5 business risks that may affect your business
A business risk is a factor that is created in the external or internal environment of an organisation or business, wherein it cannot achieve its objectives. A business risk may affect the continuity of a company.
Many organisations have not defined an Internal Control System focused on risk management, which does not allow them to respond appropriately to the realisation of the business risks.
An identified significant business risk management company must define the possible answers. The answers could be:
– Accept the risk (assuming the impact)
– Try to reduce risk by contacting someone to take control like thecheapaccountant.co.uk (implements controls)
– Transfer the risk (uses secure measures)
– Avoid the risk (it is removed from the environment that creates the risk)
Below are 5 business risks that an auditor should consider:
1 – Entry of new competitors
The entry of new competitors generates lower sales and increased returns in sales and therefore means an obsolete, damaged or slow-moving inventory.
Some ways in which this risk can be realised are:
Free Trade Agreements: These agreements can facilitate the entry of new competitors entering the market offering quality and low prices
Import of Chinese products: Chinese products are characterised by low-cost products and that to compete with products made in the country may be attractive to customers.
2 – Substitute Products
Substitute products can perform the same functions of the product offered by the company covering the same needs at a lower price, with superior performance and quality. The entry of substitute products generates lower sales and increased returns in sales. Examples:
– Tea is a substitute for soda
– Mobile telephones as a substitute for fixed telephones
– The sale of music on the Internet is a substitute for music stores
3 – Reliance on limited customers
Dependence on just a few customers’ income is one of the most common business risks in organisations and occurs when a significant portion of revenue is concentrated in a small number of customers. Example: More than 30% of revenues are concentrated in a client. This risk can be realised as follows:
Loss of Support: The problem of relying on one or a few customers is that when your client decides on another move, then it certainly can threaten the survival of your business, leading to significant losses in the company by lower revenues.
Financial problems of the client: Another important point is that typically those clients within the portfolio of the organisation represent may have some type of economic difficulty, e.g. bankruptcy. This can make recovery difficult for your organisation and lead to losses.
4 – Absence of an effective system of internal control
The absence of effective internal control in the organisation can generate a high degree of vulnerability, business risk, fraud and processes. Examples of these risks:
– A company that does not permanently monitor its external environment can be impacted by political, economic, social, technological or environmental phenomena significantly
– A company can be impacted significantly by competitive phenomena (new competitors, substitute products, product innovation, etc.)
– A company where the controls do not respond to the materialisation of risks may result in substantial losses
– An ineffective internal communication means the company cannot meet its objectives
5 – Environment
Climate changes we are experiencing at present (drought, frost etc.) can cause product shortages losses for organisations where development of its corporate purpose is dependent on renewable resources.
For organisations where development of its corporate purpose is directly dependent on non-renewable resources, depletion may threaten the continuity given that there is usually total dependence.
Example of such risks
– For food producing companies, dry seasons or harsh winter can generate increased costs of their products because of food shortage occurs. This can generate a sales loss.
– For companies growing flowers, frost can significantly affect their crops causing significant losses for the business.
– Climate change may affect consumer buying habits.
– Natural disasters in the place where the company has its facilities.