Business risk is something that is inevitable when we run a business, whether small, medium, or large businesses are not immune from business risk. These business risks vary, ranging from financial, technology, to government policies. Business risks are unexpected and can certainly cause losses to the business. Yes, even though the business plan that KH Friend prepared is fairly good, risks can still occur and become a barrier to the development of your business. But KH pals don’t need to worry. Although unavoidable, these business risks can be identified and solutions planned. Therefore, in this article, we will invite KH Pals to recognize what business risks are, types, causes, and solutions. Let’s see the article until the end!
What is Business Risk?
The word “risk” itself is taken from the English word “risk”, which means failure, obstacle, obstacle, danger, or loss. So, business risk can be defined as an obstacle and disadvantage that can occur at any time when building a business. The possibility of risk arising in a business can indeed arise from various factors, such as poor management, company systems, and strategies. In addition, risks in a business can also arise due to external factors such as disasters, economic shocks, and so on. If not detected as early as possible, business risks can cause greater losses. Therefore, companies or business people must have the ability to mitigate, manage and transfer risks.
Factors causing business risk
As mentioned earlier, business risks can be caused by two factors: internal and external. Internal causes mean that they come from the company or business itself, while external are things outside the control of the company or business. Here is the explanation:
Economic Issues
The existence of economic problems in a country is one of the factors causing business risks from external parties. This is because business activities are certainly inseparable from the economic activities of a country. When the country’s economic conditions are problematic, it can have an impact on the existing business sector.
Natural Disasters
This one also comes from an external party and the company or business has absolutely no control over it. For example, the pandemic that happened some time ago, making most businesses affected, or the tsunami that destroyed the company, and so on.
Human Behavior
The factor that causes business risk is human behavior. This arises from internal company or business factors due to improper decision-making or policies. For example, poor business and resource management. Eliminating consumer confidence, accumulating debt, and so on.
Business Risk Classification
Business risk causes at least two types of losses in a business, namely speculative risk and pure risk. Here is the explanation:
Speculative Risk
Speculative risk is a risk that if it occurs can cause a loss, or does not cause any loss (no loss), or can get a profit (gain). Examples of speculative risk are overproduction, monetary risk (foreign exchange rates), or stock purchases. For example, there is a possibility of loss if a company invests by purchasing shares. After some time, the purchased shares decline, resulting in a loss for the company.
Pure Risk
Pure risk is a form of risk that if it occurs will cause a loss and if it does not occur it will not cause a loss. Examples include fires, accidents, earthquakes, floods, landslides, and others. For example, if a restaurant experiences a fire, it will almost certainly suffer losses due to property damage. After that, the restaurant would have to close temporarily for repairs and recovery, or even close permanently due to bankruptcy after the fire.
Types of Business Risks
After discussing the causal factors and classification of business risks, KH pals also need to know what are the types of business risks. This is because business risks arise in relation to important aspects of your business development. Here are six types of business risks that KH pals should know:
Market Risk
The first type of business risk is market risk, which is caused by changes in the macro market. Where many business people are unable to stem it. For example, when Buddy KH runs a contemporary coffee business and you just made a new menu ‘Kopi Gula Aren’ which was trending and in demand by many consumers. But suddenly, a new menu comes out that is a favorite of consumers, for example ‘Regal Coffee’. In fact, at that time KH Friend had bought enough ingredients to make Aren Sugar Coffee. This is something that is detrimental to you, where KH Friend has a lot of material stock but is no longer needed. Therefore, you need to understand the market conditions and the possibilities that will occur in the future. Start by taking a personal approach with your customers. Like by asking for opinions and suggestions for the next product innovation.
Strategy Risk
This one business risk is closely related to strategy, where there is risk or uncertainty resulting from a lack of business strategy. This is because a strategy is needed and carefully prepared, or must be carried out when there is competition that might threaten our business. For example, a cellphone company called Nokia used to be a trend in all circles. But after the arrival of the latest operating system, Android, Nokia actually used another operating system and suffered huge losses because consumers prefer to use Android. Related to this, KH Friend must prepare what strategy will be carried out when going or currently running a business. So that later the business can run and minimize losses. As a businessman, KH pals should also not be selfish and still have to think about the existing market conditions and dare to choose strategies that may not immediately bring profit, but will produce it in the long run in the future.
