Types of Risk
A risk register identifies and records potential risks that could affect a project, such as:
- Financial Risks: Loss of funds, delayed payments, market changes.
- Operational Risks: Resource constraints, quality issues, delays or budget overruns.
- Legal Risks: Regulatory non-compliance or disputes with customers or suppliers.
- Strategic Risks: Difficulty meeting goals due to misalignment with objectives or lack of operational expertise.
- Reputational Risks: Lack of trust in the organization due to poor customer service or negative media coverage.
These categories are set out in the “Risk Areas” section of the tree and are broken down to the next level of detail. To build your risk register, you will need to identify individual risks in each of those areas and carry out an assessment to determine the overall level of risk that your organization is exposed to. Some of the commonest risks are listed against each risk type in the sections below to help you. Remember that this isn’t an exhaustive list.
Here is a list of 7 financial risks a business may have:
- Credit Risk: Failing to repay loans or debts when due.
- Interest Rate Risk: Changes in interest rates erode the value of investments over time.
- Liquidity Risk: Inability to access funds quickly when needed.
- Currency Risk: Losses due to currency fluctuations and exchange rate changes.
- Market Risk: Volatility in financial markets affecting the value of assets or investments held by the business.
- Finance Process Risk: Errors or negligence resulting from inadequate processes and procedures concerning financial activities, leading to potential losses and damaging the business’s finances over time.
- Fraud Risk: Deliberate manipulation of data and transaction records for financial gain, resulting in significant losses for the business if not detected and addressed swiftly upon occurrence.
Here is a list of 7 operational risks a business may have:
- Resource Risk: Insufficient resources, or inadequate allocation of resources, leading to delays or underperformance in meeting project milestones.
- Quality Risk: Mismanagement of the quality processes resulting in substandard products or services that could damage the reputation of the business.
- Process Risk: Failure to implement adequate internal controls, resulting in potential exploitation by employees and exposing the organization to financial losses due to fraud or embezzlement.
- Compliance Risk: Non-compliance with relevant regulations and laws, leading to costly fines and sanctions imposed by governing bodies.
- Technological Risk: Outdated IT systems or reliance on single sources of technology solutions which may become obsolete over time and disrupt operations within the business.
- Supplier Risk: Exposure to supply chain disruptions caused by failing suppliers, resulting in a disruption in obtaining necessary components for production and impacting sales performance over time.
- People Risk: Failure to recruit or retain the right people or inadequate succession planning leading to a shortage of skills to carry out key operational activities.
An organization chart tool is included in the tools section. This is an effective tool for identifying potential areas of risk within a business. It provides a visual representation of how the different teams and departments interact, as well as how their roles and responsibilities overlap. By having this information at hand, managers can quickly spot gaps in processes or miscommunication between teams. This allows them to identify potential areas of risk before they become a problem, allowing them to take proactive steps to protect the organization from harm.
Here is a list of 7 legal risks a business may have:
- Contract Risk: Unfavorable terms resulting in costly financial consequences for the business due to breach of contract, non-payment, or inaccuracy in sales agreements.
- Liability Risk: Damage claims from individuals or organizations due to negligence, for example, environmental damages, complaints regarding wages and salary unpaid, and workplace safety violations.
- Intellectual Property Risk: Infringement and misuse of proprietary information leading to costly legal proceedings.
- Data Protection Risk: Improper storage and handling of personal data leading to potential prosecution resulting from non-compliance with privacy laws.
- Employee Misconduct Risk: Wrongful actions by employees that may result in liability issues such as harassment or discrimination claims filed against the business by current and former staff members.
- Competition Law Risk: Violating national regulations around the competition when selling products and services into markets outside the home country could lead to fines imposed on the organization by respective authorities.
- Cybersecurity Risk: Lack of appropriate safeguards resulting in financial losses due to cyberattacks aimed at obtaining sensitive customer data or compromising corporate IT systems with malicious software designed to disrupt operations and undermine security measures within the business network infrastructure.
Reputational risk is the risk of harm to an organization’s reputation that can result from mistakes, legal violations, poor performance, or other negative events.
It is a type of risk that can affect a company’s ability to attract customers and investors and can have long-lasting impacts on its bottom line. Negative press coverage, customer complaints, and legal issues are all examples of potential reputational risks.
Reputational risks might include:
- Loss of customer trust due to negative news coverage
- Poor quality products or services that lead to customer dissatisfaction
- Unethical behaviour among employees
- Failure to resolve customer complaints promptly
- Receiving negative reviews on social media or other public forums
- Disclosing confidential information without permission, leading to legal and regulatory issues
- Breach of contract by suppliers or other third parties resulting in financial losses or other damages.
Companies can face a variety of strategic risks, including but not limited to the following:
- Strategic planning risk – Strategic plans are unrealistic or poorly constructed leading to the inability to deliver strategic goals
- Competitive risk – Changes in competitor product offerings or pricing may threaten an organization’s market share.
- Macroeconomic risk – Changes to the economic assumptions that were fundamental to achieving the organisation’s strategic objectives.
- Supply chain risk – Disruptions in the supply chain due to natural disasters, economic turmoil or other factors can create problems for companies downstream.
- Regulatory risks – Changes in legislation that affect the company’s ability to do business could significantly impact revenue and profits.
- Talent acquisition risk – Finding and hiring qualified personnel can be difficult if there is a shortage of qualified workers in the labour pool for a particular profession or area of expertise within the company’s industry sector.
- Innovation Risk – Failing to embrace new technologies or methods of doing business may put companies at a disadvantage compared to their more forward-thinking competitors.