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12 Types of Business Risks and How to Manage Them

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90% of startups fail .

Thanks to the explosion of the digital economy, business founders have plenty of opportunities that they can tap into to build a winning business.

Unfortunately, there is a myriad of challenges your new business has to navigate through. These risks are inevitable, and they are a part of life in the business world.

However, without the right plan, strategy, and instruments, your business might be drowned by these challenges.

Therefore, we have created this guide to show you how can your business utilize risk management to succeed in 2022.

There are many types of startup and business risks that entrepreneurs can expect to encounter in 2022. Most of these threats are prevalent in the infancy stages of a business.

To know what you’ll be up against, here is a breakdown of the 12 most common threats.

12 Business Risks to Plan For

1) economic risks.

Failure to acquire adequate funding for your business can damage the chances of your business succeeding.

Before a new business starts making profits, it needs to be kept afloat with money. Bills will pile up, suppliers will need payments, and your employees will be expecting their salaries.

To avoid running into financial problems sooner or later, you need to acquire enough funds to shore up your business until it can support itself.

On the side, world and business country's economic situation can change either positively or negatively, leading to a boom in purchases and opportunities or to a reduction in sales and growth.

If your business is up and running, a great way to limit the effect of negative economic changes is to maintain steady cash flow and operate under the lean business method.

Here's an article from a founder explaining how he set up a lean budget on his $400k/year online business.

2) Market Risks

Misjudging market demand is one of the primary reasons businesses fail .

To avoid falling into this trap, conduct detailed research to understand whether you will find a ready market for what you want to sell at the price you have set.

Ensure your business has a unique selling point, and make sure what you offer brings value to the buyers.

To know whether your product will suit the market, do a survey, or get opinions from friends and potential customers.

Building a Minimum Viable Product of that business idea you've had is the recommendations made by most entrepreneurs.

This site, for example, was built in just 3 weeks and launched into the market to see if there was any interest in the type of content we offered.

The site was ugly, had little content and lacked many features. Yet, +7,700 users visited it within the first week, which made us realize we should keep working on this.

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3) Competitive Risks

Competition is a major business killer that you should be wary of.

Before you even start planning, ask yourself whether you are venturing into an oversaturated market.

Are there gaps in the market that you can exploit and make good money?

If you have an idea that can give you an edge, register it. This will prevent others from copying your product, re-innovating it, and locking you out of what you started.

Competitive risks are also those actions made by competitors that prevent a business from earning more revenue or having higher margins.

4) Execution Risks

Having an idea, a business plan, and an eager market isn’t enough to make your startup successful.

Most new companies put a lot of effort into the initial preparation and forget that the execution phase is equally important.

First, test whether you can develop your products within budget and on time. Also, check whether your product will function as intended and whether it’s possible to distribute it without taking losses.

5) Strategic Risks

Business strategies can lead to the growth or decline of a company.

Every strategy involves some risk, as time & resources are generally involved to put them into practice.

Strategic risk in the chance that an implemented strategy, therefore, results in losses.

If, for example, the Marketing Department of a company implements a content marketing strategy and a lot of months, time & money later the business doesn't see any ROI, this becomes a strategic risk.

6) Compliance Risks

Compliance risks are those losses and penalties that a business suffers for not complying with countries' and states' regulations & laws.

There are some industries that are highly-regulated so the compliance risks of businesses within them are super high.

For example, in May 2018, the EU Commission implemented the General Data Protection Regulation (GDPR), a law in privacy and data protection in the EU, which affected millions of websites.

Those websites that weren't adapted to comply with this new rule, were fined.

7) Operational Risks

Operational risks arise when the day-to-day running of a company fail to perform.

When processes fail or are insufficient, businesses lose customers and revenue and their reputation gets ruined.

One example can be customer service processes. Customers are becoming every day less willing to wait for support (not to mention, receive bad quality one).

If a business customer service team fails or delays to solve customer's issues, these might find their solution in the business competitors.

8) Reputational Risks

Reputational risks arise when a business acts in an immoral and discourteous way.

This led to customer complaints and distrust towards the business, which means for the company a big loss of sales and revenue.

With the rise of social networks, reputational risks have become one of the main concerns for businesses.

Virality is super easy among Twitter so a simple unhappy customer can lead to a huge bad press movement for the company.

A recent example is the Away issue with their toxic work environment, as a former employee reported in The Verge .

The issue brought lots of critics within social networks which eventually led the CEO, Steph Korey, to step aside from the startup ( she seems to be back, anyway 🤷‍♂️! ).

9) Country Risks

When a business invests in a new country, there is a high probability it won't work.

A product that is successful in one market won't necessarily be in another one, especially when people within them are so different in cultures, climates, tastes backgrounds, etc.

Country risk is the existing failure probability businesses investing in new countries have to deal with.

Changes in exchange rates, unstable economic situations and moving politics are three factors that make these country risks be even more delicate.

10) Quality Risks

When a business develops a product or service that fails to meet customers' needs and quality expectations, the chance these customers will ever buy again is low.

In this way, the business loses future sales and revenue. Not to mention that some customers will ask for refunds, increasing business costs, as well as publicly criticize the company's products, leading to bad reputation (and a viral cycle that means even less $$ for the business).

11) Human Risk

Hiring has its benefits but also its risks.

Employees themselves involve a huge risk for a business, as they become to represent the company through how they work, mistakes committed, the public says and interactions with customers & suppliers,

A way to deal with human risk is to train employees and keep a motivated workforce. Yet, the risk will continue to exist.

12) Technology Risk

Security attacks, power outrage, discontinued hardware, and software, among other technology issues, are the events that form part of the technology risk.

These issues can lead to a loss of money, time and data, which has many connections with the previously mentioned risks.

Back-ups, antivirus, control processes, and data breach plans are some of the ways to deal with this risk.

How Businesses Can Use Risk Management To Grow Business

To mitigate any future threats, you need to prepare a comprehensive risk management plan.

This plan should detail the strategy you will use to deal with the specific challenges your business will encounter. Here’s what to do.

1) Identify Risks

Every business encounters a different set of challenges.

Before mapping the risks, analyze your business and note down its key components such as critical resources, important services or products, and top talent.

2) Record Risks

Once risks have been identified, you need to assess and document the threats that can affect each component.

Identify any warning signs or triggers of that recorded risk, also.

3) Anticipate

The best way to beat a threat is to detect and prepare for it in advance.

Once you know your business can be affected by a certain scenario, develop steps that you will take to stop the risk or to blunt its effects.

4) Prioritize Risks

Not all types of business risk have the same effect. Some can bring your startup to its knees, while others will only cause minimal effects.

To keep your business alive, start by putting in place measures that protect the vital functions from the most severe and most probable risks.

5) Have a Backup Plan

For every risk scenario, have at least two plans for countering the threat before it arrives.

The strategy you put in place should be in line with the current technology and trends.

Ensure your communicate these measures with all your team members.

6) Assign Responsibilities

When communicating measures with the team, assign responsibilities for each member in case any of the recorded risks affect the business.

These members should also be responsible for controlling the risks every certain time and maintaining records about them.

What is a Business Risk?

The term "business risk" refers to the exposure businesses have to factors that can prevent them from achieving their set financial goals.

This exposure can come from a variety of situations, but they can be classified into two:

  • Internal factors: The risk comes from sources within the company, and they tend to be related to human, technological, physical or operational factors, among others.
  • External factors: The risk comes from regulations/changes affecting the whole country/economy.

Any of these factors led to the business being unable to return investors and stakeholders the adequate amounts.

What Is Risk Management?

Risk management is a practice where an entrepreneur looks for potential risks that their business may face, analyzes them, and takes action to counter them.

The steps you take can eliminate the threat, control it, or limit the effects.

A risk is any scenario that harms your business. Risks can emanate from a wide variety of sources such as financial problems, management errors, lawsuits, data loss, cyber-attacks, natural calamities, and theft.

The risk landscape changes constantly, therefore you need to know the latest threats.

By setting up a risk management plan, your business can save money and time, which in some cases can be the determinant to keep your startup in business.

Not to mention, on the side, that risk management plans tend to make managers feel more confident to carry out business decisions, especially the risky ones, which can put their startups in a huge competitive advantage.

Wrapping Up

Becoming your own boss is one of the most rewarding things you can do.

However, launching a business is not a walk in the park; risks and challenges lurk around every corner.

If you are planning to establish a new business come 2022, make sure you secure its future by creating a broad risk management plan.

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How to Highlight Risks in Your Business Plan

Male entrepreneur working in a machine shop on cutting through a piece of metal with sparks flying out. This is just one of the physical risks to address in his business.

Tallat Mahmood

5 min. read

Updated October 25, 2023

One of the areas constantly dismissed by business owners in their business plan is an articulation of the risks in the business.

This either suggests you don’t believe there to be any risks in your business (not true), or are intentionally avoiding disclosing them.

Either way, it is not the best start to have with a potential funding partner. In fact, by dismissing the risks in your business, you actually make the job of a lender or investor that much more difficult.

Why a funder needs to understand your business’s risks:

Funding businesses is all about risk and reward.

Whether it’s a lender or an investor, their key concern will be trying to balance the risks inherent in your business, versus the likelihood of a reward, typically increasing business value. An imbalance occurs when entrepreneurs talk extensively about the opportunities inherent in their business, but ignore the risks.

The fact is, all funders understand that risks exist in every business. This is just a fact of running a business. There are risks that exist with your products, customers, suppliers, and your team. From a funder’s perspective, it is important to understand the nature and size of risks that exist.

  • There are two main reasons why funders want to understand business risks:

Firstly, they want to understand whether or not the key risks in your business are so fundamental to the investment proposition that it would prevent them from funding you.

Some businesses are not at  the right stage to receive external funding  and placate funder concerns. These businesses are best off dealing with key risk factors prior to seeking funding.

The second reason why lenders and investors want to understand the risk in your business is so that they can structure a funding package that works best overall, despite the risk.

In my experience, this is an opportunity that many business owners are wasting, as they are not giving funders an opportunity to structure deals suitable for them.

Here’s an example:

Assume your business is  seeking equity funding,  but has a key management role that needs to be filled. This could be a key business risk for a funder.

Highlighting this risk shows that you are aware of the appointment need, and are putting plans in place to help with this key recruit. An investor may reasonably decide to proceed with funding, but the funding will be released in stages. Some will be released immediately and the remainder will be after the key position has been filled.

The benefit of highlighting your risks is that it demonstrates to investors that you understand the danger the risks pose to your company, and are aware that it needs to be dealt with. This allows for a frank discussion to take place, which is more difficult to do if you don’t acknowledge this as a problem in the first place.

Ultimately, the starting point for most funders is that they  want  to invest in you, and  want  to validate their initial interest in you.

Highlighting your business risks will allow the funder to get to the nub of the problem, and give them a better idea of how they may structure their investment in order to make it work for both parties. If they are unsure of the risks or cannot get clear explanations from the team, it is unlikely they will be forthcoming when it comes to finding ways to make a potential deal work.

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  • The right way to address business risks:

The main reason many business owners don’t talk about business risks with potential funders is because they don’t want to highlight the weaknesses in their business.

This is a fair concern to have. However, there is a right way to address business risk with funders, without turning lenders and investors off.

The solution is to focus on how you  mitigate the risks.  

In other words, what are the steps you are taking in your business as a direct reaction to the risks that you have identified? This is very powerful in easing funder fears, and in positioning you as someone who has a handle on their business.

For example, if a business risk you had identified was a high level of customer concentration, then a suitable mitigation plan would be to market your products or services targeting new clients, as opposed to focusing all efforts on one client.

Having net profit margins that are lower than average for your market would raise eyebrows and be considered a risk. In this instance, you could demonstrate to funders the steps you are putting in place over a period of time to help increase those margins to at least market norms for your niche.

