Question

1. Give examples of the types of risks companies face. Give examples.

Answer 1

Strategic Risk- Everybody knows that a good company requires a detailed business strategy which is well thought-out. But it's also a fact of life that things change and sometimes your best-laid plans will come to look very outdated, very quickly. That is a strategic threat. It's the possibility that the plan of your company will become less successful and that as a result your company will fail to achieve its objectives. It may be due to technological advances, a strong new competitor entering the market, shifts in consumer demand, increases in raw materials prices, or any number of other major changes.

Operational Risk- Operational risk refers to an unintended failure in the day-to-day operations of your company. It could be a technological malfunction or it could be triggered by the people or processes, like a server outage. Operational risk does have more than one cause in some cases. Consider, for example, the risk that one of your employees would write the wrong amount on a check and pay out $100,000 instead of $10,000 from your account.

Financial Risk- Most risk types have a financial effect, either in terms of additional costs or missed sales. But the financial risk category explicitly refers to the money that flows in and out of your business, and to the likelihood of a sudden financial loss. Let's assume, for example, that a large proportion of your income comes from a single large customer, and you extend the credit to that customer for 60 days. You're at a significant financial risk in that case. If that customer can not pay, or for whatever cause, refuses payment, then your company is in great trouble.

Reputational Risk- If your credibility is affected, you can see an immediate sales loss as consumers are skeptical about doing business with you. Yet, there are also other consequences. Your staff may become demoralized, and even decide to leave. Hiring good replacements can be hard for you, because prospective recruits have learned about your poor reputation and don't want to join your firm. Providers will start giving you less favorable terms. Advertisers, advertisers or other partners that choose not to want to be associated with you any more.