Enterprise risk - identifying and addressing vulnerabilities

Date of publishing: 26 August 2022

One area where risk can create immense damage is that of business. The recognition, identification and management of risks has become an important branch of the economy, precautions in this sense being considered obligations in order to achieve success. Entrepreneurs, regardless of the size of the businesses they are developing, must know how to approach and manage risk, because, surely, at some point in time they will make their presence felt in practice.

In the article below, you will find out what risk is in business, what is the typology of the economic phenomenon and what are the main causes generating risk. You will also be able to know the main methods of risk management in business and you will discover some tips from specialists in order to avoid, as much as possible, this disturbing economic problem.

Contents:

1. What is enterprise risk management? Examples

1.1. Types of internal risks

1.2. Types of external risks

1.3. Enterprise risk causes

2. Managing the enterprise risk

2.1. How to reduce the enterprise risk

2.2. Enterprise risk management through specialist consulting

3. Tips for entrepreneurs to avoid enterprise risks

1. What is enterprise risk management? Examples

Any business is organized based on certain objectives, in terms of development, generated finances, sales level and human resource management. Many times, these goals are threatened by various elements outside the direct control of the entrepreneur. These threats are called in the specialized language as business risk, an element that manifests itself in practice in the form of the impossibility of realizing business plans according to the initial wishes.

Economic practice has shown that risks cannot be fully foreseen, as there are no methods to completely eliminate them. This characteristic is all the more current, as the global business world is subject to economic, political, medical and even military crises, which cannot be anticipated and managed. Many risks have been identified in economic practice, the typology of the problem being very broad. A logical division is that of identifying the area where the danger comes from, thus there are two significant types: internal risks, where problems are generated and relate directly to the company's activity, and external risks, which are generated by factors outside the company.

1.1 Types of internal risks

The company's internal activity is carried out based on the decisions made by the manager. Under certain conditions, these decisions fail to comply with the wishes of economic success, most often the reasons being related to the presence of unforeseen risks.

• Risks related to human resources refer to those generated by improper management of employees. In this regard, the illnesses of one or more employees, even the management of the company, theft of goods by employees quite common, fraud regarding working time or other elements and low productivity due to insufficient qualification or non-involvement in the work;
• Technological risks are those generated by the use of outdated, less productive, morally and physically outdated technology. In this regard, a significant negative influence is given by the frequent breakdowns of various equipment, which involve additional expenses for repair, but also dead times, in which production stagnates;
• Marketing risks are those that prevent the sale of services and products to the widest possible market. The most important danger in this regard is the narrowing of the market due to the loss of customers and the inability to find new ones;
• Financial risks are related to the lack of money. Often, companies find themselves unable to develop their business because they do not have enough money to purchase raw materials, technology or hire new workers. Most often, risk manifests itself in the form of cash flow problems. 

1.2. Types of external risks

The category of external risks is huge, businesses can be affected by unsuspected elements many times.

• Financial risks refer to the general evolution of economic activities in a country, a continent or globally. This includes elements such as very high inflation, fluctuations in the currency market or high interest rates;
• Political risks are those related to the decisions of governments in relation to economic life. Introducing new taxes, banning imports or exports, or complicating bureaucracy can represent important barriers to economic success;
• Natural disasters are difficult risks to identify and manage, because they appear unexpectedly and have huge effects on very large areas. Earthquakes, floods, droughts and epidemics can block the chance to make a profit;
• Changes in the structure of the population related to the emigration of a large number of residents from the area where the business is carried out can lead to a decrease in the number of potential customers and a lack of labor;
• The change in the business environment through the development of competition, through the disappearance of essential business partners and even through rent increases exposes the economic activity to complicated situations.

1.3. Enterprise risk causes

Knowing the causes of risks in business is essential, because based on this information, decisions can be made before the risks occur, both in order to eliminate the negative consequences, and in making decisions that lead to the total avoidance of these risks. Among the many causes related to the problem of risks in business, three examples can be highlighted:

• Economic causes are those related to unexpected situations, which appear in the activity carried out by various companies. In this sense, we can mention the increase in the price of raw materials and energy, the costs related to the labor force and the change in relations with banking institutions, especially due to the increase in interest on loans;
• Human causes are those related to the obstruction of normal activity by employees. Negligence in the workplace, absenteeism and strikes can significantly impact the business;
• Natural causes should not be lost sight of, as natural calamities can influence the business chain. Even if these natural disasters do not occur in the area where the business is based, they can affect other elements of the chain, such as raw material suppliers or transporters.

