How to Avoid Mismanaging Financial Business Issues & Risks

Image via Candila Capital.

Understand the Most Common Forms of Financial Business Issues and Risks

There are many types of business risks out there and many ways to break them down. In general, these can be divided into five major categories of financial risk.

Market Risk

Market risk describes risk inherent to the changing business landscape and consumer desires. For example, consumers have increasingly moved their purchasing power online over the last two years, thanks to COVID and the global pandemic. Many brick-and-mortar stores have had to quickly shift to online sales to remain open. Most economists don’t expect that trend to shift back to brick-and-mortar shopping anytime soon, either. This means that companies will have to continue to innovate around ways to deliver and market goods to customers who have cut back on how frequently they head to brick-and-mortar stores.

Strategic Risk

When a company doesn’t operate according to its business model, its strategy becomes less effective over time, and it may struggle to reach its defined goals. Strategic risk arises when a business does not operate according to its business model or plan. Strategic risk and market risk can be closely related and intertwined.

Compliance Risk

The third form of business risk is referred to as compliance risk. Compliance risk primarily arises in industries and sectors that are highly regulated, like alcohol, banking, and healthcare. Compliance risk arises when a brand fails to understand the individual requirements of its operating location. Companies can run afoul of federal, national, state, and even local laws depending on what kind of business they run. When a brand or company is noncompliant with any laws, the financial consequences can be tremendous. Compliance risk is often best managed by a compliance officer with plenty of experience in the space so they can help you navigate the ever-changing world of laws and regulations in your business area.

Operational Risk

The fourth type of business risk is operational risk. This risk arises from within the corporation, especially when the day-to-day operations of a company fail to perform. That failure could be because of an outsize credit risk, which is multifaceted, or even a liquidity risk. Operational risk also includes everything from lawsuits to personnel issues, business model risk, and fraud risk. These kinds of risks vary based on what kind of business you are in. Some business models are riskier than others.

Reputational Risk

Most of us inherently understand reputational risk. Any time a company’s reputation is compromised, either by an event resulting from a previous business risk or by a different occurrence, the company runs the risk of losing customers and significantly reducing customer loyalty.

How to Avoid Mismanaging Financial Business Issues and Risks

Knowledge is the best tool to mitigate the mismanagement of financial business issues and risks. While no one can know everything, it pays to gather as much information about your business and what potential pitfalls might snag your business in one of the ways discussed above. Getting an idea of what kinds of business and financial risks you may face as you run your company is a vital first step to managing your risks.

Prioritize the Right Risks for Your Company.

Every company is different, everyone faces different levels of risk, and every company has a different level of risk tolerance. Those risks and risk tolerances differ based on what exactly your company does, where you operate, and how you do business. It’s important to have a good grasp of just how risk-tolerant your company is and know where you are most exposed to various risks.

  1. How likely is it that this particular risk will impact my company?
  2. How exposed is my company to this risk?
  3. What steps can I take to mitigate or even eliminate the biggest risks?

Mitigate the Highest Risks With Smart Management.

Once you’ve identified the issues that pose the greatest danger to your company, you need to figure out a way to mitigate those risks, a strategy that works for your business.

Manage Growth.

Growth is great, right? It depends. There is, after all, the possibility of overextending your business (and yourself). Overextending or growing too fast can profoundly impact your risk exposure and put you at a disadvantage relative to the market, your competitors, and your business goals. Expanding too quickly can deplete valuable resources, overextend your credit, and put you at risk.

Build and Keep the Right Team.

Part of the trick to avoiding financial business issues and risks is having the right team to help you manage those risks. No one person can see all the problems or exposures that could potentially derail your business. Having a diverse group of reliable, trustworthy associates and even outside experts can help you properly manage risk exposure and keep your company on track.

The Bottom Line on How to Avoid Mismanaging Financial Business Issues & Risks

At the end of the day, managing risk comes down to knowing and understanding your own limits and those of your business, employees, and company. Keeping realistic tabs on the five main types of risk your company may be exposed to and knowing which levers to pull to keep your company safe is also crucial.



America’s Gold Authority

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