The process of highlighting risks—and, more importantly, outlining key mitigating actions—not only demonstrates honesty, but also a leadership quality in solving the problems in your business. Lenders and investors want to see both traits.

  • The impact on your credibility:

Any lender or investor  backs the leadership team  of a business first, and the business itself second.

This is because they realize that it is you, the management team, who will ultimately deliver value and grow the business for the benefit for all. As such, it is imperative that they have the right impression about you.

The consequence of highlighting business risks in your business plan with mitigations is that it provides funders a real insight into you as a business leader. It demonstrates that not only do you have an understanding of their need to understand risk in your business, but you also appreciate that minimizing that risk is your job.

This will have a massive impact on your credibility as a business owner and management team. This impact is more acute when compared to the hundreds of businesses they will meet that omit discussing the risks in their business.

The fact is, funders have seen enough businesses and business plans in all sectors to instinctively know what risks to expect. It’s just more telling if they hear it from you first.

  • What does this mean for you going forward?

Funders rely on you to deliver on your inherent promise to add value to your business for all stakeholders. The weight of this promise becomes much stronger if they can believe in the character of the team, and that comes from your credibility.

A business plan that discusses business risks and mitigations is a much more complete plan, and will increase your chances of securing funding.

Not only that, but highlighting the risks your business faces also has a long-term impact on your character and credibility as a business leader.

Content Author: Tallat Mahmood

Tallat Mahmood is founder of The Smart Business Plan Academy, his flagship online course on building powerful business plans for small and medium-sized businesses to help them grow and raise capital. Tallat has worked for over 10 years as a small and medium-sized business advisor and investor, and in this period has helped dozens of businesses raise hundreds of millions of dollars for growth. He has also worked as an investor and sat on boards of companies.

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How to make a good business plan: step-by-step guide.

A business plan is a strategic roadmap used to navigate the challenging journey of entrepreneurship. It's the foundation upon which you build a successful business.

A well-crafted business plan can help you define your vision, clarify your goals, and identify potential problems before they arise.

But where do you start? How do you create a business plan that sets you up for success?

This article will explore the step-by-step process of creating a comprehensive business plan.

What is a business plan?

A business plan is a formal document that outlines a business's objectives, strategies, and operational procedures. It typically includes the following information about a company:

Products or services

Target market

Competitors

Marketing and sales strategies

Financial plan

Management team

A business plan serves as a roadmap for a company's success and provides a blueprint for its growth and development. It helps entrepreneurs and business owners organize their ideas, evaluate the feasibility, and identify potential challenges and opportunities.

As well as serving as a guide for business owners, a business plan can attract investors and secure funding. It demonstrates the company's understanding of the market, its ability to generate revenue and profits, and its strategy for managing risks and achieving success.

Business plan vs. business model canvas

A business plan may seem similar to a business model canvas, but each document serves a different purpose.

A business model canvas is a high-level overview that helps entrepreneurs and business owners quickly test and iterate their ideas. It is often a one-page document that briefly outlines the following:

Key partnerships

Key activities

Key propositions

Customer relationships

Customer segments

Key resources

Cost structure

Revenue streams

On the other hand, a Business Plan Template provides a more in-depth analysis of a company's strategy and operations. It is typically a lengthy document and requires significant time and effort to develop.

A business model shouldn’t replace a business plan, and vice versa. Business owners should lay the foundations and visually capture the most important information with a Business Model Canvas Template . Because this is a fast and efficient way to communicate a business idea, a business model canvas is a good starting point before developing a more comprehensive business plan.

A business plan can aim to secure funding from investors or lenders, while a business model canvas communicates a business idea to potential customers or partners.

Why is a business plan important?

A business plan is crucial for any entrepreneur or business owner wanting to increase their chances of success.

Here are some of the many benefits of having a thorough business plan.

Helps to define the business goals and objectives

A business plan encourages you to think critically about your goals and objectives. Doing so lets you clearly understand what you want to achieve and how you plan to get there.

A well-defined set of goals, objectives, and key results also provides a sense of direction and purpose, which helps keep business owners focused and motivated.

Guides decision-making

A business plan requires you to consider different scenarios and potential problems that may arise in your business. This awareness allows you to devise strategies to deal with these issues and avoid pitfalls.

With a clear plan, entrepreneurs can make informed decisions aligning with their overall business goals and objectives. This helps reduce the risk of making costly mistakes and ensures they make decisions with long-term success in mind.

Attracts investors and secures funding

Investors and lenders often require a business plan before considering investing in your business. A document that outlines the company's goals, objectives, and financial forecasts can help instill confidence in potential investors and lenders.

A well-written business plan demonstrates that you have thoroughly thought through your business idea and have a solid plan for success.

Identifies potential challenges and risks

A business plan requires entrepreneurs to consider potential challenges and risks that could impact their business. For example:

Is there enough demand for my product or service?

Will I have enough capital to start my business?

Is the market oversaturated with too many competitors?

What will happen if my marketing strategy is ineffective?

By identifying these potential challenges, entrepreneurs can develop strategies to mitigate risks and overcome challenges. This can reduce the likelihood of costly mistakes and ensure the business is well-positioned to take on any challenges.

Provides a basis for measuring success

A business plan serves as a framework for measuring success by providing clear goals and financial projections . Entrepreneurs can regularly refer to the original business plan as a benchmark to measure progress. By comparing the current business position to initial forecasts, business owners can answer questions such as:

Are we where we want to be at this point?

Did we achieve our goals?

If not, why not, and what do we need to do?

After assessing whether the business is meeting its objectives or falling short, business owners can adjust their strategies as needed.

How to make a business plan step by step

The steps below will guide you through the process of creating a business plan and what key components you need to include.

1. Create an executive summary

Start with a brief overview of your entire plan. The executive summary should cover your business plan's main points and key takeaways.

Keep your executive summary concise and clear with the Executive Summary Template . The simple design helps readers understand the crux of your business plan without reading the entire document.

2. Write your company description

Provide a detailed explanation of your company. Include information on what your company does, the mission statement, and your vision for the future.

Provide additional background information on the history of your company, the founders, and any notable achievements or milestones.

3. Conduct a market analysis

Conduct an in-depth analysis of your industry, competitors, and target market. This is best done with a SWOT analysis to identify your strengths, weaknesses, opportunities, and threats. Next, identify your target market's needs, demographics, and behaviors.

Use the Competitive Analysis Template to brainstorm answers to simple questions like:

What does the current market look like?

Who are your competitors?

What are they offering?

What will give you a competitive advantage?

Who is your target market?

What are they looking for and why?

How will your product or service satisfy a need?

These questions should give you valuable insights into the current market and where your business stands.

4. Describe your products and services

Provide detailed information about your products and services. This includes pricing information, product features, and any unique selling points.

Use the Product/Market Fit Template to explain how your products meet the needs of your target market. Describe what sets them apart from the competition.

5. Design a marketing and sales strategy

Outline how you plan to promote and sell your products. Your marketing strategy and sales strategy should include information about your:

Pricing strategy

Advertising and promotional tactics

Sales channels

The Go to Market Strategy Template is a great way to visually map how you plan to launch your product or service in a new or existing market.

6. Determine budget and financial projections

Document detailed information on your business’ finances. Describe the current financial position of the company and how you expect the finances to play out.

Some details to include in this section are:

Startup costs

Revenue projections

Profit and loss statement

Funding you have received or plan to receive

Strategy for raising funds

7. Set the organization and management structure

Define how your company is structured and who will be responsible for each aspect of the business. Use the Business Organizational Chart Template to visually map the company’s teams, roles, and hierarchy.

As well as the organization and management structure, discuss the legal structure of your business. Clarify whether your business is a corporation, partnership, sole proprietorship, or LLC.

8. Make an action plan

At this point in your business plan, you’ve described what you’re aiming for. But how are you going to get there? The Action Plan Template describes the following steps to move your business plan forward. Outline the next steps you plan to take to bring your business plan to fruition.

Types of business plans

Several types of business plans cater to different purposes and stages of a company's lifecycle. Here are some of the most common types of business plans.

Startup business plan

A startup business plan is typically an entrepreneur's first business plan. This document helps entrepreneurs articulate their business idea when starting a new business.

Not sure how to make a business plan for a startup? It’s pretty similar to a regular business plan, except the primary purpose of a startup business plan is to convince investors to provide funding for the business. A startup business plan also outlines the potential target market, product/service offering, marketing plan, and financial projections.

Strategic business plan

A strategic business plan is a long-term plan that outlines a company's overall strategy, objectives, and tactics. This type of strategic plan focuses on the big picture and helps business owners set goals and priorities and measure progress.

The primary purpose of a strategic business plan is to provide direction and guidance to the company's management team and stakeholders. The plan typically covers a period of three to five years.

Operational business plan

An operational business plan is a detailed document that outlines the day-to-day operations of a business. It focuses on the specific activities and processes required to run the business, such as:

Organizational structure

Staffing plan

Production plan

Quality control

Inventory management

Supply chain

The primary purpose of an operational business plan is to ensure that the business runs efficiently and effectively. It helps business owners manage their resources, track their performance, and identify areas for improvement.

Growth-business plan

A growth-business plan is a strategic plan that outlines how a company plans to expand its business. It helps business owners identify new market opportunities and increase revenue and profitability. The primary purpose of a growth-business plan is to provide a roadmap for the company's expansion and growth.

The 3 Horizons of Growth Template is a great tool to identify new areas of growth. This framework categorizes growth opportunities into three categories: Horizon 1 (core business), Horizon 2 (emerging business), and Horizon 3 (potential business).

One-page business plan

A one-page business plan is a condensed version of a full business plan that focuses on the most critical aspects of a business. It’s a great tool for entrepreneurs who want to quickly communicate their business idea to potential investors, partners, or employees.

A one-page business plan typically includes sections such as business concept, value proposition, revenue streams, and cost structure.

Best practices for how to make a good business plan

Here are some additional tips for creating a business plan:

Use a template

A template can help you organize your thoughts and effectively communicate your business ideas and strategies. Starting with a template can also save you time and effort when formatting your plan.

Miro’s extensive library of customizable templates includes all the necessary sections for a comprehensive business plan. With our templates, you can confidently present your business plans to stakeholders and investors.

Be practical

Avoid overestimating revenue projections or underestimating expenses. Your business plan should be grounded in practical realities like your budget, resources, and capabilities.

Be specific

Provide as much detail as possible in your business plan. A specific plan is easier to execute because it provides clear guidance on what needs to be done and how. Without specific details, your plan may be too broad or vague, making it difficult to know where to start or how to measure success.

Be thorough with your research

Conduct thorough research to fully understand the market, your competitors, and your target audience . By conducting thorough research, you can identify potential risks and challenges your business may face and develop strategies to mitigate them.

Get input from others

It can be easy to become overly focused on your vision and ideas, leading to tunnel vision and a lack of objectivity. By seeking input from others, you can identify potential opportunities you may have overlooked.

Review and revise regularly

A business plan is a living document. You should update it regularly to reflect market, industry, and business changes. Set aside time for regular reviews and revisions to ensure your plan remains relevant and effective.

Create a winning business plan to chart your path to success

Starting or growing a business can be challenging, but it doesn't have to be. Whether you're a seasoned entrepreneur or just starting, a well-written business plan can make or break your business’ success.

The purpose of a business plan is more than just to secure funding and attract investors. It also serves as a roadmap for achieving your business goals and realizing your vision. With the right mindset, tools, and strategies, you can develop a visually appealing, persuasive business plan.

Ready to make an effective business plan that works for you? Check out our library of ready-made strategy and planning templates and chart your path to success.

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What is business risk?

A balloon flying dangerously close to a cactus.

You know about death and taxes. What about risk? Yes, risk is just as much a part of life as the other two inevitabilities. This became all the more apparent during COVID-19, as each of us had to assess and reassess our personal risk calculations as each new wave of the pandemic— and pandemic-related disruptions —washed over us. It’s the same in business: executives and organizations have different comfort levels with risk and ways to prepare against it.

