Business risk is anything that can interrupt how you make money, whether that’s a supply issue, a sudden drop in sales, a bad hire, or a piece of software breaking right when you need it.
All different types of business risk can have a significant impact on your company’s performance. About 20% of small businesses close within the first year, and nearly half don’t make it to year five. This is often because they didn’t spot common risks early enough to do something about them. When you know what types of business risks you’re dealing with, you can make practical plans that keep your business steady instead of scrambling when something goes wrong.
In this piece, you’ll learn about the different types of business risk, the benefits of managing risk well, and how to mitigate risks regardless of your business model or industry.
What is business risk?
Business risk is the possibility that something could disrupt operations, reduce revenue, or damage your reputation. It covers anything that threatens your business’s ability to stay profitable.
Business risks fall into two main buckets:
Internal risks (things you can influence):
- Poor management or bad decision-making
- Employee mistakes or missed processes
- Cash-flow mismanagement
- Outdated tech or systems breaking at the wrong time
- Product quality issues
- Strategic missteps, like entering the wrong market
External risks (things outside your control):
- Economic downturns or changes to consumer spending
- New regulations or compliance changes
- Natural disasters or extreme weather
- Supply chain delays or vendor failures
- New competitors or price undercutting
- Industry-wide trends you can’t predict or slow down
Most business owners design a contingency plan as part of their business continuity plan, which helps protect your business from disruptions such as a flooded warehouse after a hurricane or a viral video about a negative customer interaction. This strategy includes identifying potential business risks, assessing them, taking steps to avoid or reduce risks, and, in some cases, accepting risk as part of the normal course of business.
Depending on the particular industry, business owners’ risk management strategies might include having comprehensive insurance coverage, minimizing debt, or retaining lawyers to address legal issues.
Business risk vs. financial risk: Key differences
People often use business risk and financial risk interchangeably, but they’re not the same thing. Knowing the difference helps you diagnose problems faster and fix them before they turn into something bigger.
Business risk is the threat that something—anything—could disrupt how your company operates or competes. It covers the full picture: operations, people, business strategy, technology, compliance, supply chain, customer demand … all the moving parts that keep things running.
Financial risk, on the other hand, is specifically about money: your ability to meet financial obligations, manage debt, stay liquid, and keep cash flowing.
Here’s the simplest way to think about it:
- Business risk affects your ability to run the business.
- Financial risk affects your ability to pay for the business.
Business risk examples
These risks show up in day-to-day operations, strategy, or market conditions, and could include situations like the following:
- Your lead developer quits right before a major product release, delaying your launch and giving a competitor a head start.
- A supplier suddenly doubles their prices, forcing you to switch up your inventory plan.
- A new regulation requires you to change how you handle customer data.
- Your influencer campaign backfires and triggers a load of negative backlash.
- Your warehouse faces repeated delays because your logistics partner is overstretched.
None of these instantly kill your bank account, but they absolutely affect your ability to operate in the way you want and need to.
Financial risk examples
These risks revolve around cash flow, debt, and financial obligations, for example:
- Your sales slow down for two months, but payroll, rent, and software bills stay the same.
- You take out a loan with a variable interest rate, and rates spike.
- You have generous payment terms for clients but not enough pay on time.
- Your business relies heavily on one big customer, and they reduce their order volume by 40%.
- You scale too fast and hire ahead of revenue.
What causes business risk?
- Natural disasters. Floods, wildfires, earthquakes, major storms, anything that physically damages your space, inventory, or equipment. Even if your building stays intact, disasters often affect shipping routes as suppliers, and can make it harder for staff to get to work.
- Uncertain financial or economic conditions. A recession can shrink customer spending, interest rate hikes can make loans more expensive, inflation can spike your costs.
- Competition and market shifts. A new competitor can offer lower prices, faster delivery, or a feature you don’t have yet. Customer preferences can change before you’ve had time to meet them. Or a big industry player can suddenly enter your space and change the rules entirely.
