How to Prepare for Common Business Risks

Running a business can be incredibly rewarding, but can also produce high levels of stress and uncertainty. The good news is that 2023 looks set to be less tumultuous for South African business owners than in the past few years. According to Stats SA, business liquidations are down over a third compared to last year. While this means that some business risks will be less pressing, you'll still need to integrate business risk management practices to mitigate the remaining ones. Part of this will include getting insured. Discover how to prepare for common business risks, understand the advantages of insurance for businesses and understand the types of business insurance Auto & General can offer you.

What are business risks?

Business risks are any elements that potentially threaten your profitability and ability to function. It includes anything that could keep your business from meeting its goals or lead it towards financial loss or bankruptcy. Some types of business risks can overlap or correspond with each other. Let’s unpack this in more detail. 

9 Types of business risks that can affect your business

1. Compliance risk

Compliance refers to ensuring that your business operates within the laws, regulations and legislations stipulated by the country in which it operates. This risk concerns any external legislation or regulatory practice your business may struggle to adhere to or that an employee purposely violates. 

2. Legal risk

This refers to the potential risk that a business may face legal action due to violating laws or regulations. This covers various legal issues, including compliance laws and contractual obligations. Failure to manage legal risks properly could lead to significant financial losses due to legal proceedings, fines, penalties or settlements, not to mention reputational damage. It’s important that organisations identify potential legal risks and mitigate the impact with appropriate processes and action. 

3. Strategic risk

This risk can impact your business's path and the strategy it follows. It can include unsuitable employees starting with your business or employing someone not suited to the job in hand; an incorrect decision to launch a new product or service that is not well received by the market; or failure to respond effectively to new circumstances, such as a change to your customer base or the market in which you operate.

4. Reputational risk

Reputational risks concern how the public and stakeholders view your business, those working for it and its offerings. The aftermath of reputational issues can have an extremely damaging effect on your business. Imagine that a popular fast-food chain markets itself as environmentally and socially responsible. The company’s brand values have always emphasised its commitment to sustainability and ethical practices. However, an investigative report from a reputable news agency reveals that the company has been using unethical labour practices in its supply chain. Workers were paid extremely low wages and worked in dangerous conditions. The news goes viral and causes a public outcry. Many customers, stockists and investors lose confidence in the company and may boycott their products or discontinue their association. 

5. Operational risk

These risks impact your ability to operate and meet business goals. They can include external factors, such as inclement weather that destroys your factory, forcing it to temporarily cease operations or industrial action, which keeps your business from accessing certain elements it requires.

6. Human risk

Any business that requires people to help it operate faces this risk. Human risk refers to the potential risk that arises from the behaviour or action of people  in the business or who are associated with the business, like employees, senior management, suppliers or stakeholders. 

7. Cybersecurity risk

Businesses operating online or using digital systems could face risks when handling sensitive data or making and receiving payments. An insufficiently secure website could be vulnerable to hacking, resulting in sensitive customer information being leaked and subject to fraud.

8. Financial risk

Financial risks can come about as a result of one or more of the above factors and involve issues impacting your finances or ability to manage them. For example, it could involve your business dealing with increasing interest rates on a business loan or cash flow issues because of fluctuating business expenses.

9. Security risk

Anything that can compromise the integrity of your assets is a security risk. This can include employees failing to arm your premises or protect your online servers from malware or phishing attempts.

Business risk management: the 5-step process

While there are different approaches to manage your business risk, the following process can help if you haven't done it before.

1. Identify what risks you face

You can determine this by conducting a risk assessment. This is a systematic process of identifying, analysing and evaluating potential risks that could affect your business. Auditors usually carry out the process.  You can also review industry trends and market conditions, which will identify shifts in economic downturns or new industry regulations. 

2. Analyse the risks

Once you've identified what risks you face, you can analyse them to determine if any can be eliminated or mitigated in the long or short term. For example, a plastic packaging business can face long-term reputational and compliance risks as customers seek eco-friendly packaging options.

3. Prioritise the risks

Your next step is prioritising each risk according to its urgency and impact and then putting in place plans to prevent or address them. 

4. Treat the risks

Once you have identified the potential risks your business faces, analysed them and the threat they pose and decided which are the most urgent to deal with, you are ready to develop a sound risk management plan. This can involve a once-off effort, such as moving into an access-controlled building to address your physical security risk. It can also involve finding a way to manage ongoing risks. For example, suppose you are a professional services firm offering advice or information, for a fee, to the public. In that case, insurance can cover you against any legal action clients might take should your advice produce any unfavourable outcomes.

5. Monitor the risks

Your business is likely to evolve as time passes, which means the risks it faces could change. Monitoring them can help you foresee future risks and adjust to meet them. For example, if you offer a delivery service and purchase a fleet of delivery vehicles, you must purchase business vehicle insurance to protect your investment.

Types of business insurance that cover business risk

You may wonder if business insurance can cover every risk your business could face. Most business insurance coverage can be customised to meet your specific needs and include a range of suitable products. For example, you can purchase public liability insurance to cover the costs of addressing defamation in court or paying a customer compensation due to damages or financial loss. You can also get business interruption insurance to help cover your financial commitments should your business shut down temporarily because you cannot work.

Get a business insurance quote from Auto & General

The exact combination of business risks you face will be unique to your company, as will the insurance you require. To create a package that meets all your needs, it's advisable to contact a professional who can answer your questions. Auto & General’s expert team is ready to assist you with your queries, so request a quote today.

-----------------------------------------------------------------------------------

BusinessTech: This is how many businesses have closed in South Africa in 2023 so far

Disclaimer: The information in this article is provided for informational purposes only and should not be construed as financial, legal, or medical advice.