Where does business risk come from? To start with, external factors can wreak havoc on an organization’s best-laid plans. These can include things like inflation , supply chain  disruptions, geopolitical upheavals , unpredictable force majeure events like a global pandemic or climate disaster, competitors, reputational  issues, or even cyberattacks .

But sometimes, the call is coming from inside the house. Companies can be imperiled by their own executives’ decisions or by leaks of privileged information, but most damaging of all, perhaps, is the risk of missed opportunities. We’ve seen it often: when companies choose not to adopt disruptive innovation, they risk losing out to more nimble competitors.

The modern era is rife with increasingly frequent sociopolitical, economic, and climate-related shocks. In 2019 alone, for example, 40 weather disasters caused damages exceeding $1 billion each . To stay competitive, organizations should develop dynamic approaches to risk and resilience. That means predicting new threats, perceiving changes in existing threats, and developing comprehensive response plans. There’s no magic formula that can guarantee safe passage through a crisis. But in situations of threat, sometimes only a robust risk-management plan can protect an organization from interruptions to critical business processes. For more on how to assess and prepare for the inevitability of risk, read on.

Learn more about McKinsey’s Risk and Resilience  Practice.

What is risk control?

Risk controls are measures taken to identify, manage, and eliminate threats. Companies can create these controls through a range of risk management strategies and exercises. Once a risk is identified and analyzed, risk controls can be designed to reduce the potential consequences. Eliminating a risk—always the preferable solution—is one method of risk control. Loss prevention and reduction are other risk controls that accept the risk but seek to minimize the potential loss (insurance is one method of loss prevention). A final method of risk control is duplication (also called redundancy). Backup servers or generators are a common example of duplication, ensuring that if a power outage occurs no data or productivity is lost.

But in order to develop appropriate risk controls, an organization should first understand the potential threats.

What are the three components to a robust risk management strategy?

A dynamic risk management plan can be broken down into three components : detecting potential new risks and weaknesses in existing risk controls, determining the organization’s appetite for risk taking, and deciding on the appropriate risk management approach. Here’s more information about each step and how to undertake them.

1. Detecting risks and controlling weaknesses

A static approach to risk is not an option, since an organization can be caught unprepared when an unlikely event, like a pandemic, strikes. So it pays to always be proactive. To keep pace with changing environments, companies should answer the following three questions for each of the risks that are relevant to their business.

  • How will a risk play out over time? Risks can be slow moving or fast moving. They can be cyclical or permanent. Companies should analyze how known risks are likely to play out and reevaluate them on a regular basis.
  • Are we prepared to respond to systemic risks? Increasingly, risks have longer-term reputational or regulatory consequences, with broad implications for an industry, the economy, or society at large. A risk management strategy should incorporate all risks, including systemic ones.
  • What new risks lurk in the future? Organizations should develop new methods of identifying future risks. Traditional approaches that rely on reviews and assessments of historical realities are no longer sufficient.

2. Assessing risk appetite

How can companies develop a systematic way of deciding which risks to accept and which to avoid? Companies should set appetites for risk that align with their own values, strategies, capabilities, and competitive environments—as well as those of society as a whole. To that end, here are three questions companies should consider.

  • How much risk should we take on? Companies should reevaluate their risk profiles frequently according to shifting customer behaviors, digital capabilities, competitive landscapes, and global trends.
  • Are there any risks we should avoid entirely? Some risks are clear: companies should not tolerate criminal activity or sexual harassment. Others are murkier. How companies respond to risks like economic turmoil and climate change depend on their particular business, industry, and levels of risk tolerance.
  • Does our risk appetite adequately reflect the effectiveness of our controls? Companies are typically more comfortable taking risks for which they have strong controls in place. But the increased threat of severe risks challenges traditional assumptions about risk control effectiveness. For instance, many businesses have relied on automation to increase speed and reduce manual error. But increased data breaches and privacy concerns can increase the risk of large-scale failures. Organizations, therefore, should evolve their risk profiles accordingly.

3. Deciding on a risk management approach

Finally, organizations should decide how they will respond when a new risk is identified. This decision-making  process should be flexible and fast, actively engaging leaders from across the organization and honestly assessing what has and hasn’t worked in past scenarios. Here are three questions organizations should be able to answer.

  • How should we mitigate the risks we are taking? Ultimately, people need to make these decisions and assess how their controls are working. But automated control systems should buttress human efforts. Controls guided, for example, by advanced analytics can help guard against quantifiable risks and minimize false positives.
  • How would we respond if a risk event or control breakdown happens? If (or more likely, when) a threat occurs, companies should be able to switch to crisis management mode quickly, guided by an established playbook. Companies with well-rehearsed crisis management capabilities weather shocks better, as we saw with the COVID-19 pandemic.
  • How can we build true resilience? Resilient companies not only better withstand threats—they emerge stronger. The most resilient firms can turn fallout from crises into a competitive advantage. True resilience stems from a diversity of skills and experience, innovation, creative problem solving, and the basic psychological safety that enables peak performance.

Change is constant. Just because a risk control plan made sense last year doesn’t mean it will next year. In addition to the above points, a good risk management strategy involves not only developing plans based on potential risk scenarios but also evaluating those plans on a regular basis.

Learn more about McKinsey’s  Risk and Resilience  Practice.

What are five actions organizations can take to build dynamic risk management?

In the past, some organizations have viewed risk management as a dull, dreary topic, uninteresting for the executive looking to create competitive advantage. But when the risk is particularly severe or sudden, a good risk strategy is about more than competitiveness—it can mean survival. Here are five actions leaders can take to establish risk management capabilities .

  • Reset the aspiration for risk management.  This requires clear objectives and clarity on risk levels and appetite. Risk managers should establish dialogues with business leaders to understand how people across the business think about risk, and share possible strategies to nurture informed risk-versus-return decision making—as well as the capabilities available for implementation.
  • Establish agile  risk management practices.  As the risk environment becomes more unpredictable, the need for agile risk management grows. In practice, that means putting in place cross-functional teams empowered to make quick decisions about innovating and managing risk.
  • Harness the power of data and analytics.  The tools of the digital revolution  can help companies improve risk management. Data streams from traditional and nontraditional sources can broaden and deepen companies’ understandings of risk, and algorithms can boost error detection and drive more accurate predictions.
  • Develop risk talent for the future.  Risk managers who are equipped to meet the challenges of the future will need new capabilities and expanded domain knowledge in model risk management , data, analytics, and technology. This will help support a true understanding of the changing risk landscape , which risk leaders can use to effectively counsel their organizations.
  • Fortify risk culture.  Risk culture includes the mindsets and behavioral norms that determine an organization’s relationship with risk. A good risk culture allows an organization to respond quickly when threats emerge.

How do scenarios help business leaders understand uncertainty?

Done properly, scenario planning prompts business leaders to convert abstract hypotheses about uncertainties into narratives about realistic visions of the future. Good scenario planning can help decision makers experience new realities  in ways that are intellectual and sensory, as well as rational and emotional. Scenarios have four main features  that can help organizations navigate uncertain times.

  • Scenarios expand your thinking.  By developing a range of possible outcomes, each backed with a sequence of events that could lead to them, it’s possible to broaden our thinking. This helps us become ready for the range of possibilities the future might hold—and accept the possibility that change might come more quickly than we expect.
  • Scenarios uncover inevitable or likely futures.  A broad scenario-building effort can also point to powerful drivers of change, which can help to predict potential outcomes. In other words, by illuminating critical events from the past, scenario building can point to outcomes that are very likely to happen in the future.
  • Scenarios protect against groupthink.  In some large corporations, employees can feel unsafe offering contrarian points of view for fear that they’ll be penalized by management. Scenarios can help companies break out of this trap by providing a “safe haven” for opinions that differ from those of senior leadership and that may run counter to established strategy.
  • Scenarios allow people to challenge conventional wisdom.  In large corporations in particular, there’s frequently a strong bias toward the status quo. Scenarios are a nonthreatening way to lay out alternative futures in which assumptions underpinning today’s strategy can be challenged.

Learn more about McKinsey’s Strategy & Corporate Finance  Practice.

What’s the latest thinking on risk for financial institutions?

In late 2021, McKinsey conducted survey-based research with more than 30 chief risk officers (CROs), asking about the current banking environment, risk management practices, and priorities for the future.

According to CROs, banks in the current environment are especially exposed to accelerating market dynamics, climate change, and cybercrime . Sixty-seven percent of CROs surveyed cited the pandemic as having significant impact on employees and in the area of nonfinancial risk. Most believed that these effects would diminish in three years’ time.

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Introducing McKinsey Explainers : Direct answers to complex questions

Climate change, on the other hand, is expected to become a larger issue over time. Nearly all respondents cited climate regulation as one of the five most important forces in the financial industry in the coming three years. And 75 percent were concerned about climate-related transition risk: financial and other risks arising from the transformation away from carbon-based energy systems.

And finally, cybercrime was assessed as one of the top risks by most executives, both now and in the future.

Learn more about the risk priorities of banking CROs here .

What is cyber risk?

Cyber risk is a form of business risk. More specifically, it’s the potential for business losses of all kinds  in the digital domain—financial, reputational, operational, productivity related, and regulatory related. While cyber risk originates from threats in the digital realm, it can also cause losses in the physical world, such as damage to operational equipment.

Cyber risk is not the same as a cyberthreat. Cyberthreats are the particular dangers that create the potential for cyber risk. These include privilege escalation (the exploitation of a flaw in a system for the purpose of gaining unauthorized access to resources), vulnerability exploitation (an attack that uses detected vulnerabilities to exploit the host system), or phishing. The risk impact of cyberthreats includes loss of confidentiality, integrity, and availability of digital assets, as well as fraud, financial crime, data loss, or loss of system availability.

In the past, organizations have relied on maturity-based cybersecurity approaches to manage cyber risk. These approaches focus on achieving a particular level of cybersecurity maturity by building capabilities, like establishing a security operations center or implementing multifactor authentication across the organization. A maturity-based approach can still be helpful in some situations, such as for brand-new organizations. But for most institutions, a maturity-based approach can turn into an unmanageably large project, demanding that all aspects of an organization be monitored and analyzed. The reality is that, since some applications are more vulnerable than others, organizations would do better to measure and manage only their most critical vulnerabilities.

What is a risk-based cybersecurity approach?

A risk-based approach is a distinct evolution from a maturity-based approach. For one thing, a risk-based approach identifies risk reduction as the primary goal. This means an organization prioritizes investment based on a cybersecurity program’s effectiveness in reducing risk. Also, a risk-based approach breaks down risk-reduction targets into precise implementation programs with clear alignment all the way up and down an organization. Rather than building controls everywhere, a company can focus on building controls for the worst vulnerabilities.

Here are eight actions that comprise a best practice for developing  a risk-based cybersecurity approach:

  • fully embed cybersecurity in the enterprise-risk-management framework
  • define the sources of enterprise value across teams, processes, and technologies
  • understand the organization’s enterprise-wide vulnerabilities—among people, processes, and technology—internally and for third parties
  • understand the relevant “threat actors,” their capabilities, and their intent
  • link the controls in “run” activities and “change” programs to the vulnerabilities that they address and determine what new efforts are needed
  • map the enterprise risks from the enterprise-risk-management framework, accounting for the threat actors and their capabilities, the enterprise vulnerabilities they seek to exploit, and the security controls of the organization’s cybersecurity run activities and change program
  • plot risks against the enterprise-risk appetite; report on how cyber efforts have reduced enterprise risk
  • monitor risks and cyber efforts against risk appetite, key cyber risk indicators, and key performance indicators

How can leaders make the right investments in risk management?

