Factors Affecting Business Risk

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Every business is subject to risks that affect cash flows and profitability. Some come from internal weaknesses; some come from external threats; and some arise from positive sources, such as expansion and growth opportunities. Although risks change over time and vary between businesses and industries, the factors that affect business risks generally remain the same. To successfully mitigate and manage business risks, it’s vital to understand these factors.

Internal Factors

  • Human, technological and physical factors both cause and affect internal business risks. Human factors can include your employees, vendors and customers. Technological factors include computers, information technology and business processes that rely on technology to remain cost effective and efficient. Physical factors can include equipment malfunctions, downtime and eventual obsolescence. Brick and mortar businesses also face risks relating to building maintenance and losses the business may incur due to slips, falls or other accidents. Internal factors are generally those you can predict, plan for and control.

External Factors

  • External economic, natural and political factors are those over which you have little or no control. As a result, the risks these factors pose can affect your business to a great degree. On the other hand, external factors most often aren’t business-specific, so when an external factor affects your business, it’s most likely also affecting the competition. The key to mitigating external risks lies in constantly monitoring your customers, the economy, pending legislation and your competitors. An emergency plan can mitigate risks that a fire, flood or a tornado might pose.

Cash Management

  • Cash-handling policies and procedures, purchasing decisions and budget allotments can all affect cash flow risks. Risks pertaining to fraud and employee theft increase without strong cash controls, including separation of duties, an authorization system and regular transaction reviews. A weak or nonexistent procurement policy can lead to poor purchase decisions, vendor favoritism and overpayment risks. Without regular monitoring, even well thought out budget allotments can go awry when market conditions change.

Personal Factors

  • Personal conflicts and complacency are additional factors that can affect business risks, according to the U.S. Small Business Administration. For example, balancing work with personal and family obligations can affect both you and your employees. A common scenario occurs when a key employee submits a time-off request for the busiest day of the month. Complacency can lead to missing opportunities for growth and increased profitability because you’re satisfied with the status quo.

References

  • Photo Credit Gajus/iStock/Getty Images
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