What are main sources of business risks that companies should plan for?

Highlights

  • A business is always accompanied by a certain level of risk.
  • Knowing about these risks would help a company’s management to make decisions regarding acceptable risk levels relative to potential profits.
  • Thus, the key to successful risk management is maintaining an ideal balance between risk and reward.

A business is always accompanied by a certain level of risk. So, it is important to know about the sources of the risk that may impact the business. Knowing about such risks would help a company’s management to make decisions regarding acceptable risk levels relative to potential profits. Thus, the key to successful risk management is maintaining an ideal balance between risk and reward. Here we will discuss some of the main sources of business risks that companies should plan for:

Interest rate

Changes in interest rates can have a significant impact on businesses. Interest rate changes can impact both stocks and bonds. Bond prices are inversely proportional to interest rates. In addition, borrowing costs for a business shoot up. It can result in higher credit risk and higher rates on new loans.

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Operating profit

A marketplace is always full of risks that can’t be eliminated or directly controlled but can only be managed. For instance, consumer demand may fall with time, resulting in less demand for the company’s products. There is always a risk of a competitor introducing a product which may have a higher appeal for buyers. There is always a risk of a general economic downturn, which may hit the company’s sales. Thus, these risks may have an impact on the company’s sales or operating margin.

Labour issues

Labour issues also have an impact on the cost of production. While wage costs may increase due to the need to retain certain workers, loss of employees may also result in the company losing profitability. In addition, unwise decisions by the management can also have an adverse impact on the future of the company.

READ MORE: How to invest in stocks of foreign companies?

International risk

A company which has operations spread across the world may have to face risks related to exchange rates and tariffs. Even as risks rising out of the currency exchange rate can be managed via hedging, risk of legal or political nature are difficult to predict and not managed by management strategies.

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Inflation risk

An increase in inflation can have an impact on the purchasing power of the invested dollars. A rise in commodity prices can make it costlier to purchase raw materials to produce the final product.  Inflation also leads to an increase in interest rates.

READ MORE: Why is deflation more dangerous than inflation?

The Bottom Line

Even as business risks can’t be completely do away with, steps can be taken to lessen their impact. Companies can draft a contingency plan to make their risk management structure more robust.

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