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How to identify risks in business: Insights from a fractional COO



A group of eight diverse business professionals sit at a conference table, discussing strategy and business risks.

 

Effective risk management is vital for the longevity and growth of startups and established businesses. But modern business risks have rapidly evolved, making identification a challenge. Rather than look at historical challenges, businesses need to look ahead to the future. That naturally leads business leaders to ask how to effectively identify risks in business.


As a fractional COO with 25 years of experience, I’ve worked with founders and management teams to transform their operations and technology to better mitigate current and future risks. And in the current market environment, climate change is the most significant and interdependent risk.


According to the World Economic Forum's 2022 Global Risk Report, experts have identified the most severe risks on a global scale. Extreme weather, biodiversity loss, increased infectious diseases, natural resource crises, and geoeconomic conflicts will exacerbate current threats. As a result, organizations worldwide are reevaluating their risk management process and rework operations.


However, not all businesses will experience the same risk event. Organizations can identify possible emerging risks now and develop an adaptable risk management plan to combat this future uncertainty. The essential factor for unlocking potential solutions is to define risks with a forward-looking view and integrate this information into the risk assessment process.



Defining risks for a climate-conscious world


The advent of climate change has drastically changed the definition of business risk.


Traditional categories such as legal, market, and security threats must now be expanded to include the impact of climate instability and social erosion. Even earlier disaster risks must now account for increased severity and frequency. As the intensity of the potential impact continues to grow, organizations must rework their business continuance plans as soon as possible.


These shifts in climate are already affecting businesses worldwide. One report from the Federal Reserve Bank of San Francisco found that 37% of surveyed businesses said that climate change has affected their revenue and investments. That number jumped to 60% of respondents answering in the affirmative when asked if they believe climate will affect them in the future.


Therefore, it's prudent for start-ups and legacy businesses to consider climate a significant risk to every aspect of their business.


But what does that look like, specifically?


Let's take a look at different traditional types of business risks and how climate impact amplifies each one.


A black and white image of a chess game, featured image for the “How to identify risks in business” article.

11 types of business risk and their relationships to climate action failure


Competitor risk


Every organization must consider how its competitors are not only responding to the market but also what steps they are taking to fortify their operations in terms of climate change. Sustainability is easily a competitive advantage and reputation builder. It’s prudent to anticipate how competitors will go green and how that will affect your business.


Compliance risk


Whether it’s filing with the SEC, accepting credit cards and adhering to PCI-DSS regulation, or another industry-specific requirement, compliance is becoming an increasingly complicated risk. And as business continues to cross geographical boundaries, organizations must now consider global and regional compliance in addition to local ones. As climate becomes a priority for governments and industry associations, businesses must shift to more sustainable business practices to remain compliant.


Financial risk


Acquiring funding, debt management, currency risk, economic shifts, and liquidity all impact an organization’s cash flow. Climate shifts exacerbate these pressures, resulting in additional expenses due to business interruptions. Supply chains, in particular, can be affected at any point—from gathering raw materials to delivery.


Growth risks


Growing too fast or too slow can create many operational issues for businesses, particularly startups. While most investors and founders favor speed, scaling too fast can result in overextending or poor timing to market. The need for speed might also result in reduced product or service quality, thus leading to reputational and market risk. There are also potential risks when expanding into new regions—however, climate change can affect geopolitical stability and business regulations, making entering new markets more challenging.


Human risk


Poor HR practices or operational processes that require human effort can result in costly errors across the board. Examples can include labor law violations, high turnover due to poor working conditions or low wages, or even unintentional mistakes in accounting or security.


Market risk


Macroeconomic shifts are a significant risk, as we’ve seen in the post-COVID recovery phase. Financial markets aren’t just dependent on tangible pressures. Investor and consumer sentiment directly influences the economy, sometimes more than actual company performance. Therefore, it’s important to consider how your business will function in a downturn — and what steps could help you rebound faster.


Legal risk


When a business fails to meet a contract, has a dispute with customers or employees, or becomes non-compliant, it risks expensive lawsuits. Proper supervision of all aspects of business, from compliance to customer service and ethical sourcing, can help mitigate potential issues.


Operational risk


Day-to-day risks, no matter how small, can amount to large losses of revenue and productivity. Employee errors, poor customer experience processes, legacy technology, disaster damage, and other factors can weaken your business in the long run.


