Types and Causes of Business Risk

A business has risk as its most integral and elementary part, without incurring risk, a business cannot proceed. A business is an entity that is dependent on a larger ecosystem that consists of suppliers, vendors, manufacturers, investors, employees and end consumers. All of these stakeholders constitute great risks to a business, which makes business risks an inseparable part.

There are multiple forms and reasons behind business threats, which can occur in the everyday life of a business. You can get to know about different business risks in detail, and also learn how to mitigate these risks in this blog.

What is Business Risk?

Business risk has been defined as an unforeseen threat which a business faces in its day-to-day operations, which reduces the total profit earned by the business. There can be various business risks, such as loss due to fire damage, a sudden supply chain breakdown, and financial loss due to cyber-attacks.The other forms of business risk can be regulatory risk too, such as the Indian government changing a law in exports which is adversely affecting the revenue of a business. Another risk is reputation risk such as a loss in reputation of a company, which impacts the business to a great extent.

A business risk can impact the business in various adverse ways, such as low profit or damaging the reputation of the business. Business risks can disrupt a business in these following ways:

• It can fail to meet the profit margin required for running the business ,and eventually leading to a huge financial loss.
• The business may get disrupted in daily operations and may have to shut down temporarily.
• In case of no insurance, a business can even go bankrupt and dissolve.
• A business with recurring losses can also face a series of challenges in the long run, such as losing key employees, or loss of a talented workforce.
• Businesses risks may damage the brand image and reputation in the long-run, which can eventually lead to low customer retention.

It is of paramount significance that a business analyses the risks it can face over time, and arranges specific measures to resolve those risks.

Nature of Business Risk

There are multiple factors that can pose risks to a business, so it is better to understand the characteristics of business risks before.

These are the main characteristics of business risk:

Lack of certainty

A business calamity arises as the future of the business in the long term may be uncertain. The uncertainty may arise because of a lack of strategic risk management, or not knowing the actual cause of risk.

Profit-oriented

Businesses engage and bear risks to grow their profits, so business risks may often come with the reward of profits. Profit margin plays a vital role, as in the case of lower profit, a business is less likely to undertake a higher risk.

An integral part of the business

Enterprises cannot get entirely risk-free, it can minimize risks but not be liberated from threats. Sometimes business threats may not be detected for a longer time, such as dishonesty of an employee or poor investment strategy.

Non-measurability

A business risk cannot be measured analytically beforehand, it can be only approximated. For example, risk from fire damage cannot be measured before such a case happens, the business can only insure itself at the actual value.

Causes of Business Risk

Business risks can be attributed to a range of factors, depending on the nature of operations and the overall size of the organisation. These reasons can be strategic, operational as well as third-party risks. Let us have a close eye on each of these natural causes of business risks:

Natural calamities

Natural perils such as floods or tempest are a serious threat to the business. Businesses lose goods worth lakhs owing to earthquake or inundation, and unless they are insured, the financial loss is usually catastrophic.

Economic reasons

Economic causes of business risk can range from a low supply of input materials, or a change in business policy by the government. A business risk can also arise due to hyperinflation or low procurement of raw materials. For example, in 2024, Dabur India faced a loss of ₹417.52 crores due to excessive food inflation in India.

Technological reasons

Technological reasons can be a breakdown in a manufacturing machinery, or workflow disruption due to outdated technology, or defective machinery.

Human reasons

These reasons are attributable to business employees, or logistics partners. For example, employee theft can be a serious reason for the business to suffer, or strike by the employee union.

Types of Business Risk

Here are the main four types of business threats:

Financial risks

Financial risks are those risks that occur when a client defaults payments, or in case the company faces debts which cannot be recovered. Financial risks can also be not getting a sufficient financial backup in case of a startup.

Compliance risks

Compliance risks often arise because of poor regulatory standards maintained by the business. In factories especially, ensuring compliance with regulations is a compulsory necessity, such as pharmaceuticals, BFSI, healthcare and logistics. Failure to comply is a great threat to business.

Strategic risks

These risks can occur in case of a faulty business model, or if the business is following a poor strategy due to insufficient competitor research. Strategic risks can arise because of the business not being at par with the competitors, or lacking in product innovation.

Reputational risk

For example, Adani Group was alleged of manipulating stocks and committing account fraud, which damaged the company’s brand reputation. This further led to investors of Adani Group losing almost $82.9 billion according to The Indian Express.

Operational risk

Operational risks occur when a business fails in regular operations, or daily operations fail to resolve interruptions. These risks can also occur due to employee inefficiency, or supply chain disruption such as a disruption in warehouse delivery or poor client coordination.

Technological risk

This risk needs to be monitored more frequently owing to their high degree of damage, such as cyber attack which results in loss of personal data and financial damage. Moreover, technological risks also constitute outdated systems or a failure in the tech system which can cause heavy disruptions in everyday workflow.

Examples of Business Risk

Let us now explore a few real-life business risk examples here:

Financial risks

BYJU’S faced a great financial risk of being in a total market debt of $1.2 billion with interest, which has caused the company to delay the salaries of its employees according to The Economic Times.

Compliance risks

Paytm, a popular Indian third-pay merchant platform has faced a high risk, losing ₹840 crores. Among the causes of business risk for Paytm, is its non-compliance with KYC of customers, causing the Reserve Bank of India to restrict Paytm Payments Bank.

Strategic risks

Ola Cabs is a great example to showcase strategic risk, as currently the company has shut down its operations in Australia including regions such as Melbourne, Sydney and has laid off multiple employees.

Reputational risk

Adani Group has been one of the recent brands that may have suffered critical reputational risks. According to press publishings, Adani Group had been alleged with bribery to the Indian government and stock manipulation by the United States Department of Justice in 2024, which has damaged the reputation of the company.

Operational risk

Minda Industries, a company specializing in manufacturing two and three-wheeler automobile batteries faced significant operational risk because of Covid-19. The company could begin to work by partially resuming daily operations, which had hurt its revenue and profitability the most.

How to Mitigate Business Risks

Business risk insurance

The best way to mitigate business risks can be getting insured, such as a business can purchase commercial general liability insurance or cyber risk insurance. For example, in the case of intellectual property infringement, a business can claim compensation if insured with commercial general liability insurance.

Contingency plans & back-ups

A risk management process can include several strategies that can reduce the risk and may also dissolve the risk, for instance, a business may set up systems or backups to resolve the risk. Moreover, a business can also approach the risk reduction technique. In this, the business assesses the market position of the brand and chooses an appropriate decision after analyzing their risk level.

Diversification strategy

Businesses can mitigate the risks by diversification strategy, such as implementing concentric diversification. Under the concentric strategy, a business can offer new products along with current products, which is believed to lower the risk.

Conclusion

Business risks can be fatal if not countered at the right time. A business risk can arise from multiple sources, so it is vital to be aware of the types of business risks and apply a mitigation strategy. With the right strategy, such as having business insurance, major commercial losses can be easily avoided.