Ignoring high-consequence, low-likelihood risks can be catastrophic to an organization—but preparing for everything is too costly. In the case of the COVID-19 crisis, the danger of a global pandemic on this scale was foreseeable, if unexpected. Nevertheless, the vast majority of companies were unprepared: among billion-dollar companies in the United States, more than 50 filed for bankruptcy in 2020.

McKinsey has described the decisions to act on these high-consequence, low-likelihood risks as “ big bets .” The number of these risks is far too large for decision makers to make big bets on all of them. To narrow the list down, the first thing a company can do is to determine which risks could hurt the business versus the risks that could destroy the company. Decision makers should prioritize the potential threats that would cause an existential crisis  for their organization.

To identify these risks, McKinsey recommends using a two-by-two risk grid, situating the potential impact of an event on the whole company against the level of certainty about the impact. This way, risks can be measured against each other, rather than on an absolute scale.

Organizations sometimes survive existential crises. But it can’t be ignored that crises—and missed opportunities—can cause organizations to fail. By measuring the impact of high-impact, low-likelihood risks on core business, leaders can identify and mitigate risks that could imperil the company. What’s more, investing in protecting their value propositions can improve an organization’s overall resilience.

Articles referenced:

  • “ Seizing the momentum to build resilience for a future of sustainable inclusive growth ,” February 23, 2023, Børge Brende and Bob Sternfels
  • “ Data and analytics innovations to address emerging challenges in credit portfolio management ,” December 23, 2022, Abhishek Anand , Arvind Govindarajan , Luis Nario  and Kirtiman Pathak
  • “ Risk and resilience priorities, as told by chief risk officers ,” December 8, 2022, Marc Chiapolino , Filippo Mazzetto, Thomas Poppensieker , Cécile Prinsen, and Dan Williams
  • “ What matters most? Six priorities for CEOs in turbulent times ,” November 17, 2022, Homayoun Hatami  and Liz Hilton Segel
  • “ Model risk management 2.0 evolves to address continued uncertainty of risk-related events ,” March 9, 2022, Pankaj Kumar, Marie-Paule Laurent, Christophe Rougeaux, and Maribel Tejada
  • “ The disaster you could have stopped: Preparing for extraordinary risks ,” December 15, 2020, Fritz Nauck , Ophelia Usher, and Leigh Weiss
  • “ Meeting the future: Dynamic risk management for uncertain times ,” November 17, 2020, Ritesh Jain, Fritz Nauck , Thomas Poppensieker , and Olivia White
  • “ Risk, resilience, and rebalancing in global value chains ,” August 6, 2020, Susan Lund, James Manyika , Jonathan Woetzel , Edward Barriball , Mekala Krishnan , Knut Alicke , Michael Birshan , Katy George , Sven Smit , Daniel Swan , and Kyle Hutzler
  • “ The risk-based approach to cybersecurity ,” October 8, 2019, Jim Boehm , Nick Curcio, Peter Merrath, Lucy Shenton, and Tobias Stähle
  • “ Value and resilience through better risk management ,” October 1, 2018, Daniela Gius, Jean-Christophe Mieszala , Ernestos Panayiotou, and Thomas Poppensieker

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Business Plan Risk Analysis The Ultimate Guide

Business Plan Risk Analysis - What You Need to Know

The business plan risk analysis is a crucial and often overlooked part of a robust business plan. In the ever-changing world of business knowing potential pitfalls and how to mitigate them could be the difference between success and failure.  A well-crafted business plan acts as a guiding star for every venture, be it a startup finding its footing or a multinational corporation planning an expansion. However, amidst financial forecasts, marketing strategies, and operational logistics, the element of risk analysis frequently gets relegated to the back burner. In this blog, we will dissect the anatomy of the risk analysis section, show you exactly why it is important and provide you with guidelines and tips. We will also delve into real-life case studies to bring to life your learning your learning.

Table of Contents

  • Risk Analysis - What is it?
  • Types of Risks
  • Components of Risk Analysis
  • Real-Life Case Studies
  • Tips & Best Practices
  • Final Thoughts

Business Plan Risk Analysis - What Exactly Is It?

Risk analysis is like the radar system of a ship, scanning the unseen waters ahead for potential obstacles. It can forecast possible challenges that may occur in the business landscape and plan for their eventuality. Ignoring this can be equivalent to sailing blind into a storm. The business plan risk analysis section is a strategic tool used in business planning to identify and assess potential threats that could negatively impact the organisation's operations or assets. Taking the time to properly think about the risks your business faces or may face in the future will enable you to identify strategies to mitigate these issues.

Business Plan Risk Analysis Ignore At Your Peril

Types of Business Risks

There are various types of risks that a business may face, which can be categorised into some broader groups:

  • Operational Risks: These risks involve loss due to inadequate or failed internal processes, people, or systems. Examples could include equipment failure, theft, or employee misconduct.
  • Financial Risks: These risks are associated with the financial structure of the company, transactions the company makes, and the company's ability to meet its financial obligations. For instance, currency fluctuations, increase in costs, or a decline in cash flow.
  • Market Risks: These risks are external to the company and involve changes in the market. For example, new competitors entering the market changes in customer preferences, or regulatory changes.
  • Strategic Risks: These risks relate to the strategic decisions made by the management team. Examples include the entry into a new market, the launch of a new product, or mergers and acquisitions.
  • Compliance Risks: These risks occur when a company must comply with laws and regulations to stay in operation. They could involve changes in laws and regulations or non-compliance with existing ones.

The business risk analysis section is not a crystal ball predicting the future with absolute certainty, but it provides a foresighted approach that enables businesses to navigate a world full of uncertainties with informed confidence. In the next section, we will dissect the integral components of risk analysis in a business plan.

Business Plan Risk Analysis Keep Your KPIs in Mind

Components of a Risk Analysis Section

Risk analysis, while a critical component of a business plan, is not a one-size-fits-all approach. Each business has unique risks tied to its operations, industry, market, and even geographical location. A thorough risk analysis process, however, typically involves four main steps:

  • Identification of Potential Risks: The first step in risk analysis is to identify potential risks that your business may face. This process should be exhaustive, including risks from various categories mentioned in the section above. You might use brainstorming sessions, expert consultations, industry research, or tools like a SWOT analysis to help identify these risks.
  • Risk Assessment: Once you've identified potential risks, the next step is to assess them. This involves evaluating the likelihood of each risk occurring and the potential impact it could have on your business. Some risks might be unlikely but would have a significant impact if they did occur, while others might be likely but with a minor impact. Tools like a risk matrix can be helpful here to visualise and prioritise your risks.
  • Risk Mitigation Strategies: After assessing the risks, you need to develop strategies to manage them. This could involve preventing the risk, reducing the impact or likelihood of the risk, transferring the risk, or accepting the risk and developing a contingency plan. Your strategies will be highly dependent on the nature of the risk and your business's ability to absorb or mitigate it.
  • Monitoring and Review: Risk analysis is not a one-time task, but an ongoing process. The business landscape is dynamic, and new risks can emerge while old ones can change or even disappear. Regular monitoring and review of your risks and the effectiveness of your mitigation strategies is crucial. This should be an integral part of your business planning process.

Through these four steps, you can create a risk analysis section in your business plan that not only identifies and assesses potential threats but also outlines clear strategies to manage and mitigate these risks. This will demonstrate to stakeholders that your business is prepared and resilient, able to handle whatever challenges come its way.

Business Plan Risk Analysis Look To Discuss With Many Sources

Business Plan Risk Analysis - Real-Life Examples

To fully grasp the importance of risk analysis, it can be beneficial to examine some real-life scenarios. The following are two contrasting case studies - one demonstrating a successful risk analysis and another highlighting the repercussions when risk analysis fails.

Case Study 1: Google's Strategic Risk Mitigation

Consider Google's entry into the mobile operating system market with Android. Google identified a strategic risk : the growth of mobile internet use might outpace traditional desktop use, and if they didn't have a presence in the mobile market, they risked losing out on search traffic. They also recognised the risk of being too dependent on another company's (Apple's) platform for mobile traffic. Google mitigated this risk by developing and distributing its mobile operating system, Android. They offered it as an open-source platform, which encouraged adoption by various smartphone manufacturers and quickly expanded their mobile presence. This risk mitigation strategy helped Google maintain its dominance in the search market as internet usage shifted towards mobile.

Case Study 2: The Fallout of Lehman Brothers

On the flip side, Lehman Brothers, a global financial services firm, failed to adequately analyse and manage its risks, leading to its downfall during the 2008 financial crisis. The company had significant exposure to subprime mortgages and had failed to recognise the potential risk these risky loans posed. When the housing market collapsed, the value of these subprime mortgages plummeted, leading to significant financial losses. The company's failure to conduct a robust risk analysis and develop appropriate risk mitigation strategies eventually led to its bankruptcy. The takeaway from these case studies is clear - effective risk analysis can serve as an essential tool to navigate through uncertainty and secure a competitive advantage, while failure to analyse and mitigate potential risks can have dire consequences. As we move forward, we'll share some valuable tips and best practices to ensure your risk analysis is comprehensive and effective.

Business Plan Risk Analysis Tips and Best Practices

While the concept of risk analysis can seem overwhelming, following these tips and best practices can streamline the process and ensure that your risk management plan is both comprehensive and effective.

  • Be Thorough: When identifying potential risks, aim to be as thorough as possible. It’s crucial not to ignore risk because it seems minor or unlikely; even small risks can have significant impacts if not managed properly.
  • Involve the Right People: Diverse perspectives can help identify potential risks that might otherwise be overlooked. Include people from different departments or areas of expertise in your risk identification and assessment process. They will bring different perspectives and insights, leading to a more comprehensive risk analysis.
  • Keep it Dynamic: The business environment is continually changing, and so are the risks. Hence, risk analysis should be an ongoing process, not a one-time event. Regularly review and update your risk analysis to account for new risks and changes in previously identified risks.
  • Be Proactive, Not Reactive: Use your risk analysis to develop mitigation strategies in advance, rather than reacting to crises as they occur. Proactive risk management can help prevent crises, reduce their impact, and ensure that you're prepared when they do occur.
  • Quantify When Possible: Wherever possible, use statistical analysis and financial projections to evaluate the potential impact of a risk. While not all risks can be quantified, putting numbers to the potential costs can provide a clearer picture of the risk and help prioritise your mitigation efforts.

Implementing these tips and best practices will strengthen your risk analysis, providing a more accurate picture of the potential risks and more effective strategies to manage them. Remember, the goal of risk analysis isn't to eliminate all risks—that's impossible—but to understand them better so you can manage them effectively and build a more resilient business.

In the ever-changing landscape of business, where uncertainty is a constant companion, the risk analysis section of a business plan serves as a guiding compass, illuminating potential threats and charting a course toward success. Throughout this blog, we have explored the critical role of risk analysis and the key components involved in its implementation. We learned that risk analysis is not just about identifying risks but also about assessing their potential impact and likelihood. It involves developing proactive strategies to manage and mitigate those risks, thereby safeguarding the business against potential pitfalls. In conclusion, a well-crafted business plan risk analysis section is not just a formality but a strategic asset that empowers your business to thrive in an unpredictable world. As you finalise your business plan, keep in mind that risk analysis is not a one-time task but an ongoing practice. Revisit and update your risk analysis regularly to stay ahead of changing business conditions. By embracing risk with a thoughtful and proactive approach, you will position your business for growth, resilience, and success in an increasingly dynamic and competitive landscape. Want more help with your business plan? Check out our Learning Zone for more in-depth guides on each specific section of your plan.

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Types of business risks and ideas for managing them.

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Published: July 06, 2023

There are several types of business risks that can threaten a company’s ability to achieve its goals. Learn some of the most common risks for businesses and ideas for how to manage them.

Business risks can include financial, cybersecurity, operational, and reputational risks, all of which can seriously impact a company’s strategic plans if business leaders don’t take action to mitigate them.

