This can impact on your company’s cash flow and income. Because investors may value your business by discounting its projected cash flows, financial risk can also affect shareholder wealth.
Financial risk includes liquidity which can affect retained earnings and capital if a company is unable to meet its current liabilities without suffering significant losses. Also included is a market risk – changes in commodity prices, credit spreads, interest rates or equity prices.
Financial risk also comprises company reporting risk – the possibility that a company reports on accounting, tax or regulatory data that is inaccurate or reported in an untimely manner. Other financial risks include credit risk (the inability to meet financial obligations when due) and capital structure risk (a company’s debt to equity ratio, which is determined by the way a business finances its operations).
2. Strategic Risk
A company’s strategic risk is determined by its business functions, investor communications and operating environment (which is affected by the markets in which it buys and sells goods and services). The operating environment also depends on government regulations and compliance requirements that govern a company’s operations and markets. In turn, unfavourable changes in the supply or demand of products or services also affect a company’s strategic risk, as do the competitors that vie for sales and supplies in the company’s chosen markets.
3. Operational Risk
Operational risk (process risk and innovation risk) concerns a company’s internal activities. Process risk relates to resources such as employees, equipment, materials and business processes that support production processes or affect a company’s continued operations.
In turn, innovation risk depends on the success or failure of performance improvement initiatives or business process upgrades. Innovation risk also relates to the degree a company’s investment in incremental product improvements is rational and its approach to the development of new products.
Business owners consider a number of criteria during a decision making process, not the least of which are business risks. To best ensure a business doesn’t suffer a catastrophic loss that puts continued operations in doubt, owners must manage the business risks. A first step in the process is identifying and classifying relevant business risks including strategic, financial and operational risks.