What is business risk and what controls should organizations have in place?
Business Risk and Controls
Business or operational risks related to the activities carried out within organization, arising from structures, system, people, products and processes. Business or operational risks include business interceptions, errors or omissions by employees, product failure, health and safety, failure of IT system, fraud, Loss of key people, litigation. Loss of suppliers etc. These are generally within the control of organization through risk assessment, risk management policies including internal control and insurance
In Banking, operational risk has a particular meaning as defined by Based Committee on banking supervision, operational risk is defined as the risk of loss resulting from inadequate or failed internal process, people and system or form external events. Their definition includes legal risk but exclude strategic and reputational risk operational risk, which is largely subjective in distinguished from the more quantifiable credit, liquidity interest rate and market risks.
The most significant business risks are focused on strategy the business adopts including concentration of resources, mergers and acquisition and exit strategies, planning and benchmarking procedures are also important. Organizations also need to guard against risk that business operations are not aligned to its strategic goals.
Relating with stakeholders will also have a significant impart upon business risks because of consequences of non cooperation e.g. investors not contributing new funds, suppliers not delivering on time, employers disrupting production and ultimately of course customers not buying goods and services organization must be aware of key factors that may lead to problems in relation with stakeholders.
a) Investors will be concerned with financial returns, accuracy and timeliness of information and quality of leadership.
b) Relation with suppliers and employees will be influenced by the terms and conditions of business with employees, the organization also need to consider whether they have appropriate knowledge and attitude.
c) Customers will obviously be influenced but the level of customer service also product safely issues and perhaps whether organization is ethics in matters such as marketing practices.
Other factors contributing to business risk will include.
- The type of industries/markets within which business operates.
- State of economy
- Actions of competitors and possibility of substitutes
- Introductory and declining stage of products life cycle investors risk
- Dependence upon inputs with fluctuating prices e.g. oil, wheat, etc.
- Level of operating gearings.
- Flexibility of production process to adopt to different specifications and products
- Organization research and development capacity
There may be little management can do about some of these risks, they are inherent in business activity. However strategic diversification can contribute substantially to reduction of many business risks.
Financial risks include risks relating to structure of finance the organizations has, in particular the risks relating to the mix of equity and debt capital also whether organization has an insufficient long term capital base for the amount of trading it is doing organization also consider risk of fraud and mistake of financial resources, other short tem financial risk including
- Credit risks
- Liquidity Risks
- Cash management risks
Long term risks including currency and interest rate risks and currency risks include
- Transaction risk
- Translation risk
- Economic risk
Risk of loss of reputation caused as a result of adverse consequences of other risks.