What’s most important is that business owners are aware of the risks that could shake up their operations. That way, they can take steps to prevent them or minimize their impact if they occur. Here’s a look at some common business risks. 

Financial Risks

Companies must generate sufficient  cash flow  to make interest payments on loans and to meet other debt-related obligations on time. Financial risk refers to the  flow of money  in the business and the possibility of a sudden financial loss. A company may be at  financial risk  if it doesn’t have enough cash to properly manage its debt payments and becomes delinquent on its loans.

Businesses with relatively higher levels of debt financing are considered at higher financial risk, since lenders often see them as having a greater chance of not meeting payment obligations and becoming insolvent. Types of financial risk include:

  • Credit risk:  When a company extends credit to customers, there is the possibility that those customers may stop making payments, which reduces revenue and earnings. A company also faces credit risk when a lender extends business credit to make purchases. If the company doesn’t have enough money to pay back those loans, it will default.
  • Currency risk:  Currency risk, also known as exchange-rate risk, can arise from the change in price of one currency in relation to another. For example, if a U.S. company agrees to sell its products to a European company for a certain amount of euros, but the value of the euro rises suddenly at the time of delivery and payment, the U.S. business loses money because it takes more dollars to buy euros.
  • Liquidity risk:  A company faces  liquidity  risk when it cannot convert its assets into cash. This type of business risk often occurs when a company suddenly needs a substantial amount of cash to meet its short-term debt obligations. For example, a manufacturing company may not be able to sell outdated machines to generate cash if no buyers come forward.

Cybersecurity Risks

As more businesses use online channels for  sales  and e-commerce payments, as well as for collecting and storing customer data, they are exposed to greater opportunities for hacking, creating security risks for companies and their stakeholders. Both employees and customers expect companies to protect their personal and financial information, but despite ongoing efforts to keep this information safe, companies have experienced data breaches, identity theft, and payment fraud incidents.

When these incidents happen, consumer confidence and trust in companies can take a dive.

Not only do security breaches threaten a company’s reputation, but the company is sometimes financially liable for damages.

Ideas for managing security risks: 

  • Investing in fraud detection tools and software  security solutions .
  • Educating employees about how they can do their part to keep the company’s data safe. Basic guidance includes not clicking suspicious links in emails or sharing sensitive data without encrypting it first.

Operational Risks

A business is considered to have operational risk when its day-to-day activities threaten to decrease profits. Operational risks can result from employee errors, such as undercharging customers. Additionally, a natural disaster like a tornado, hurricane, or flood might damage a company’s buildings or other physical assets, disrupting its daily operations.

Of course, one of the starkest examples of negative impacts to companies' production and supply chain operations is the Coronavirus pandemic. In an April 2022 Small Business Pulse Survey conducted by the U.S. Census Bureau, roughly 65 percent of respondents reported that the pandemic had either a moderate negative effect or a large negative effect on their business. 

  • Making time for necessary employee training to minimize internal mistakes.
  • Developing contingency plans to shield against external events that may impact operations. For example, a restaurant impacted by a natural disaster might be able to partner with another local restaurant, bar, or coffee shop to use their kitchen and sell to-go items.

Reputational Risks

Reputational risk  can include a product safety recall, negative publicity, and negative reviews online from customers. Companies that suffer reputational damage can even see an immediate loss of revenue, as customers take their business elsewhere. Companies may experience additional impacts, including losing employees, suppliers, and other partners.

Ideas for managing reputational risks: 

  • Pay attention to what customers and employees say about the company both online and offline.
  • Commit not only to providing a quality product or service, but also to ensuring that workers are trained to deliver excellent customer service and to resolve customer complaints, offer refunds, and issue apologies when necessary.

The Takeaway

Business owners face a variety of business risks, including financial, cybersecurity, operational, and reputational. However, they can take proactive measures to prevent or mitigate risk while continuing to  seize opportunities for growth . To learn more about the benefits of risk management planning read,  "5 Hidden Benefits of Risk Management."

Frequently Asked Questions

1. what are the main types of business risks.

There are several types of business risks: • Financial Risks • Cybersecurity Risks • Operational Risks • Reputational Risks

2. What are common examples of business risks?

• Financial risks can include cash flow problems, inability to meet financial obligations, or taking on too much debt. • Cybersecurity risks are risks associated with data breaches, hacks, or cyber-attacks. • Operational risks include supply chain disruptions, natural disasters, or IT failures. • Reputational risks can occur when a company's reputation is damaged by negative publicity, scandal, or other events.

3. How can you identify a business risk?

There are a few key ways to identify business risks:

• Reviewing financial statements and performance indicators: This can help you identify risks related to cash flow, profitability, or solvency. • Conducting a SWOT analysis: A SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) can also be a helpful tool for identifying risks and brainstorming ways to mitigate them. • Identifying key dependencies: Key dependencies are things that your business relies on to function, and if they were to fail or be disrupted, it could have a serious impact on your business. • Carrying out root cause analysis: Conducting root cause analysis can help you to identify what underlying factors could lead to a problem or issue.

A version of this article was originally published September 01, 2022.

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What Is Risk Management & Why Is It Important?

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  • 24 Oct 2023

Businesses can’t operate without risk. Economic, technological, environmental, and competitive factors introduce obstacles that companies must not only manage but overcome.

According to PwC’s Global Risk Survey , organizations that embrace strategic risk management are five times more likely to deliver stakeholder confidence and better business outcomes and two times more likely to expect faster revenue growth.

If you want to enhance your job performance and identify and mitigate risk more effectively, here’s a breakdown of what risk management is and why it’s important.

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What Is Risk Management?

Risk management is the systematic process of identifying, assessing, and mitigating threats or uncertainties that can affect your organization. It involves analyzing risks’ likelihood and impact, developing strategies to minimize harm, and monitoring measures’ effectiveness.

“Competing successfully in any industry involves some level of risk,” says Harvard Business School Professor Robert Simons, who teaches the online course Strategy Execution . “But high-performing businesses with high-pressure cultures are especially vulnerable. As a manager, you need to know how and why these risks arise and how to avoid them.”

According to Strategy Execution , strategic risk has three main causes:

  • Pressures due to growth: This is often caused by an accelerated rate of expansion that makes staffing or industry knowledge gaps more harmful to your business.
  • Pressures due to culture: While entrepreneurial risk-taking can come with rewards, executive resistance and internal competition can cause problems.
  • Pressures due to information management: Since information is key to effective leadership , gaps in performance measures can result in decentralized decision-making.

These pressures can lead to several types of risk that you must manage or mitigate to avoid reputational, financial, or strategic failures. However, risks aren’t always obvious.

“I think one of the challenges firms face is the ability to properly identify their risks,” says HBS Professor Eugene Soltes in Strategy Execution .

Therefore, it’s crucial to pinpoint unexpected events or conditions that could significantly impede your organization’s business strategy .

Related: Business Strategy vs. Strategy Execution: Which Course Is Right for Me?

According to Strategy Execution , strategic risk comprises:

  • Operations risk: This occurs when internal operational errors interrupt your products or services’ flow. For example, shipping tainted products can negatively affect food distribution companies.
  • Asset impairment risk: When your company’s assets lose a significant portion of their current value because of a decreased likelihood of receiving future cash flows . For instance, losing property assets, like a manufacturing plant, due to a natural disaster.
  • Competitive risk: Changes in the competitive environment can interrupt your organization’s ability to create value and differentiate its offerings—eventually leading to a significant loss in revenue.
  • Franchise risk: When your organization’s value erodes because stakeholders lose confidence in its objectives. This primarily results from failing to control any of the strategic risk sources listed above.

Understanding these risks is essential to ensuring your organization’s long-term success. Here’s a deeper dive into why risk management is important.

4 Reasons Why Risk Management Is Important

1. protects organization’s reputation.

In many cases, effective risk management proactively protects your organization from incidents that can affect its reputation.

“Franchise risk is a concern for all businesses,“ Simons says in Strategy Execution . “However, it's especially pressing for businesses whose reputations depend on the trust of key constituents.”

For example, airlines are particularly susceptible to franchise risk because of unforeseen events, such as flight delays and cancellations caused by weather or mechanical failure. While such incidents are considered operational risks, they can be incredibly damaging.

In 2016, Delta Airlines experienced a national computer outage, resulting in over 2,000 flight cancellations. Delta not only lost an estimated $150 million but took a hit to its reputation as a reliable airline that prided itself on “canceling cancellations.”

While Delta bounced back, the incident illustrates how mitigating operational errors can make or break your organization.

2. Minimizes Losses

Most businesses create risk management teams to avoid major financial losses. Yet, various risks can still impact their bottom lines.

A Vault Platform study found that dealing with workplace misconduct cost U.S. businesses over $20 billion in 2021. In addition, Soltes says in Strategy Execution that corporate fines for misconduct have risen 40-fold in the U.S. over the last 20 years.

One way to mitigate financial losses related to employee misconduct is by implementing internal controls. According to Strategy Execution , internal controls are the policies and procedures designed to ensure reliable accounting information and safeguard company assets.

“Managers use internal controls to limit the opportunities employees have to expose the business to risk,” Simons says in the course.

One company that could have benefited from implementing internal controls is Volkswagen (VW). In 2015, VW whistle-blowers revealed that the company’s engineers deliberately manipulated diesel vehicles’ emissions data to make them appear more environmentally friendly.

This led to severe consequences, including regulatory penalties, expensive vehicle recalls, and legal settlements—all of which resulted in significant financial losses. By 2018, U.S. authorities had extracted $25 billion in fines, penalties, civil damages, and restitution from the company.

Had VW maintained more rigorous internal controls to ensure transparency, compliance, and proper oversight of its engineering practices, perhaps it could have detected—or even averted—the situation.

Related: What Are Business Ethics & Why Are They Important?

3. Encourages Innovation and Growth

Risk management isn’t just about avoiding negative outcomes. It can also be the catalyst that drives your organization’s innovation and growth.

“Risks may not be pleasant to think about, but they’re inevitable if you want to push your business to innovate and remain competitive,” Simons says in Strategy Execution .

According to PwC , 83 percent of companies’ business strategies focus on growth, despite risks and mixed economic signals. In Strategy Execution , Simons notes that competitive risk is a challenge you must constantly monitor and address.

“Any firm operating in a competitive market must focus its attention on changes in the external environment that could impair its ability to create value for its customers,” Simons says.

This requires incorporating boundary systems —explicit statements that define and communicate risks to avoid—to ensure internal controls don’t extinguish innovation.

“Boundary systems are essential levers in businesses to give people freedom,” Simons says. “In such circumstances, you don’t want to stifle innovation or entrepreneurial behavior by telling people how to do their jobs. And if you want to remain competitive, you’ll need to innovate and adapt.”

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Netflix is an example of how risk management can inspire innovation. In the early 2000s, the company was primarily known for its DVD-by-mail rental service. With growing competition from video rental stores, Netflix went against the grain and introduced its streaming service. This changed the market, resulting in a booming industry nearly a decade later.

Netflix’s innovation didn’t stop there. Once the steaming services market became highly competitive, the company shifted once again to gain a competitive edge. It ventured into producing original content, which ultimately helped differentiate its platform and attract additional subscribers.

By offering more freedom within internal controls, you can encourage innovation and constant growth.

4. Enhances Decision-Making

Risk management also provides a structured framework for decision-making. This can be beneficial if your business is inclined toward risks that are difficult to manage.

By pulling data from existing control systems to develop hypothetical scenarios, you can discuss and debate strategies’ efficacy before executing them.

“Interactive control systems are the formal information systems managers use to personally involve themselves in the decision activities of subordinates,” Simons says in Strategy Execution . “Decision activities that relate to and impact strategic uncertainties.”