- Technology failures and cybersecurity threats. A software outage can stop sales going through, a broken POS system can hamper in-store ops, and data breaches, phishing attacks, and ransomware can lead to significant financial losses and damage trust.
- Customer credit and non-payment. A late payment can slow down your cash flow, a customer who can’t pay at all creates a direct financial loss, and if several customers start paying late at the same time, you suddenly have a cash crunch on your hands.
Benefits of business risk management
Managing risk keeps your business stable and helps you bounce back when something inevitably goes sideways (and it will go sideways at some point—that’s a natural part of running a business).
Here are the biggest benefits:
You prevent small problems from becoming big, expensive ones
Most crises start as tiny issues everyone ignores. It could be a supplier that keeps missing delivery windows or a cash-flow dip you hope will correct itself. Managing risk early means you’ll catch these patterns before they spiral.
You build a more stable, predictable business
Consistency is key in a stable business. It helps you plan ahead and make smart investments. Customers feel that stability too, and businesses that run smoothly tend to keep people around longer—that goes for both staff and customers.
You squash financial surprises (not the good kind)
Risk management helps you avoid any big money shocks, whether it’s a sudden spike in costs, a tsunami of missed payments, or expensive supply chain issues.
You make faster, smarter decisions
It’s easier to make decisions when you know your weak spots and potential roadblocks because you’re not reacting in the moment. You can take a more proactive approach.
You strengthen your reputation
Customers and partners don’t want to work with a business that’s constantly putting out tiny fires. They want to work with ones that have their act together. People are more likely to trust you if you can promise things like reliable deliveries and consistent service.
You bounce back more quickly when something does go wrong
Look—disruptions can and will happen. What matters is how fast you can come back from them. A good risk plan means you already know:
- Who’s responsible
- What steps to take
- Where the backups are
- How to communicate clearly with customers
Netflix is a great example of a brand that turned risk into an advantage.
When the streaming giant shifted from mail-order DVDs to streaming, it faced a massive operational risk: not everyone had fast enough internet, streaming rights were messy, and their entire business model was on the line. But instead of waiting for the industry to shift, they planned for it.
They invested early in streaming technology, locked down long-term content deals, and prepared their infrastructure for explosive growth.
The end result was nothing short of incredible:
- They avoided being disrupted by competitors like Blockbuster (which famously ignored the digital shift).
- They became the dominant player in the new streaming landscape.
- And when DVD rentals inevitably declined, Netflix didn’t feel the shock because they’d already built the next version of their business.
6 types of business risk
There are six major types of business risk that can affect how you operate, make decisions, and stay profitable.
1. Financial risk: Threatens profitability through debt, cash flow issues, and inflation
Financial risk for a business is any situation or factor that jeopardizes a business’s finances and operations. Depending on the sector and a startup’s capital structure, financial risk could be caused by:
- Too much debt
- High interest rates on loans
- Insufficient cash flow from sales
- Poor investment strategies
- Inflation
2. Strategic risk: Undermines your ability to compete by weakening your positioning, timing, or overall business direction
Strategic risk shows up when your big-picture plans don’t match reality. It’s what happens when you bet on the wrong thing, aim at the wrong market, or make a move before you’re ready (or long after the window has closed).
Examples include:
- Launching a product or service no one actually wants (think $100 smart shampoo dispensers).
- Choosing a beautiful historic retail location only to learn you can’t expand due to landmark restrictions.
- Spending years perfecting an app only to have a faster competitor beat you to launch.