Credit Risk
This type of risk applies to KH pals who run businesses with credit payment systems, such as finance companies. Where KH Friend must understand the risk of consumers who do not pay the installments. It is possible that the consumer runs away, goes bankrupt, dies, and so on. To avoid this risk, you need to analyze your debtors or prospective customers. Furthermore, you also need to determine several things such as the debt limit that can be given and how long the maximum credit period can be given.
Operational Risk
This risk will usually lead to a failure in managing a business related to daily operations. This may occur due to several technical failures, such as server errors, human errors, or inefficient processes in business operations. For example, your company recruited five people for business development. After doing so, it was discovered that actually recruiting these five people was inefficient and only needed three people. Of course this can harm the company in terms of material and time, where the company needs to pay employee salaries and take a long time for the recruitment process.
Financial Risk
This type of risk will usually have an impact on the financials of the company or business and refers specifically to cash inflows and outflows that may result in financial losses for the company. For example, KH Friend has a business where most of its income comes from a number of large clients who make product payments in several stages. Then when the repayment stage, the client does not make payments according to the specified schedule. This can certainly damage your business cash flow and cause uncertainty when the client will pay the settlement. So it is important to create a buying and selling system with safer provisions, for example, payment of only five percent of the total cost of the bill and regulate penalties for clients who are late in making payments. Also, avoid debt if it is not for urgent needs.
Legal and Compliance Risk
Legal risks usually arise due to claims from other parties for violations of the law, such as copyright infringement, reneging on agreements that have been written in the contract (default), not following applicable laws and regulations, and so on. In addition, compliance risk is also closely related to legal risk, where this risk arises due to the inability to comply with statutory provisions or regulations. For example, violations in the field of employment such as providing salaries below the minimum wage, in the tax sector, or not having a business license in running a business. Where if KH Friend commits this violation, sanctions can be imposed ranging from reprimands, fines, to suspension of business activities.
What is the Solution to Overcoming Business Risks?
Now, you already know what types of business risks that can occur in your business. So, what are the solutions to overcome them? Below are some things that can be prepared carefully in order to be able to overcome business risks that occur in your business:
Write a Business Plan
In running a business, it is important to create a written plan. Look at it from various perspectives to plan goals, evaluate, and assess the business. Also pay attention to the operational, financial, and marketing strategies that are carried out.
Do Risk Management Planning
Risk management planning is different from business planning. A risk management plan includes steps that can be taken, procedures, and ways to overcome if risks occur. For example, if your business produces a perishable product, it must determine how to make the product safe when distributed to the market.
Follow the Plan
If you have written all the plans, both business and risk management plans, then follow them. With the guidelines that have been made, it will minimize the risks that occur. In addition, if you have followed the plan and all operational standards, then all that remains is to evaluate whether there is a profit or even a loss.
Minimizing Risk with Legality Compliance
Another important thing in running a business is about meeting compliance with business legality documents. Without legal documents, your business is illegal and not legally protected. That’s why it is important to ensure that legal and compliance risks can be avoided. Where the risk is no longer material loss but can cause your business to be forced to close or get a fine. Thus the explanation of business risks ranging from understanding, causal factors, classification, types, and how to overcome them.
READ ALSO: Risks of Owning a Business Without Legality
Although unavoidable, but never make this risk as a reason for KH Friend to hesitate in stepping. This is precisely the business challenge that you must face with the right strategy.
KH Contact
Kontrak Hukum is here to answer the problems faced by your business. As a digital legal platform in Indonesia, Kontrak Hukum is ready to help you recognize all the risks that may occur in your business. Including legal and compliance risks, we provide affordable and complete business legality document management services ranging from business entity establishment, licensing and taxes such as NIB, NPWP, NIB, to intellectual property. So, what are you waiting for? Consult all your business risks and fulfill your business legality documents now at Kontrak Hukum! For more information about services that suit your business needs, you can visit KH Services – Starting a Business page. If you still have other questions, don’t hesitate to consult first at Ask KH or via Direct Message (DM) to Instagram @kontrakhukum.
