Risk is the potential that a chosen action, including the choice of inaction, will lead to a loss or an undesirable outcome. Any business carries some risk, but some are much more risky than others. In any business organisation there are basically four types of risk:
- Business Risks include the risks from being in particular industry and location, and from the business strategy that the company has adopted.
- Financial Risks include credit and counterparty risk, interest rate and liquidity risk, FX, commodity and energy risk, and derivatives and accounting risk.
- Operational Risks cover the risks from all operational procedures and resources used by the firm which include skills shortages, lack of raw materials and physical disasters.
- Compliance Risks are the risks from not ensuring compliance with laws and regulations. Such as a breach of The Companies Act requirements, tax issues, health and safety breach, and environmental disasters such as an oil spill.
These come together as Enterprise Risk - see figure below.
Types of Risk
Source: J&W Associates Copyright© 2011