But strategic risk goes deeper than just “bad ideas.” It also includes:
- Failing to differentiate from competitors (you blend in, so customers pick the cheaper or faster option)
- Expanding too fast or launching new product lines without proper market validation
- Timing mistakes, like entering a market too early (before market demand exists) or too late (after the competition has made its mark)
3. Operational risk: Disrupts day-to-day workflow and delivery, leading to delays, higher costs, and unhappy customers
Operational risks are ones that have an impact on a business’s activities and daily workflow. You may face operational risk if you:
- Don’t consider your supply chain and business logistics needs working together holistically—proper supply chain management can help ensure your products are produced and distributed on time
- Are lacking or have insufficient business insurance, which can leave your business exposed to losses from manufacturing breakdowns, product malfunctions, natural disasters or legal damages, among other issues
- Have inadequate information technology (IT) protocols in place when computer systems fail
- Hire employees that repeat human error due to insufficient training, causing harm to productivity
And one big trend worth noting: Cyber incidents are now the number one operational risk globally, cited by 38% of businesses (7% ahead of the next biggest threat), according to the Allianz Risk Barometer. This includes ransomware, data breaches, system outages, and operational paralysis from cyberattacks.
4. Compliance risk: Exposes your business to fines, legal action, and forced shutdowns
Compliance risk is either failing to qualify for or obtain the correct permits and licenses to operate in accordance with state or federal regulations or laws. Or, it’s being in noncompliance with industry laws and regulations. If you fail to take compliance risks or regulatory risk seriously, your business could be fined or shuttered, or your reputation could be harmed.
Actions that might be considered compliance risks include:
- A factory illegally dumping manufacturing byproducts into a local river to avoid waste treatment costs
- Food companies not adhering to health regulations to prevent consumer illness
- Discrimination against job applicants based on gender, race, nationality, religion, or ethnicity, which is illegal under federal law
5. Reputational risk: Damages customer trust and credibility
Reputational risks include actions, behaviors, or events that hurt public opinion of your business. Examples of things that could put a company’s reputation at risk include:
- Social media postings of conflicts or hostile interactions between customers, business owners, or staff
- Failing to honor a return policy or guarantee, selling defective products, or poor customer service
- Companies that experience a cyberattack or customer data breaches
6. Global risk: Interrupts international operations through geopolitical conflict, currency swings, environmental disruption
Global risk affects any business that operates internationally or depends on global supply chains. These risks come from events you can’t control, such as: geopolitics, currency fluctuations, wars, sanctions, or global manufacturing issues.
Examples include:
- Overseas labor disputes
- Gas price hikes
- Border conflicts
- Fluctuating currency exchange rates
- New or increased sanctions, tariffs, and taxes
Natural catastrophes are actually becoming more frequent and more expensive. According to Allianz, insured losses from natural disasters have surpassed $100 billion for five consecutive years. That’s a huge signal that global and climate-related risks are now a permanent part of doing business.
How to manage business risk
- Identify risks
- Assess and prioritize
- Determine your risk appetite
- Implement mitigation strategies
- Monitor and adjust
Managing business risk starts with understanding what could go wrong and building a clear plan to handle it before it becomes a problem.
1. Identify risks
Start by mapping out everything that might disrupt your operations, finances, reputation, or strategic business plans.
Don’t just think about what has gone wrong, think about what could go wrong.
Certain structured frameworks can help you uncover any blind spots:
SWOT analysis (strengths, weaknesses, opportunities, threats)
A SWOT analysis helps you see internal factors (strengths and weaknesses) and external factors (opportunities and threats) that could impact your performance.
Weaknesses and threats can be early-warning signs that something’s about to go wrong. For example, if “overreliance on one supplier” is a weakness, or “cheap overseas competitors” is a threat, you’ve already surfaced two clear operational and strategic risks.
PESTEL analysis (political, economic, social, technological, environmental, legal)
PESTEL zooms out even further and helps you scan the world around your business to spot external risks you can’t control but should probably prepare for.
This framework forces you to think beyond day-to-day operations and consider economic downturns, new regulations, shifting cultural trends, emerging technologies, or extreme weather.
Risk matrix (likelihood vs. impact)
Once you’ve listed risks, a risk matrix helps you categorize them based on whether they’re a low, medium, high, or critical risk.
The aim is to separate out annoying but manageable risks (like the occasional customer complaint) from risks that could shut down the business (like cyberattacks or a complete collapse in cashflow).
