Risk Factors in Business

Risk factors in Business are constituents, circumstances, or causes, responsible for interruption, or, disrupting the business activities or operations, expectations, plans, objectives, or strategies of a business or an investor along with hampering the business’s ability to extend the promised results to the stakeholders because of the uncertainties, and impact of unforeseen or assumed risks.

• Risk factors in business are conditions or events that can negatively impact a business's success, profitability, or sustainability. They can arise from internal or external sources and vary across industries and organizations.
• Common risk factors in business include market, financial, operational, legal, regulatory, and strategic risks
• Identifying and assessing risk factors is essential for effective risk management. It allows businesses to prioritize and allocate resources to mitigate or manage the most significant risks, develop contingency plans, and make informed decisions to enhance resilience and business performance.
• Risk factors can be mitigated through various risk management strategies, including risk avoidance, reduction, transfer, acceptance, and diversification.

Risk factors denote elements which could hamper the organization’s growth or its stated or expected objectives. The objectives could be numerous depending upon business to business, and subsequently, the number of risk factors falls in the same tandem.  

As already mentioned above, examples of risk factors vary from business to business, but objectively, and generally, we could divide them into two categories:

#1 - Internal

Risk factors are generated because the company’s operation is widely known as internal risk factors. These are inherent to the organization and its activities. As these risks are created in an organization, to some extent, these could be forecasted and mitigated with greater ease in comparison to the external risk factors. So, it's relatively easy to counter, alleviate, or reduce the risks originating within the entity. It is broadly divided into three following types:

1. Sometimes risks are generated because of the human capital of the organization. Few mentions could be incompetent staff, labor shutdowns, unethical practices followed by employees, dishonesty, embezzlement of money, etc.
2. Over time, digitalization has access to almost all spheres, and the risk faced because of technology is paramount. Every organization which is equipped with technology in any way could face challenges such as data theft, hacking, inefficient workings of software or apps in place, etc. These risks could lead to inefficiency or lack of productivity, and in many cases, it could lead to global embarrassment and loss of goodwill.
3. Last but not least, a risk also persists regarding the physical assets of the business. Irrespective of digitization or technological advancements, an organization would require some physical assets to manage its day-to-day activities. If tangible or intangible assets fall prey to irregularities, it also causes deep suffering. The significant risks perpetrated in this area could be loss, theft, or damage to assets, leading to interruption, halt, or shutdown of business activities or business.

#2 - External

Another type of risk generated from outside of an organization is known as external risk factors. These could be made from any sources such as from the competition, economy, nature, and policies of the government. External risks are challenging to anticipate due to their unique character, and similarly, the countermeasures are severe. A few are mentioned below:

1. Economic Risks: When the whole economy is down turning, it is tough to keep the businesses in good shape. In a depression or slanting economy, consumer spending lowers, employment takes a hit, investments, and spending reductions. Likewise, it creates a circular effect by affecting all businesses in the nation.
2. Natural Risks: Risks that originated from natural causes are also severe and unpredictable. It could affect the business in multiple ways such as operations, damage to physical assets, closure of stores hit by natural calamities, etc. It is considered as one of the biggest threats, but, fortunately, adequate insurance could provide excellent support in these situations
3. Political Risks: Every govt has its policies and agendas in place. A business could get affected by the government. Policies about finance, taxes, import/export, tariffs, etc. Though risks emanating from political events are entirely predictable as the parties mention their agendas in the election manifesto or a general idea about the upcoming policies are available in the public domain. Some insurance plans could protect businesses from risk initiating from political uncertainties, war, import/export regulations, etc.

In some cases, such as risk factors related to natural calamities and economic issues, it is complicated to assess the damage laden by risk factors. Still, in other cases, it could be devised. Businesses generally have a dedicated department taking care of issues arising from various types of risks. The calculation of impacts by a risk factor could be done by assuming a probability of such an event happening by multiplying it with the expected damage entailed by the risk factor. For example, the assessment of loss expected from a fire to the factory of an entity could be calculated by a 10% chance (assumed) of happening multiplied by $10 million value of a property.

In the end, all the businesses are laden with risks arising from multiple risk factors severely impacting the entities. Organizations do foresee, plan, and make arrangements to prevent and correct the issues and damages caused by several risk factors.

This has been a guide to what are Risk Factors in Business & its definition. Here we discuss types & how to calculate risk factors along with its management. You may learn more about financing from the following articles -

• Counterparty Risk
• Risk Transfer
• Risk Reversal
• Investment Risk