Businesses of all types and sizes face risks. Some risks are worth taking and increase your revenue, but other risks cause you to lose money. It's important to spend time evaluating your business risks so you can determine which ones are worthwhile to take.
Common Business Risks
Operational Risks
Operational risks are related to your company's business functions. They can include a broad range of challenges, including fraud, IT risks and legal issues, and are usually caused by an inadequate or failed system, internal process or human. Consider related solutions such as Cover Holders and Risk Takers when evaluating transfer options.
Compliance Risks
Hundreds of federal, state and local laws and regulations affect small businesses. Maintaining compliance may cost thousands of dollars annually, but you may face fines or other penalties for non-compliance.
Fraud and Theft Risks
Any type of embezzlement, dishonest financial reporting, unethical or illegal acts, or theft by employees or customers harms your business.
Credit Risks
Taking out a loan to start or maintain your company or extending credit to a customer are two examples of credit risks that can affect cash flow and solvency.
IT Risks
Data breaches, loss of data and cyber attacks affect your ability to do business and can lead to lawsuits and recovery costs. For cyber-specific protections and programs, review offerings such as the e-Business Risk Management Program.
Medical Risks
Accidents, injuries, illnesses and environmental factors can affect the health and well-being of your employees and customers.
Reputational Risks
Slow customer service or a bad online review can damage your reputation, in some cases beyond repair.
How to Evaluate Your Risks
After identifying business risks, take three steps to evaluate whether a risk is worth taking or one you should avoid.
Determine the rank of each risk. Risks can affect each business differently. Assign each risk a rank of low, medium or high so that you can address the most serious risks first and protect your business.
Assign a financial loss figure to each risk. Know how much a risk will cost and then decide if it's financially worth it. As an example, decide how much money an expansion will bring in versus how much it will cost for the expansion loan, including fees and interest.
Create a plan to handle risks effectively. When you know which risks your business faces, you can decide how to handle each one. You can hire an IT specialist to monitor cyber risks, assign someone to the role of safety manager to help maintain OSHA compliance, or require upfront payments to reduce credit risk. For property exposures or specialized coverages, consider options such as Mercantile (Lessors Risk Only - LRO).
Evaluating your business risks is an important part of your company's success. Discuss your risk management with your business mentor, attorney and financial planner, and talk to an agent.
Frequently Asked Questions
What are the most common types of business risks?
Common risks include operational, compliance, fraud and theft, credit, IT, medical and reputational risks.
How should I prioritize which risks to address first?
Rank each risk as low, medium or high based on likely impact and probability, and address high-ranked risks first.
Can insurance cover all business risks?
Insurance can cover many financial losses but not all risks; some risks require operational controls or changes to business processes.
How often should I reassess my business risks?
Reassess risks regularly—at least annually—and after major changes such as growth, new products or regulatory shifts.