2. Assess and prioritize
Not all risks are equal. Assess the potential impact of each one based on two things:
- How likely is it to happen?
- How big is the impact if it does?
High-probability, high-impact issues go to the top of your list. Low-probability, low-impact issues should still be monitored but they’re not a priority.
For example:
- A cyberattack = high likelihood, high impact
- A once-a-century flood = low likelihood, high impact
- A supplier delay = medium likelihood, medium impact
| Impact/likelihood → | Low | Medium | High |
|---|---|---|---|
| High impact | Monitor closely | Prioritize | Act immediately |
| Medium impact | Monitor | Manage if it resurfaces | Prioritize |
| Low impact | Ignore or accept | Monitor | Manage selectively |
3. Determine your risk appetite
Your risk appetite is the level of risk your business is actually willing to take on. Every business has a different threshold depending on its goals, finances, industry, and growth plans.
Calculated risks you might choose to accept might include:
- Entering a new market to grow faster
- Launching a new product based on early but incomplete market signals
- Investing heavily in technology or marketing to gain a competitive edge
These risks come with potential upside.
On the other hand, the risks you should minimize or avoid might include:
- Compliance violations (fines, legal action, shutdowns)
- Severe reputational harm (viral PR crises, data breaches)
- Unstable cashflow
- Threats to customer safety or data security
These risks offer zero upside and can destroy your business.
A helpful rule of thumb is if the risk creates opportunity, it might be worth it. But if it only creates damage, you should aim to reduce or avoid it.
4. Implement mitigation strategies
Once you know which risks are the most likely and the most harmful, build strategic business plans to reduce, avoid, transfer, or accept them:
- Reduce them by improving training, upgrading your systems, diversifying suppliers, strengthening cybersecurity, and refining processes.
- Avoid them by cancelling any launches you can’t support, exiting markets that are a cash drain, and dropping any unreliable partners.
- Transfer them by using insurance, contracts, or outsourcing to shift part of the risk.
- Accept them by living with low-grade risks that won’t meaningfully impact the business.
For example, if you’re a wholesale ecommerce brand with chronic supplier delays, you might reduce risk by adding a backup supplier and transferring some of the risk by using insurance for any freight issues.
5. Monitor and adjust
Assessing and addressing business risk is an ongoing activity. Nothing sits still for long, and there will always be shifts in the market, new competitors, changes to regulations, and even changes to your own priorities.
It’s good practice to build a habit of:
- Reviewing your risk matrix quarterly
- Tracking leading indicators (e.g., rising return rates, slower sales cycles)
- Updating your risk appetite as the business grows
- Reassessing suppliers, partners, and technology every year
6 ways to minimize risk to your business
1. Stay in compliance
Staying in compliance with regulations can help ensure that your business avoids fines and penalties, can continue operating, and wins and retains the trust of customers. Compliance strategies include offering training for employees, consistently monitoring industry regulations, and documenting all compliance efforts.
Compliance requirements also vary wildly by industry.
A food business has to follow strict health and safety rules to prevent contamination.
Ecommerce brands must comply with data privacy laws like GDPR, cookie consent rules, and payment security standards.
Manufacturers deal with worker safety regulations and environmental disposal laws. Even service businesses (like agencies or consultants) need proper contracts, licensing, and tax compliance. The point is: Your compliance work should match the risks and rules of your industry, not a generic template.
2. Review the company’s finances to manage debt
Regularly review your company’s financial picture to know when to spend and when to cut costs. Taking this approach can assist in managing debt and minimizing credit risk.
More specifically, you can:
- Avoid maxing out business credit cards
- Consider business financing options such as low-interest community development financial institution (CDFI) loans that lend money to small businesses that may be considered risky for conventional banks
- Track and monitor cash flow and expenses regularly
- Keep financial obligations, including making on-time monthly payments toward any debt obligations
- Keep a lean budget and low overhead costs
- Save three to six months of operational costs to minimize liquidity risk
3. Buy insurance coverage
Wildfires, hurricanes, floods, and other natural disasters happen, and equipment like ovens, sewing machines, and refrigerators break. Or you may lose income due to theft or deal with a data breach that exposes customer information—there are insurance options for that, too.