2. Managing the enterprise risk

A useful quality for any entrepreneur is related to business risk management. By knowing the potential risks, both in terms of the types that are more likely to happen and when they tend to occur, planning can be done for the purpose of prevention or preparations can be made to reduce the costs involved in these risks. The identification of risks can be done directly by the entrepreneur by carrying out an analysis that ascertains the strengths, weaknesses, opportunities and threats. Another option is to turn to enterprise risk management consultancy carried out by specialized companies, whose employees have extensive experience in the field.

2.1. How to reduce the enterprise risk

An essential method of reducing risks is to take out insurance. Insurance agencies take on the potential risks in exchange for paying sums that are, most of the time, easy to pay. In this regard there are two types of insurance.

First of all, it is about the mandatory insurances, those that the laws of the Romanian state impose. This category includes unemployment insurance, which any employer must pay on behalf of employees, disability insurance, and workers' compensation insurance.

The second category is represented by optional insurances, specially intended for the business environment. There are dozens of types of insurance in this category, such as employee life insurance, commercial property insurance, professional and product liability insurance, or general liability insurance.

All types of insurance in the two categories, indeed, require the payment of annual or quarterly amounts, but the economic reality has shown that companies that use such solutions are less exposed to various risks and recover more easily after certain events unexpected, negative.

To make the right decisions in this situation, entrepreneurs must follow the advice of specialists in the field.

• Identifying risks is paramount because for every business there are certain categories of risks that are more likely to occur. It would be ideal to conclude as many insurances as possible, but this is often impossible, because it involves expenses that are difficult to bear. Because of this, the best solution is to choose to insure those risks with a high probability of occurrence;
• The choice of the insurance agency must be made after careful consideration of the services provided and, above all, of the manner in which any damages are paid. Some companies are late with payments or even in danger of bankruptcy, so the choice must be made with knowledge;
• Conclusion of insurance policies will be done only after careful comparison of the options and the costs involved;
• Adaptation to the realities of life is paramount. The world is constantly changing, with it the risks becoming more or less likely. It is recommended that once a year a new analysis is done and the insurance policy is adapted accordingly.

2.2. Enterprise risk management through specialist consulting

Many of the entrepreneurs, especially the beginners who develop small and medium businesses, do not yet know all the secrets of entrepreneurship, many times they end up in the situation of being taken by surprise by destructive events. Ideal for them would be to acquire rich information related to the business environment and the general political and economic situation of the country and the world.

Unfortunately, this is not always possible, managers' time being limited, they have to spend many hours of the day for the effective management of companies. For this reason, it is a good idea to turn to business consulting provided by specialized companies with decades of experience in the field. These firms provide business risk services such as cyber security and data protection, corporate governance, internal audit, internal control, IT assurance & advisory, legal compliance, third party risk management, etc.

3. Tips for entrepreneurs to avoid enterprise risks

Entrepreneurs must dedicate part of their work to identifying and managing risks. Reality has shown that they cannot be ignored, managers who carelessly approach the business environment will certainly come to regret it at some point, reduce the profit or even lose the business for good. There were not a few cases where a single undesirable event, such as an accident, a strike or a wrong decision, led to a real economic disaster.

Risk management specialists have some easy-to-follow and implement tips for them that could significantly reduce the possibility of risk in business:

• The best weapon against risk is knowledge. The more a manager knows about economic life in general and political-social and financial life in particular, the easier he can identify risks and make correct decisions to avoid them or minimize their effects. In this regard, there is a rich specialized literature, but also specialization courses that interested people can participate in;
• Business consulting has proven its value. Any economic field can benefit from the advice of specialists. This element is all the more current as the business world benefits from the latest innovations, an example being the use of artificial intelligence. Consultancy firms are making every effort to utilize these innovations, which the various consulting businesses can use to support their development;
• Today's world is a world of change, therefore adaptability is a powerful weapon in business risk management. Studies have shown that conservative business people who refuse to accept the new and who get stuck in the past are more likely to fail to overcome unwanted events.

In conclusion, knowing the elements that characterize business risk and, above all, its management methods is a more than necessary skill for entrepreneurs who want to develop their businesses and obtain a healthy profit.