JPMorgan Chase, one of the most prominent financial institutions in the world, is particularly susceptible to cyber risks because it compiles vast amounts of sensitive customer data . According to PwC , cybersecurity is the number one business risk on managers’ minds, with 78 percent worried about more frequent or broader cyber attacks.

Using data science techniques like machine learning algorithms enables JPMorgan Chase’s leadership not only to detect and prevent cyber attacks but address and mitigate risk.

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Start Managing Your Organization's Risk

Risk management is essential to business. While some risk is inevitable, your ability to identify and mitigate it can benefit your organization.

But you can’t plan for everything. According to the Harvard Business Review , some risks are so remote that no one could have imagined them. Some result from a perfect storm of incidents, while others materialize rapidly and on enormous scales.

By taking an online strategy course , you can build the knowledge and skills to identify strategic risks and ensure they don’t undermine your business. For example, through an interactive learning experience, Strategy Execution enables you to draw insights from real-world business examples and better understand how to approach risk management.

Do you want to mitigate your organization’s risks? Explore Strategy Execution —one of our online strategy courses —and download our free strategy e-book to gain the insights to build a successful strategy.

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Managing Risks: A New Framework

  • Robert S. Kaplan
  • Anette Mikes

risks of business plan

Risk management is too often treated as a compliance issue that can be solved by drawing up lots of rules and making sure that all employees follow them. Many such rules, of course, are sensible and do reduce some risks that could severely damage a company. But rules-based risk management will not diminish either the likelihood or the impact of a disaster such as Deepwater Horizon, just as it did not prevent the failure of many financial institutions during the 2007–2008 credit crisis.

In this article, Robert S. Kaplan and Anette Mikes present a categorization of risk that allows executives to understand the qualitative distinctions between the types of risks that organizations face. Preventable risks, arising from within the organization, are controllable and ought to be eliminated or avoided. Examples are the risks from employees’ and managers’ unauthorized, unethical, or inappropriate actions and the risks from breakdowns in routine operational processes. Strategy risks are those a company voluntarily assumes in order to generate superior returns from its strategy. External risks arise from events outside the company and are beyond its influence or control. Sources of these risks include natural and political disasters and major macroeconomic shifts. Risk events from any category can be fatal to a company’s strategy and even to its survival.

Companies should tailor their risk management processes to these different risk categories. A rules-based approach is effective for managing preventable risks, whereas strategy risks require a fundamentally different approach based on open and explicit risk discussions. To anticipate and mitigate the impact of major external risks, companies can call on tools such as war-gaming and scenario analysis.

Smart companies match their approach to the nature of the threats they face.

Editors’ note: Since this issue of HBR went to press, JP Morgan, whose risk management practices are highlighted in this article, revealed significant trading losses at one of its units. The authors provide their commentary on this turn of events in their contribution to HBR’s Insight Center on Managing Risky Behavior.

  • Robert S. Kaplan is a senior fellow and the Marvin Bower Professor of Leadership Development emeritus at Harvard Business School. He coauthored the McKinsey Award–winning HBR article “ Accounting for Climate Change ” (November–December 2021).
  • Anette Mikes is a fellow at Hertford College, Oxford University, and an associate professor at Oxford’s Saïd Business School.

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How to Perform Business Risk Mitigation: Strategies, Types, and Best Practices

By Kate Eby | March 23, 2023

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Successful companies are always identifying, lessening, and eliminating business risks. We’ve gathered tips from industry experts on how they do this. We also provide risk assessment templates and step-by-step guidance on business risk mitigation.

Included on this page, you’ll find the main ways companies should respond to risks , best practices for business risk mitigation , a step-by-step process for performing good risk mitigation, and templates that can help guide you in assessing and dealing with business risks.

What Is Risk Mitigation?

Risks can pose a threat to a project or a business. Risk mitigation is the process of eliminating or lessening the impact of those risks. Teams can use risk mitigation in several ways to help protect a business.

Project leaders might use project risk management and mitigation to ensure the success of a specific project. Business leaders might use business risk mitigation — sometimes as part of overall enterprise risk management or enterprise risk assessment — to protect the long-term health of a company.

Why Is Risk Mitigation Important?

Risk mitigation is important because risks sometimes turn into realities. If your project team or business leaders haven’t figured out ways to deal with and lessen those risks, they can have a hugely negative impact on a project or business.

Andrew Lokenauth

“Business risk mitigation is important because it helps organizations to identify and address potential risks that could impact their operations, reputation, or bottom line,” says Andrew Lokenauth, a former finance executive with Goldman Sachs and JP Morgan, an adjunct professor at the University of San Francisco School of Management, and the founder of Fluent in Finance . “By proactively managing risks, organizations can minimize disruptions and protect their assets, stakeholders, and long-term viability.”

Here are some of the top reasons that business risk mitigation is important:

  • Maintain the Existence and Profitability of a Business: Some risks can torpedo the very existence of a business — especially if they happen when the business hasn’t prepared for them. Business leaders must identify and assess risks and figure out ways to lessen or eliminate high-priority risks.
  • Maintain a Business Reputation for Stability: Some risks, when they happen, can  damage a company’s customer relationships. Business leaders want customers to be able to trust the stability of a business. Preparing for risks helps ensure that stability. 
  • Keep Internal and External Stakeholders Happy: Both employees and external stakeholders want a business to succeed and be prepared for negative risks. Making sure your team performs good risk management — including risk mitigation — will give internal and external stakeholders confidence that the business is ready for any negative events.

Erika Andresen

  • Keep Your Staff and Others Safe: The mitigation measures you need for weather events will also protect the safety of your staff and others. Mitigation measures against problems such as fire damage can also protect staff and customers. 
  • Avoid Negative Societal and Economic Impacts: In some cases, risks to your organization can have large societal and economic impacts. Examples include risks to the operations of utilities, government agencies, or internet companies. Perform solid risk mitigation to prevent these negative risks or lessen their impact.
  • Know That No One Else Will Do It for You: Many people believe that certain risks just won’t happen or that some government agency or other group is monitoring the situation and will assist if there is a problem. That is often not true. “This is typical of most Americans — not even just business heads or business leaders — that you don’t think it’s gonna happen to you,” says Andresen. “You think if it does happen, it's not going to be that bad, and that you're going to get help from somewhere else. And all of those things are patently false.”

What Are the Types of Risk Mitigation?

When people talk about the types of risk mitigation, what they’re often referring to are types of risk responses or risk response strategies. Risk mitigation is one possible risk response, but it is not the only one.

Another important thing to remember is that not all risks are negative. There are positive risks — or opportunities — that can happen for your business as well. Experts have outlined five primary ways to respond to negative risks and five primary ways to respond to positive risks, both of which are important to the long-term health of a company.

These are the five primary risk response strategies for dealing with negative risks:

Luis Contreras

  • Mitigate: Risk mitigation involves taking steps to reduce the likelihood or impact of a risk. 
  • Transfer: Leaders can choose to transfer a risk to another entity. Buying insurance is a good example of transferring risk. You still take steps to prevent fires at your property, but when you buy fire insurance, the insurance company assumes much of the financial risk if a fire happens.
  • Accept: In some cases, it is simply not possible or economically feasible to avoid or mitigate risk. Leaders might choose to accept certain risks that are too costly to try to affect or that are unlikely to happen.“It may not be possible or practical to avoid or reduce a risk,” Lokenauth says. “In these cases, organizations may choose to accept the risk and manage it as it arises.”
  • Escalate: In project risk management — though not often in business risk mitigation — leaders choose to escalate certain risks. This response involves providing information on the risk to top organizational leadership, so they can make a decision. This is usually the response to a significant risk that would require significant costs to mitigate.

These are the five primary risk response strategies for positive risks:

  • Share:   If your company chooses to share a positive risk, that means it will work with another company or entity to take advantage of an opportunity. Sharing positive risk can increase the likelihood and impact of opportunities. However, they also require that the company split the resulting benefits. 
  • Exploit: When a company chooses to exploit a positive risk, it devotes special attention and resources to making sure an event happens.
  • Enhance:  Companies can enhance positive risks by improving the likelihood that it will happen. This is different from exploiting a risk, because the possibility still exists that the opportunity will never arise. 
  • Accept: If your company understands that a positive risk might happen, it might prepare to act on it without investing resources to try to increase the chances that it will happen.
  • Escalate: As with escalating negative risks, your team can escalate positive risks to company leadership to make decisions about which strategy to implement. This is common when teams identify opportunities that could have enormous benefit to the company but might take a large investment to enhance or exploit.

You can learn much more about risk assessments, and the primary ways that project managers and organizations can respond to both negative and positive risks, in this essential guide to project risk assessments .

Risk Mitigation Strategies

Businesses use a number of strategies to help them respond to business risks. These can include overall risk and contingency planning, as well as tactical moves, such as hiring a risk manager or outside risk management consultant.

Here are some overall risk response strategies teams can use:

  • Risk Management Planning: Teams will very often produce a risk management plan for individual projects, but they can also create a risk management plan for an entire enterprise. This plan should describe how your team plans to identify, assess, respond to, and mitigate risks to the organization. You can learn much more about risk management plans and planning and can download risk management plan templates .
  • Contingency Planning: Contingency planning is usually a part of project risk management, but teams can create contingency plans for their entire organization. Contingency plans include specific actions your team will take if a risk actually happens. The contingency plan might include extra funds or extra staff to respond to a risk.
  • Business Continuity Planning: Business continuity planning is the most common risk response strategy that organizations use to deal with risks to the entire enterprise. For specific projects, organizations will more often use strategies such as contingency planning and project risk management planning. The goals of business continuity planning are to identify important risks to the organization and make plans for what the organization will do to lessen or eliminate those risks.

You can learn much more about business continuity plans . You can also download business continuity plan templates .

  • Setting Aside Contingency Reserves: These are funds an organization sets aside to help it deal with and mitigate important risks if they happen.
  • Employing a Risk Manager: Many organizations choose to employ a full-time risk manager to oversee the organization’s entire risk management program. This role may involve helping with project risk management, or overseeing the more general management of risk and compliance across an organization.
  • Contracting with Outside Consultancies: Many organizations contract with outside risk experts to help with risk assessments and business continuity planning.
  • Employee Training: Forward-thinking organizations also conduct employee training and drills to bolster their contingency and risk mitigation plans. The training helps employees understand what they should be doing if a risk happens. You can learn more about such training and drills as part of contingency plans. 
  • Product Testing: For software and technology companies especially, it’s important to do product testing throughout the development of a product. That testing will lower the risk that your organization will have to spend extra money to fix problems or to repeat development work.
  • Following Information Security Best Practices: Information security issues are a huge risk for many organizations. Most organizations understand the importance of good information security practices, such as implementing strict password policies and two-factor authentication requirements.

Risk Mitigation Best Practices

Experts recommend following certain best practices for business risk mitigation. Some best practices include being proactive in identifying and assessing risks and making management policies clear to all stakeholders.

