Types of risks
It's a good idea to understand the different types of risks your business may face so you can recognise and plan ahead for them.
Risks can be:
- opportunity-based – risk from choosing one option over other options
- uncertainty-based – risk from uncertain or unknown events such as natural disasters or loss of suppliers
- hazard-based – risk from dangerous materials or actions.
This type of risk comes from taking one opportunity over others. By deciding to commit your resources to one opportunity, you risk:
- missing a better opportunity
- getting unexpected results.
Opportunity-based risks for a business can include moving a business to a different location, buying a new property, or selling a new product or service.
Example: Mimi's story
Mimi, a business owner, has $20,000 in the bank at an interest rate of 2.5%. She chooses to buy new equipment for her business to increase the efficiency of her workers. The opportunity-based risks of this choice include:
- missing out on a higher interest rate in the future
- the equipment doesn't increase efficiency as she expected.
Example: Steve's story
Steve runs a clothing retail store in the shopping strip of a suburb in Perth. Most of his sales come from people walking past his shop. Recently, a new shopping centre opened about 1km from his shop. This new shopping centre has decreased the number of people who pass by Steve’s shop. He has to decide if he should move his business to the new shopping centre or stay where he is and increase marketing to attract new customers. He must think about the opportunities and the risks of changing location.
Steve notes the opportunities of changing location:
- Increase in sales as more people will walk past his new store.
- Lower marketing expenses because of the busy location and co-marketing with other tenants.
And the risks of changing location:
- Increase in competition from similar clothing stores within the shopping centre.
- Loss of regular customers and damage to business goodwill in local community.
Steve must decide if the opportunities are greater than the risks of moving to the new location. He also has to think about whether increasing his marketing budget will give him a better return on investment than moving.
This type of risk comes from uncertainty around unknown or unexpected events. It’s hard to predict these events and the damage they can cause. It’s also hard to control the damage once these events occur.
Examples of uncertainty-based risks include:
- damage by fire, flood or other natural disasters
- unexpected financial loss due to an economic downturn, or bankruptcy of other businesses that owe you money
- loss of important suppliers or customers
- decrease in market share because new competitors or products enter the market
- court action.
To reduce the impact of uncertain events on your business, you can do things like:
- develop an emergency management plan to reduce the damage to your business in an emergency
- keep a supplier database to help you manage your stock and equipment
- seek and use regular feedback from your customers and other people you deal with in your business
- check your business environment regularly for risks such as changes in trends and customer expectations
- seek expert advice every now and then to check the financial health of your business and to get advice on how to improve your business.
These types of risks come from dangerous situations in the workplace.
Some common examples include:
- physical hazards caused by high noise levels, extreme weather or other environmental factors
- equipment related hazards caused by faulty equipment or poor processes when using equipment such as machinery
- chemical hazards caused by improper storage or use of flammable, poisonous, toxic or carcinogenic chemicals
- biological hazards caused by viruses, bacteria, fungi or pests
- ergonomic hazards caused by poor workplace design, layout or equipment use
- psychological hazards caused by bullying and harassment, discrimination, heavy workload or mismatch of employee skills with job duties.
Example – Jimmy's story
Jimmy runs a transport business. He drives trucks to move commercial products around Australia. Some of the hazards he may face on a daily basis include:
- contact with chemicals and fumes when refuelling
- uncomfortable seating and fatigue, especially during long journeys
- no heating or air-conditioning to change the temperature inside the truck.
Some steps that Jimmy can take to reduce these risks include:
- wearing appropriate clothing to reduce his exposure to chemicals
- taking regular breaks during his trips to stretch and walk around
- ensuring that he only works the legal hours for his industry to deal with fatigue
- installing fans or air-conditioning in his truck
- having adequate clothing and water for each trip.
Find out more about workplace health and safety (WHS) in your business.