Starting up businesses takes a lot of money and risk. Risk is part of the job of an entrepreneur. Knowing how to manage and minimize risk can spell the difference between a failed business and a profitable one. Here are five of the most important risks to mitigate.
Structural Risk
Structural risk refers to a business’ fundamental, legal, and organizational makeup. This risk involves the legal and ownership structure. Assessing this risk also means knowing how wide the leadership group is. Groups like investors, teams, and advisors fall into this category. It is best to perform a business risk analysis to spot hazards or issues that could damage the business and implement steps to protect the company.
Competitive Risk
Competitive risk refers to the ability to maintain competitive action and reaction. This risk drives improvements like cost reduction and higher quality. Examples of competitive risk include pricing, innovation, location, resources, promotion distribution, and intellectual property. Keep a close eye on the market and competitors to analyze what the company may need to improve or change to remain on top.
Execution Risk
Execution risk refers to the versatility of the business model and how well it is executing. This risk measures whether the company’s plans will or will not work. An example is when a company is implementing a new information system that is difficult to integrate. The company will likely lose business due to the malfunction of the system. Clients will be lost while the system gets fixed, and repairs cost money. Before fully switching over to a new system, it is best to make sure every employee is properly trained on the new system to avoid conflict.
Investment Risk
Investment risk refers to the ability to spend money in a business environment where capital is scarce, technologies are volatile, expensive, and not easily understood. This risk measures the likelihood of losing some or all of an original investment. For example, if a person invests in a United States Treasury bond, their money is practically guaranteed to earn a small interest. If that same person invested in a corporate bond, their risk is higher because the business is more likely to go bankrupt than the U.S. government. An intelligent way to help prevent such a potential disaster involves hiring the services of a financial analyst to verify funds spending is proper and safe.
Integration Risk
Integration risk refers to inadequate integration between strategy, investments, people, and processes. An example is a poorly designed data integration between two technologies that leads to data problems disrupting critical operational processes. Similar to the example in Execution Risk, it is best to verify everything can and will work properly before officially switching to a new program or technology.
Risk plays a constant factor in your business. Knowing how to manage and minimize risk will help your business grow exponentially.
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This article was updated on 10/25/24.
