Avoid common traps by becoming aware of the different types of risks businesses face.
Managing different types of risk is vital to the success of businesses, both new and old. The type of risk a particular business faces may vary depending on what stage of development the business is in and what types of products it sells. The first step in managing business risk is recognizing the types of risks.
Financing Risk
Businesses can face a variety of financial risks. Some of these risks include the ability to get loans from the bank, which depends on credit history, or funding from other sources, such as joint venture capitalists and private equities; foreign currency exchange rates for business involved in international markets and, most importantly, the financial risk of making enough money to keep the proverbial lights on. Additionally, established businesses that trade publicly incur a lot of additional financial risk by putting themselves at the mercy of the stock market, as the value of their company can move wildly from day to day. Liquidity also is a financial risk. A company may be insolvent, though it has enough money to cover its debts and operations if it cannot transform its assets into cash.
Technology Risk
Technology risk exists in businesses that develop new products or otherwise rely on technology for their central operations. New products often require new, unproven technologies, and in order to be a first mover in this field, businesses must take on this risk. Similarly, if your business relies on certain technologies, there is the risk that the technology particular to you will become outdated. Many outside investors will take on companies with financial risk, but it is hard to attract outside investors if your company is exposed to significant technological risk.
Management Risk
A good management team can make money with a bad product, where a poor management team can lose money with a good product. Having the right people in charge of a company makes all the difference. This is part of the reason why larger companies invest so much money in human resources. Many successful investors, such as Warren Buffet, look at the management team almost exclusively when considering various investments.
Government Risk
Businesses incur government risk in one of two ways. First, if the business has operations in a foreign country, it runs the risk of political instability where the government could kick them out of its country and take the business's assets or more. Secondly, domestic companies face the risk of varying regulatory environments. For example, the Gulf of Mexico drilling moratorium is a governmental risk that has recently affected oil companies involved in that area.
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