Reputational risk


What your customers and employees think of your business matters. A poor response (or no response) to disasters, data breaches, customer issues, or poor labor standards can all result in reputation damage. When this happens, businesses suffer high turnover for both employees and customers—resulting in lost revenue and mounting expenses.


Security risk


Hackers and cybercriminals have become more and more sophisticated. Social engineering tactics and personal data theft cause monumental harm to a company through reputational, financial, and legal damages.


Strategic risk


Failing to follow through with business promises or perceptions not only skew internal operations but can lead to lost trust with consumers and employees.


Sustainability risk


Even going green can have its share of potential risks. Ensuring that your suppliers meet sustainability standards, avoiding superficial greenwashing initiatives, and balancing sustainable initiatives with short-term costs adds another layer of consideration. Furthermore, as more and more consumers demand companies reduce their carbon footprint, failing to invest in green business practices can lead to reputational and market losses. As a result, businesses will need to prioritize initiatives to maintain full transparency.


Confused female business owner reflects on how to identify business risks

How to identify business risks and the identification life cycle in 7 steps


Assess your operations and policies


First things first, it’s always important to map and assess your current business operations. The more detailed your description of each process and policy, the easier it will be to identify risk.


Pinpoint and prioritize risk areas


Next, you’ll want to locate specific risky areas in your process or operations. You’ll also want to attempt to prioritize them, as you’ll eventually want to fortify these areas. Prioritization also helps you identify interdependent risks and determine which would make the biggest impact. It's common to rank risks by their probability of happening to quickly name immediate threats. Artificial intelligence (AI) offers an efficiency and accurate way to complete this step.


Discuss risks with other stakeholders


You’ll also want to discuss these risks with other stakeholders. Investors, partners, department heads, external advisors, and the management team can all offer insights into potential risks and solutions.


Review future industry threats


It’s not enough to review current threats. While it’s impossible to predict the future, it is possible to look ahead and consider potential risks based on your industry, geography, and compliance requirements. Taking a forward-looking approach enables you to hit the ground running during periods of uncertainty or change.


Detail a risk report


Once you’ve listed and reviewed your risks, it’s essential to draft a report detailing these threats. Identifying not only the risks but also potential consequences and solutions ensure you have a benchmark to review later on.


Determine risk mitigation strategies


Once you have identified your risks, you can move on to looking at mitigation strategies, how to measure success, and how to implement them.


Monitor, optimize, and repeat


Risk management isn’t a one-time event. Ideally, you’ll want to have an ongoing process for monitoring and optimizing your risk management approach. Even if you only do a complete review once a year, keeping track of your initiatives and identifying new potential threats as they appear makes it easier for you to prepare.


Selecting clear risk management metrics in your report can help you and your team stay on the same page when analyzing the success of your mitigation strategies.



Business risk assessment example


There are a few different ways you can format your assessment. Businesses can leverage something as simple as a free spreadsheet to well-oiled risk management software to identify and track threats. However, each assessment should contain the same information:

  • The risk and its description

  • The priority level of the risk

  • The probability of the risk occurring

  • How severe the consequences of the risk would be

  • What actions you can take to mitigate risk


Headshot of Bhuva Shakti, fractional COO specializing in business risk

Hire your next Fractional COO specializing in business risk


The best time to work on risk mitigation is now. Whether you are a startup defining your business strategy or an established organization interested in fortifying your operations from internal and external risk, working with an expert in risk management can help.


The best time to work on risk mitigation is now. Whether you are a startup defining your business strategy or an established organization interested in fortifying your operations from internal and external risk, working with an expert in risk management can help.


I provide guidance on risk management, compliance, DEI, and sustainability to businesses of all sizes and across industries. As a founder and investor, I understand the challenges businesses face today and how important risk identification is for long-term success.


In addition, I am a portfolio presenter and speaker at technology, entrepreneurship, and climate impact conferences. I have spoken at industry-leading events like the AI Summit in New York, the World Business Angels Forum, and Women in Tech.


Ready to take the next step towards encouraging sustainability and risk management? Book me as an advisor or as a speaker for your upcoming event.


 

This blog post can also be found on Bhuva Shakti’s LinkedIn newsletter “The BIG Bulletin.” Both the BIG Bulletin on LinkedIn and the BIG Blog are managed by Bhuva’s Impact Global. We encourage readers to visit Bhuva’s LinkedIn page for more insightful articles, posts, and resources.

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