Here are some important best practices for business risk mitigation:

  • Create a Strong Culture of Risk Management: It’s important that your organization and its leaders understand the importance of investing in solid risk management. Avoid the temptation to believe that risk management is not important or necessary. “Humans want to avoid risks, so we want to even avoid the discussion of risks,” Contreras says. “Good risk management forces you to have those discussions. You have to face them and look them in the eye, then make some decisions on how you're going to handle them. Don't let it fall by the wayside.”
  • Involve Stakeholders: Make sure you communicate with and involve stakeholders in your risk management work. That means asking for their input as you identify and assess risks.
  • Create a Clear and Transparent Risk Management Framework and Policy: Your organization should outline the basics of its risk management program in a risk management policy. Everyone in your organization should have access to and understand that policy. “A risk management policy should outline the organization's approach to risk management, including the roles and responsibilities of different stakeholders; the processes for identifying, analyzing, and responding to risks; and the methods for monitoring and reviewing the effectiveness of risk management efforts,” Lokenauth says.
  • Be Proactive: It is vital for any organization to be proactive and aggressive in identifying and planning for risks. Lokenauth recalls a time when he worked for a large company in New York that wasn’t prepared for all risks. When Hurricane Sandy hit in October 2012, the firm had no place for its employees to work. “We were home for a week or two getting paid, and we weren't doing any work,” he says. “Things weren't getting done. It took them about a week or two to send us laptops. And then it took another week to try to figure out where to put us, to rent some space in Jersey City. If they had a plan in place for a thing like that, it would have been better. “It's important to be proactive about identifying and addressing potential risks rather than waiting for them to occur,” he says. Contreras adds that a business leader’s perspectives on risks can affect how an entire company approaches risk — either to the company’s benefit or to their detriment. “Small and medium-sized businesses are usually led by one big leader,” he says. “That leader’s perspective can really sway the business — and maybe not in a good way. The leader might be super optimistic, always thinking, ‘Yeah, we can do this.’ But the leadership team really needs to look at things and ask, ‘What if it doesn’t go?’ What would be the downside here? What are the things that can go wrong?’ So you want to get people in a room and start thinking negatively. ‘What are the things that can go wrong? And what can we do about them? What can we do to mitigate them?’”
  • Be Comprehensive: It’s important that your organization thinks about risks in all areas. Avoid focusing only on what leaders think might be the most obvious areas for risk. “It's important to develop a comprehensive risk management plan rather than focusing on individual risks in isolation,” Lokenauth says.
  • Conduct Employee Training or Drills: Risk mitigation isn’t finished once a company writes a contingency plan. Leaders must also train employees to perform the actions outlined in the plan. They must also determine whether that contingency plan is going to be effective by performing drills. You can learn more about training and drills in contingency planning.
  • Continuously Monitor Possible Risks: Too many organizations perform one risk assessment, then believe they are finished — sometimes for a year or two or more, experts say. However, risks are constantly changing, and organizations need to continually identify and assess new risks to avoid costly oversights. That means requiring routine risk assessments and creating a culture that is always monitoring and addressing new risks. “You want to establish policies on how you identify and monitor risks, and you want to monitor them every month,” Lokenauth says. That can be as simple as making sure your risk department works through a monthly checklist of risks that you are tracking and what’s happening with them. It also means watching for new risks or for changing circumstances around current risks, experts say.
  • Make Changes Where Needed: When your organization’s continual assessment shows that a new risk has arisen, or that an older risk is changing, it must make changes in its risk response plan. “If you grow as a company, you now have a different footprint in which you need to assess your risk,” Andresen says. “If you shrink — again, you have a different footprint. You might not need the same control measures or countermeasures, and you can put that money somewhere else.”
  • Communicate Your Risk Management Plans: It’s vital that your organization communicates often and effectively with organization leaders, employees, and other stakeholders about the organization’s risk management work.

What Is the Risk Mitigation Process?

Experts sometimes use the term risk mitigation process to describe how organizations identify, assess, and prepare to lessen or mitigate risks. More often, experts use the term risk management to describe that work.

Here are the seven basic steps of the risk management process:

  • Identify All Possible Risks: Gather a team or multiple teams to offer input on all possible risks to your organization. You might do this through formal meetings or gather input in other ways. “The first thing you would do is have every department do their risk analysis — but not in a silo,” Andresen says. “You do want them talking to each other. Because you’ll get some people being inspired by the others. You’ll get others validating the risk of others. And you get a whole operating picture of the entire company: ‘Where are we weak? Where are we strong?’” Lokenauth suggests using such options as “brainstorming sessions, risk assessments, or reviewing industry data” to identify risks. Ask everyone involved — internally and externally — to think broadly about all possible risks. Your team can use a questionnaire to assess potential risks to your organization and analyze its risk culture.
  • Analyze Risk Probability and Impact: After your team identifies all risks, it will need to assess each risk’s probability and the potential impact on your business. “You have to figure out what exactly is the most vital piece of your ability to conduct your business, then figure out the risks to that,” Andresen says. “Then you have to look at internal and external risks. What are the internal risks that you can encounter? And what are your external risks that you could potentially encounter? How do you want to solve for them? ”Contreras notes that your team can also assess the top risks for various departments within your organization, along with various kinds of risks. “If, say, it's a supplier risk, what are the top three suppliers that we should be concerned about?” he says. “And what are the top three infrastructure risks? What are the top three HR staffing risks that we have?”
  • Prioritize Risks: Once your team has studied and assessed the probability and potential impact of each risk, it must then prioritize which risks are most important to address. “As the likelihood becomes very high — let's say over 50 percent — then you decide, ‘OK, we need to do something to mitigate that,’” Contreras says. “Then the second determination would be: ‘What's the cost?’ If it’s high likelihood and high dollars, those are the ones you do want to focus on — the more likely it is to happen and the more obvious the cost impact.” For example, a risk that could cost your organization millions of dollars will take priority over a risk that would cost them thousands at most. Similarly, a risk that is almost certain to happen will take priority over a risk that has almost no chance of happening.
  • Create Response Plans: Create plans to deal with or lessen the effects of the most important risks. Your organization likely won’t have the resources to mitigate every risk your company identifies. That’s why you prioritize the most important risks to face. “The next step is to develop responses to address the important risks,” Lokenauth says. “This may involve implementing controls or safeguards to prevent the risk from occurring, transferring the risk to a third party, or accepting the risk and managing it as it arises.” Lokenauth adds that your team should consider the costs to your organization of mitigating even the high-priority risks. If mitigating a high-priority risk will be prohibitively expensive, an organization might decide to simply accept that risk, while mitigating lower-priority risks.
  • Track and Monitor Risks: Remember that business risk mitigation is an ongoing, evolving process. Continually track risks and potential changes in risk probability or impact. Contreras suggests that risk teams hold regular meetings to assess and monitor risks. “You probably should make it monthly — where you revisit the risks, and you're either changing the probability, or you're taking some out because they didn't happen, or some of them occurred,” he says. “Now, it becomes not a risk, but an issue — a problem that you have to begin to solve.”
  • Monitor Mitigation Measures: Your organization should also monitor its mitigation measures. Monitor how and whether your teams are implementing risk mitigation measures. In addition, monitor how the mitigation measures are working and what risks have already occurred.
  • Report to Organization Leaders: Regularly report to organizational leaders about ongoing risks and mitigation measures.

Example Risk Response Plan

Example Business Risk Response Plan

Download a Sample Business Risk Response Plan for  Excel | Microsoft Word

Download this completed example business risk response plan that can help your team understand how to write a risk response plan for your organization. This plan includes sample data, with components such as include risk, risk severity, description of mitigation plans for that risk, and if and how those mitigation plans are working. Use this template as a starting point, and customize it to create your own business risk response plan.

Risk Mitigation by Departments and Broad Areas

Teams can assess business risks by department, such as operations or sales. They can also assess them by broad categories, such as technical risks or compliance risks. This will help organizations avoid costly oversights during risk mitigation.

Organizations might assess risk in various departments, such as the following:

  • Human Resources

They might also assess risks in broader, thematic areas. Those areas might include:

  • Compliance Risks: There can be risks in areas where laws or government rules require certain actions and issue penalties for noncompliance.
  • Management Risks: There can be risks surrounding a company’s management, such as a key leader leaving the company.
  • Operational Risks: Risks can arise based on the operational structure of your organization, such as how it sources materials or hires staff members.
  • Overall Costs Risks: Some risks threaten to significantly increase your company’s costs to operate.
  • Reputational Risks: Some risks relate to your company’s image and reputation among customers or clients.
  • Resources Risks: There can be risks to the resources your company needs to operate.
  • Strategic Risks: Some risks involve a company’s overall business strategy.
  • Technical Risks: There can be risks related to technology your company is using or producing.

Your team might also consider doing what is called a PESTLE analysis . In this analysis, your team considers the overall business environment and potential risk in six areas: political, economic, social, technological, environmental, and legal. 

Tip: You might see this type of analysis written as a PESTEL analysis . Both acronyms indicate the same six areas but are written in a different order.

PESTLE Analysis Template

PESTLE Analysis Grid Template

Download a PESTLE Analysis Template Excel | Microsoft Word

Download this template to help guide you through a PESTLE analysis. This analysis helps your team focus on and think about risks to the business in six broad areas. Use the empty columns to list potential risks to your organization in each category and summarize your risk mitigation plan.

Risk Mitigation Tools

A variety of tools are available to help your team assess and mitigate risks. These include risk management plans and assessments. Many companies also use risk assessment frameworks (RAFs), which specifically measure IT risks.

These are some tools that can help all companies with risk management and risk mitigation:

  • Risk Assessment Matrix: A risk assessment matrix can help your team calibrate risks based on probability and likelihood.
  • SWOT Analysis: A SWOT analysis can help your team analyze threats to your organization, along with strengths, weaknesses, and opportunities.
  • Root Cause Analysis: A root cause analysis can help your team determine the root cause of an issue or problem affecting your company. 
  • Business Impact Analysis: A business impact analysis is a process that teams work through to assess the possible effects of major interruptions to an organization’s operations. Most often, these potential interruptions are events such as natural disasters, major accidents, or other emergencies.

These are some common RAFs that IT experts use:

  • Factor Analysis of Information Risk (FAIR)
  • Committee of Sponsoring Organizations of the Treadway Commission (COSA) Risk Management Framework
  • Control Objectives for Information Technologies (COBIT) from the Information Systems Audit and Control Association
  • Operationally Critical Threat, Asset, and Vulnerability Evaluation (OCTAVE) Framework from Carnegie Mellon University
  • Risk Management Framework from the National Institute of Standards and Technology (NIST)
  • Threat Agent Risk Assessment (TARA), created by Intel

Risk Mitigation vs. Contingency

A risk mitigation plan might include a contingency reserve or contingency. While the risk mitigation plan includes many elements, the contingency is simply a reserve of funds, time, or other resources that can help mitigate certain risks.

Risk Mitigation vs. Risk Management

Risk mitigation is one part of the entire risk management process. When your organization performs risk management, it will perform risk assessments that might call for risk mitigation.

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  • Environmental regulations
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3. Financial Risk

  • Carrying insurance to cover any unexpected accidents or disasters at your small business
  • Setting aside an emergency fund
  • Having an exit strategy for investments your business makes
  • Keeping debt to a minimum

4. Operational Risk

  • Failures in technology
  • Changes in laws and regulations
  • Loan payments

5. Reputational Risk

  • Data breaches
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  • Negative social media posts
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6. Global Risk

7. competitive risk.

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Business Plan 101: Critical Risks and Problems

risks of business plan

When starting a business, it is understood that there are risks and problems associated with development. The business plan should contain some assumptions about these factors. If your investors discover some unstated negative factors associated with your company or its product, then this can cause some serious questions about the credibility of your company and question the monetary investment. If you are up front about identifying and discussing the risks that the company is undertaking, then this demonstrates the experience and skill of the management team and increase the credibility that you have with your investors.  It is never a good idea to try to hide any information that you have in terms of risks and problems.

Identifying the problems and risks that must be dealt with during the development and growth of the company is expected in the business plan. These risks may include any risk related to the industry, risk related to the company, and risk related to its employees. The company should also take into consideration the market appeal of the company, the timing of the product or development, and how the financing of the initial operations is going to occur. Some things that you may want to discuss in your plan includes: how cutting costs can affect you, any unfavorable industry trends, sales projections that do not meet the target, costs exceeding estimates, and other potential risks and problems.  The list should be tailored to your company and product. It is a good idea to include an idea of how you will react to these problems so your investors see that you have a plan.

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How to Make a Risk Management Plan (Template Included)

ProjectManager

You identify them, record them, monitor them and plan for them: risks are an inherent part of every project. Some project risks are bound to become problem areas—like executing a project over the holidays and having to plan the project timeline around them. But there are many risks within any given project that, without risk assessment and risk mitigation strategies, can come as unwelcome surprises to you and your project management team.

