7 Types of Risk and Strategies to Help Manage Them

We live in a time of rapid technological advancements, looming environmental challenges, and escalating geopolitical issues. These factors are already causing volatility and uncertainty, drastically impacting industries and economies worldwide, and according to the Harvard Business Review, these trends are here to stay.

Wouldn’t it be nice if we could find a way to predict the future and prepare for what lies ahead? Well, there is a way, and it’s called risk management. You could think of this crucial business practice as one of those crystal balls where you catch glimpses of potential future scenarios amidst shrouds of mist and then use that information to inform your planning and decision-making.

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To help prepare you for what’s to come, here is a handy guide highlighting the seven types of risks you should look out for and proven strategies for managing them.

What is Risk Management?

Risk management or risk mitigation is a process used to identify, analyze, and manage financial, legal, security, or strategic risks that could negatively impact a company’s operations and profits. These risks could result from economic uncertainties, technological issues, management blunders, and natural disasters.

All risks are not equal; some could have minimal impact, while others could be catastrophic. A risk mitigation strategy helps protect a company from dangers threatening its operations, reputation, employees, and profits.

Why is Risk Management Crucial Today?

Proactive risk management helps companies build resilience and reinvent themselves to prosper in times of uncertainty. It can also help save costs, improve business continuity and success, and fortify companies in the face of rapid change.

A risk management plan intertwined with your operational strategy will lead to more informed decision-making. Risk mitigation for SMEs is especially vital as it supports their growth ambitions and drives success by encouraging a long-term, future-focused approach to business. Similarly, risk mitigation in SaaS finance is crucial to protect a company’s financial data and help it make sound investment and business decisions.

A risk mitigation plan will help protect your company’s reputation. How your company reacts to a threat can significantly impact its public image. Whether the danger could have been controlled or not, effectively managing it will minimize the damage to your reputation and help you build trust with employees, investors, and customers.

A holistic risk management strategy can minimize financial losses. Even unforeseen circumstances that aren’t categorized as financial risks, such as accidents, cybersecurity attacks, or pandemics, can have severe economic repercussions. For example, planning through SaaS financial risk management helps mitigate the additional costs that could arise from such events.

Not all risks are wrong; in some instances, risk management is about determining whether a positive risk is worth taking. Some risks can help companies boost their growth through innovation and optimization. PwC’s 2023 Global Risk Survey states, “62% of organizations predominantly seek to uncover opportunities within risks.” In today’s age, this presents a unique opportunity for companies to keep up with the breakneck pace of change.

7 Types of Risks to Plan For

• Operational risk can impede your organization’s day-to-day operations or workflow and lead to severe financial and reputational losses. Various factors, such as human error, cybersecurity threats, natural disasters, political turmoil, or government regulations, can cause it.
• Financial risk includes controllable or uncontrollable factors that could impact your business’s cash flows or cause an investment to lose money. SaaS financial risk management helps to mitigate or find opportunities within common risks related to credit, foreign investment, equity, currency, liquidity, and assets.
• Strategic risk is a factor that negatively impacts your organization’s strategy or causes failure. These risks can arise from controllable factors, such as faulty business decisions, or uncontrollable factors, such as changes to the industry in which you operate.
• Technology risks such as data breaches, cybersecurity threats, or IT system failures affect your IT infrastructure. Managing these risks is especially crucial in today’s digital era when companies depend entirely on technology. Mismanaged technology risks can trigger a domino effect that impacts your company’s operations, finances, security, and reputation.
• Reputational risk identifies and mitigates the possibility of negative publicity, unfavorable public perception, or uncontrollable events affecting your company’s reputation. Managing this type of risk is crucial to maintaining your company brand and building customer and stakeholder trust, which can impact your value and profitability.
• Compliance risk refers to factors that deem your company non-compliant with regulations, laws, industry standards, or ethical norms. Compliance risk management protects your company from incidents affecting your financial or legal status and reputation.
• Security risk focuses on internal and external threats to the security of your organization’s people, profits, infrastructure, and other valuable assets. These risks can result from anything from crime and inadequate protections for physical and informational assets to political unrest and currency fluctuations.

Building an Effective Risk Mitigation Strategy

Effective risk mitigation for SMEs is holistic and focuses on long-term resilience-building. Let’s examine how to create a risk management strategy and some best practices to help your plan succeed.

 To establish your risk management strategy, you will need to:

• Identify all potential risks that could impact your organization’s operations, strategy, finances, reputation, compliance, security, and technological infrastructure.
• Analyze your identified risks and prioritize them based on the likelihood of occurrence and the degree of impact on your organization.
• Implement or transform mitigation strategies for each identified risk and its perceived impact. You can also offset some risks with business insurance services.
• Allocate a budget and resources, such as personnel, finances, and technology, to keep your plan running smoothly.
• Execute your strategy by avoiding, mitigating, transferring, or accepting each risk. Your plan will constantly evolve, with some steps bolstering your long-term resilience and others addressing urgent, short-term concerns.
• Monitor risks and continuously improve by incorporating feedback and reviewing and adapting your plan based on its effectiveness or changing needs.

Once you have established and implemented your strategy, you can ensure its success by fostering a risk culture. Encourage employees and functions from across the organization to identify and assess risks as well as the potential opportunities that lie within. Welcome diverse perspectives and feedback to develop your employees’ risk management capabilities.

Leverage technology to take your strategy to the next level. A survey shows that 65% of executives invest more in risk management technology to ramp up their efforts. Risk mitigation in SaaS finance is one area that could benefit from such technologies to more effectively analyze, monitor, and flag data- and technology-related risks.

The Final Word

Building resilience and preparedness is crucial for companies facing growing volatility and uncertainty. A holistic risk mitigation strategy reinforced by the latest technologies and an organization-wide risk culture can provide a practical roadmap for navigating the murky waters of a rapidly evolving business landscape.

Want to know more about building a successful risk management plan? In addition to HR, benefits, recruiting and payroll through its PeopleOps, Escalon’s Essential Business Services include FinOps (CFO services, taxes, bookkeeping and accounting) and Risk Management including Business Insurance. Talk to an expert today

This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.