To help protect yourself, thoroughly research the types of small-business insurance policies available, and pick the ones that best suit your needs. Together with a business continuity plan, you can be better prepared if a disruption hits.
For startups especially, insurance is a key part of your broader risk strategy.
The main types include:
- General liability (covers accidents and property damage)
- Professional liability (protects you if your service causes a loss)
- Property insurance (covers equipment, inventory, and physical workspace)
- Cyber insurance (critical if you store customer data)
- Business interruption insurance (helps cover lost income after a disaster)
- Workers’ compensation (if you have employees)
The right mix depends entirely on your business model or operating model. For example, an ecommerce brand needs strong cyber and product liability coverage, while a service startup might prioritize professional liability and contractor coverage.
4. Cultivate a loyal customer base
When customers know they’re valued, they’re far more likely to stick around, buy again, and recommend you to others. That’s great for growth, but it’s also a great form of risk management.
Loyal customers soften the blow when something goes wrong. Customers who trust you are more forgiving and less likely to walk away if you face a supply chain disruption, a price increase, or a temporary service hiccup.
Ways to cultivate customer loyalty include:
- Honoring return policies and money-back guarantees
- Creating loyalty or rewards programs
- Addressing customer complaints or negative online reviews quickly and honestly
5. Diversify suppliers and vendors
Relying on a single supplier is basically putting your entire business on one shaky leg. If that supply partner raises prices, misses deadlines, runs out of stock, or suddenly shuts down, you’re stuck, and your customers feel it immediately. Diversifying your suppliers spreads out that risk, so one disruption doesn’t take your whole operation down.
As well as bringing in backup suppliers, look at different regions (so a storm or strike doesn’t hit all of them at once), different price tiers (so you’re not overpaying during shortages), and different product or material options (so you can pivot if something becomes unavailable). Many businesses also create tiered supplier lists: primary, secondary, and emergency partners.
6. Hire experts
You can’t be the CEO, accountant, lawyer, IT department, and risk analyst all at once, and luckily you don’t need to be. When something is outside your skill set, bringing in the right experts is one of the smartest moves you can make.
Think about specialists like:
- Risk management consultants who help you mitigate exposure to threats, build contingency plans, and set up processes that keep you ahead of problems
- Legal counsel who make sure you’re compliant and protected
- Cybersecurity professionals who can lock down your systems, test your vulnerabilities, and protect you from cyber incidents
- Insurance brokers who help you choose the right coverage mix for your business model
- Financial advisers or fractional CFOs who help stabilize cash flow, manage debt, and forecast risk
Business risk FAQ
Is my business liable when I didn’t know it was breaking the law?
Yes, it’s the responsibility of business owners to know all the laws and regulations about trade, labor, the environment, and any other issues.
What are the consequences of not managing business risk?
The consequences of not addressing business risk and avoiding compliance risks—like poor adherence to manufacturing safety regulations—could result in a workplace injury or fines. The business could be sued, facing costly legal judgments that could even result in insolvency or bankruptcy.
Is it necessary to monitor and evaluate business risks on an ongoing basis?
Yes, as a business owner you should continually be on the lookout for potential risks and always be in full compliance with all regulations and laws.
What is the biggest risk in business?
The biggest risk in business is failing to adapt, whether that’s ignoring market shifts, clinging to an outdated strategy, or missing early warning signs that customer needs have changed. Most major business failures start with leaders assuming tomorrow will look like yesterday.
How often should businesses review their risk management strategy?
Businesses should review their risk management strategy at least once a year, but fast-moving industries benefit from quarterly check-ins. You should also revisit the plan anytime something big changes, like new regulations, a major hire, a product launch, or shifts in the economy or competitive landscape.
