Every business faces risks. Risk is the chance that a loss, injury, or peril will occur, or that an outcome will differ from what the business owner expected, often preventing a company from meeting its financial or operational goals.
If business owners identify the risks most likely to affect their company, they can take steps to minimize the effects. Risks may be external or internal, with external risks originating outside a firm, and internal risks arising from within. Learn about the external and internal risks companies may face this year and how they can be managed.
Risk Barometer Outlines Most Important Concerns
What are the major risks for businesses? To answer that question, the insurance company Allianz surveyed more than 2,700 business people and risk management experts across the globe in late 2020. The survey respondents represented businesses of all sizes, including large, medium-sized, and small companies.
The insurer asked the participants to name up to three risks that were most important to businesses in their industry. Allianz then analyzed the results and published its findings in a report called the Risk Barometer, which outlines the top 10 risks worldwide, as cited by the survey respondents. Allianz releases the Risk Barometer on an annual basis, identifying the top corporate risks for the year ahead.
Major business risks vary somewhat from year to year. Because the pandemic caused unprecedented disruption in 2020, it overshadowed many other risks.
Nine of the 10 risks outlined in the Risk Barometer for 2021 were external risks. They are listed below, in descending order of importance. The first three—business interruption, the COVID-19 pandemic, and cyber incidents—are interlinked. According to Allianz, this demonstrates the growing vulnerability and uncertainty of our highly globalized and connected world, even for small businesses. Actions taken in one location can have ramifications across the globe, according to the report. Here’s a closer look at each external risk.
Many businesses have suffered disruption and income losses due to government-imposed shutdowns or supply chain problems related to the pandemic. This has highlighted the downside of global production and supply chains, which have replaced local manufacturing and sourcing for many companies in recent decades.
Early in 2020, manufacturing facilities in China and other countries were forced to shut down for reasons related to COVID-19. The coronavirus also caused delays in container shipping and at major ports. At the same time, demand for products like face masks, bleach, and pharmaceuticals increased substantially, resulting in supply chain complications. Many U.S. businesses were unable to obtain products they needed to maintain their regular operations.
As a result of the global health crisis, some small businesses have been forced to close temporarily, shut down for good, or even declare bankruptcy. Some have had trouble paying rent or have been forced to lay off workers, too. Almost 94% of companies surveyed in a recent report by trade credit insurance company Euler Hermes, noted in the Risk Barometer, reported a disruption to their supply chains due to the coronavirus pandemic. U.S. companies are the most affected, with 26% reporting a “severe disruption.”
As businesses become increasingly more dependent on technology and intangible assets, cyber risks are a major concern. The pandemic has accelerated this trend, according to the Euler Hermes survey, with a quarter of respondents facing a disruption coming from the IT, tech, and energy sectors. Because many small businesses lack a robust security system, they are vulnerable to data breaches, ransomware, and other types of cyberattacks.
Small businesses can protect themselves against cyber risks by investing in robust antivirus software and purchasing cyber insurance coverage.
The Six Other External Risks
- Market Developments: With the world in the midst of an economic downturn, many industries are experiencing volatility. Business insolvencies worldwide have increased by 38%, according to the Allianz report. As financially weak companies leave the marketplace, new competitors will enter, putting pressure on the businesses that remain.
- Legislative and Regulatory Changes: This category includes risks like marijuana legislation, state laws redefining the meaning of "independent contractor," and laws requiring paid sick leave.
- Natural Catastrophes: Many small businesses are located in areas vulnerable to natural catastrophes, such as hurricanes, tornadoes, wildfires, or floods. Many natural perils are covered by standard property policies but some catastrophes, like earthquakes and floods, require specialized insurance.
- Macroeconomic Developments: These include monetary policies, interest rates, inflation, and deflation.
- Climate Change and Volatile Weather: Climate change increases the frequency and severity of heat waves, windstorms, wildfires, and other natural catastrophes that can damage business property.
- Political Risks and Violence: According to Allianz, riots and other forms of civil unrest now challenge terrorism as the main political risk exposure for businesses. Small businesses located in urban areas may suffer property losses during riots or other civil disturbances. Fortunately, riot and civil commotion are covered perils under most property insurance policies.
Internal risks originate inside the business organization. Of the top 10 global risks described in the Allianz Risk Barometer, only one, fire and explosion, is an internal risk. Other common internal risks are listed below.
Fire and Explosion
Fire and explosion appears as No. 7 on the Allianz Risk Barometer—both globally and in the U.S.—after natural catastrophes. These perils can cause major damage. They also can generate income losses if they prevent companies from serving their customers or resuming their operations in a timely manner. Physical damage caused by fire and explosion is covered by standard property policies, and revenue losses can be covered by business income insurance.
Shortage of Skilled Workers
Small businesses employ nearly half of the U.S. workforce. Many businesses were having difficulty recruiting skilled workers before the pandemic began, and the outbreak has compounded the problem.
Workplace injuries are a serious risk for small businesses. They can increase the employer's workers’ compensation costs and disrupt operations. Many small businesses rely on a few key workers, and may have trouble functioning if one is out on disability. Businesses can help prevent injuries by creating a workplace safety plan.
Cyber incidents can be perpetrated by employees. According to the FBI, a significant number of data thefts suffered by businesses are committed by former or disgruntled employees who exploit their access to company networks. Businesses can prevent such incidents by revoking employees' access to computer systems when they leave the firm. Employers should also monitor current employees for suspicious activities.
How Business Owners Can Manage Risk
While many of the external risks that worry business owners around the world are out of their control, it’s possible to prepare in advance, minimizing the effects of many internal risks.
Whether human, technical, or financial, it’s possible to identify and anticipate such risks in your business plan. Look at anything that could halt, slow, or affect the profit of your business. The U.S. Small Business Administration suggests listing these risks, ranking them in importance for your circumstances, and calculating potential costs.
Pinpointing and assessing top business risks is something that will require time and should be revisited periodically. Be sure to schedule time in your calendar to consider and plan for areas of business risk.