That’s where a risk management plan comes in—to help mitigate risks before they become problems. But first, what is project risk management ?

What Is Risk Management?

Risk management is an arm of project management that deals with managing potential project risks. Managing your risks is arguably one of the most important aspects of project management.

The risk management process has these main steps:

  • Risk Identification: The first step to manage project risks is to identify them. You’ll need to use data sources such as information from past projects or subject matter experts’ opinions to estimate all the potential risks that can impact your project.
  • Risk Assessment: Once you have identified your project risks, you’ll need to prioritize them by looking at their likelihood and level of impact.
  • Risk Mitigation: Now it’s time to create a contingency plan with risk mitigation actions to manage your project risks. You also need to define which team members will be risk owners, responsible for monitoring and controlling risks.
  • Risk Monitoring: Risks must be monitored throughout the project life cycle so that they can be controlled.

If one risk that’s passed your threshold has its conditions met, it can put your entire project plan in jeopardy. There isn’t usually just one risk per project, either; there are many risk categories that require assessment and discussion with your stakeholders.

That’s why risk management needs to be both a proactive and reactive process that is constant throughout the project life cycle. Now let’s define what a risk management plan is.

What Is a Risk Management Plan?

A risk management plan defines how your project’s risk management process will be executed. That includes the budget , tools and approaches that will be used to perform risk identification, assessment, mitigation and monitoring activities.

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Risk Management Plan Template

Use this free Risk Management Plan Template for Word to manage your projects better.

A risk management plan usually includes:

  • Methodology: Define the tools and approaches that will be used to perform risk management activities such as risk assessment, risk analysis and risk mitigation strategies.
  • Risk Register: A risk register is a chart where you can document all the risk identification information of your project.
  • Risk Breakdown Structure: It’s a chart that allows you to identify risk categories and the hierarchical structure of project risks.
  • Risk Assessment Matrix: A risk assessment matrix allows you to analyze the likelihood and the impact of project risks so you can prioritize them.
  • Risk Response Plan: A risk response plan is a project management document that explains the risk mitigation strategies that will be employed to manage your project risks.
  • Roles and responsibilities: The risk management team members have responsibilities as risk owners. They need to monitor project risks and supervise their risk response actions.
  • Budget: Have a section where you identify the funds required to perform your risk management activities.
  • Timing: Include a section to define the schedule for the risk management activities.

How to Make a Risk Management Plan

For every web design and development project, construction project or product design, there will be risks. That’s truly just the nature of project management. But that’s also why it’s always best to get ahead of them as much as possible by developing a risk management plan. The steps to make a risk management plan are outlined below.

1. Risk Identification

Risk identification occurs at the beginning of the project planning phase, as well as throughout the project life cycle. While many risks are considered “known risks,” others might require additional research to discover.

You can create a risk breakdown structure to identify all your project risks and classify them into risk categories. You can do this by interviewing all project stakeholders and industry experts. Many project risks can be divided up into risk categories, like technical or organizational, and listed out by specific sub-categories like technology, interfaces, performance, logistics, budget, etc. Additionally, create a risk register that you can share with everyone you interviewed for a centralized location of all known risks revealed during the identification phase.

You can conveniently create a risk register for your project using online project management software. For example, use the list view on ProjectManager to capture all project risks, add what level of priority they are and assign a team member to own identify and resolve them. Better than to-do list apps, you can attach files, tags and monitor progress. Track the percentage complete and even view your risks from the project menu. Keep risks from derailing your project by signing up for a free trial of ProjectManager.

Risk management feature in ProjectManager

2. Risk Assessment

In this next phase, you’ll review the qualitative and quantitative impact of the risk—like the likelihood of the risk occurring versus the impact it would have on your project—and map that out into a risk assessment matrix

First, you’ll do this by assigning the risk likelihood a score from low probability to high probability. Then, you’ll map out your risk impact from low to medium to high and assign each a score. This will give you an idea of how likely the risk is to impact the success of the project, as well as how urgent the response will need to be.

To make it efficient for all risk management team members and project stakeholders to understand the risk assessment matrix, assign an overall risk score by multiplying your impact level score with your risk probability score.

3. Create a Risk Response Plan

A risk response is the action plan that is taken to mitigate project risks when they occur. The risk response plan includes the risk mitigation strategies that you’ll execute to mitigate the impact of risks in your project. Doing this usually comes with a price—at the expense of your time, or your budget. So you’ll want to allocate resources, time and money for your risk management needs prior to creating your risk management plan.

4. Assign Risk Owners

Additionally, you’ll also want to assign a risk owner to each project risk. Those risk owners become accountable for monitoring the risks that are assigned to them and supervising the execution of the risk response if needed.

Related: Risk Tracking Template

When you create your risk register and risk assessment matrix, list out the risk owners, that way no one is confused as to who will need to implement the risk response strategies once the project risks occur, and each risk owner can take immediate action.

Be sure to record what the exact risk response is for each project risk with a risk register and have your risk response plan it approved by all stakeholders before implementation. That way you can have a record of the issue and the resolution to review once the entire project is finalized.

5. Understand Your Triggers

This can happen with or without a risk already having impacted your project—especially during project milestones as a means of reviewing project progress. If they have, consider reclassifying those existing risks.

Even if those triggers haven’t been met, it’s best to come up with a backup plan as the project progresses—maybe the conditions for a certain risk won’t exist after a certain point has been reached in the project.

6. Make a Backup Plan

Consider your risk register and risk assessment matrix a living document. Your project risks can change in classification at any point during your project, and because of that, it’s important you come up with a contingency plan as part of your process.

Contingency planning includes discovering new risks during project milestones and reevaluating existing risks to see if any conditions for those risks have been met. Any reclassification of a risk means adjusting your contingency plan just a little bit.

7. Measure Your Risk Threshold

Measuring your risk threshold is all about discovering which risk is too high and consulting with your project stakeholders to consider whether or not it’s worth it to continue the project—worth it whether in time, money or scope .

Here’s how the risk threshold is typically determined: consider your risks that have a score of “very high”, or more than a few “high” scores, and consult with your leadership team and project stakeholders to determine if the project itself may be at risk of failure. Project risks that require additional consultation are risks that have passed the risk threshold.

To keep a close eye on risk as they raise issues in your project, use project management software. ProjectManager has real-time dashboards that are embedded in our tool, unlike other software where you have to build them yourself. We automatically calculate the health of your project, checking if you’re on time or running behind. Get a high-level view of how much you’re spending, progress and more. The quicker you identify risk, the faster you can resolve it.

Free Risk Management Plan Template

This free risk management plan template will help you prepare your team for any risks inherent in your project. This Word document includes sections for your risk management methodology, risk register, risk breakdown structure and more. It’s so thorough, you’re sure to be ready for whatever comes your way. Download your template today.

risks of business plan

Best Practices for Maintaining Your Risk Management Plan

Risk management plans only fail in a few ways: incrementally because of insufficient budget, via modeling errors or by ignoring your risks outright.

Your risk management plan is one that is constantly evolving throughout the course of the project life cycle, from beginning to end. So the best practices are to focus on the monitoring phase of the risk management plan. Continue to evaluate and reevaluate your risks and their scores, and address risks at every project milestone.

Project dashboards and other risk tracking features can be a lifesaver when it comes to maintaining your risk management plan. Watch the video below to see just how important project management dashboards, live data and project reports can be when it comes to keeping your projects on track and on budget.

In addition to your routine risk monitoring, at each milestone, conduct another round of interviews with the same checklist you used at the beginning of the project, and re-interview project stakeholders, risk management team members, customers (if applicable) and industry experts.

Record their answers, adjust your risk register and risk assessment matrix if necessary, and report all relevant updates of your risk management plan to key project stakeholders. This process and level of transparency will help you to identify any new risks to be assessed and will let you know if any previous risks have expired.

How ProjectManager Can Help With Your Risk Management Plan

A risk management plan is only as good as the risk management features you have to implement and track them. ProjectManager is online project management software that lets you view risks directly in the project menu. You can tag risks as open or closed and even make a risk matrix directly in the software. You get visibility into risks and can track them in real time, sharing and viewing the risk history.

Risk management popup in ProjectManager

Tracking & Monitor Risks in Real Time

Managing risk is only the start. You must also monitor risk and track it from the point that you first identified it. Real-time dashboards give you a high-level view of slippage, workload, cost and more. Customizable reports can be shared with stakeholders and filtered to show only what they need to see. Risk tracking has never been easier.

Screenshot of the project status report in ProjectManager, ideal for risk management

Risks are bound to happen no matter the project. But if you have the right tools to better navigate the risk management planning process, you can better mitigate errors. ProjectManager is online project management software that updates in real time, giving you all the latest information on your risks, issues and changes. Start a free 30-day trial and start managing your risks better.

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FACT SHEET: President   Biden Takes Action to Protect American Workers and Businesses from China’s Unfair Trade   Practices

President Biden’s economic plan is supporting investments and creating good jobs in key sectors that are vital for America’s economic future and national security. China’s unfair trade practices concerning technology transfer, intellectual property, and innovation are threatening American businesses and workers. China is also flooding global markets with artificially low-priced exports. In response to China’s unfair trade practices and to counteract the resulting harms, today, President Biden is directing his Trade Representative to increase tariffs under Section 301 of the Trade Act of 1974 on $18 billion of imports from China to protect American workers and businesses.   The Biden-Harris Administration’s Investing in America agenda has already catalyzed more than $860 billion in business investments through smart, public incentives in industries of the future like electric vehicles (EVs), clean energy, and semiconductors. With support from the Bipartisan Infrastructure Law, CHIPS and Science Act, and Inflation Reduction Act, these investments are creating new American jobs in manufacturing and clean energy and helping communities that have been left behind make a comeback.   As President Biden says, American workers and businesses can outcompete anyone—as long as they have fair competition. But for too long, China’s government has used unfair, non-market practices. China’s forced technology transfers and intellectual property theft have contributed to its control of 70, 80, and even 90 percent of global production for the critical inputs necessary for our technologies, infrastructure, energy, and health care—creating unacceptable risks to America’s supply chains and economic security. Furthermore, these same non-market policies and practices contribute to China’s growing overcapacity and export surges that threaten to significantly harm American workers, businesses, and communities.   Today’s actions to counter China’s unfair trade practices are carefully targeted at strategic sectors—the same sectors where the United States is making historic investments under President Biden to create and sustain good-paying jobs—unlike recent proposals by Congressional Republicans that would threaten jobs and raise costs across the board. The previous administration’s trade deal with China  failed  to increase American exports or boost American manufacturing as it had promised. Under President Biden’s Investing in America agenda, nearly 800,000 manufacturing jobs have been created and new factory construction has doubled after both fell under the previous administration, and the trade deficit with China is the lowest in a decade—lower than any year under the last administration.   We will continue to work with our partners around the world to strengthen cooperation to address shared concerns about China’s unfair practices—rather than undermining our alliances or applying indiscriminate 10 percent tariffs that raise prices on all imports from all countries, regardless whether they are engaged in unfair trade. The Biden-Harris Administration recognizes the benefits for our workers and businesses from strong alliances and a rules-based international trade system based on fair competition.   Following an in-depth review by the United States Trade Representative, President Biden is taking action to protect American workers and American companies from China’s unfair trade practices. To encourage China to eliminate its unfair trade practices regarding technology transfer, intellectual property, and innovation, the President is directing increases in tariffs across strategic sectors such as steel and aluminum, semiconductors, electric vehicles, batteries, critical minerals, solar cells, ship-to-shore cranes, and medical products.   Steel and Aluminum   The tariff rate on certain steel and aluminum products under Section 301 will increase from 0–7.5% to 25% in 2024.   Steel is a vital sector for the American economy, and American companies are leading the future of clean steel. Recently, the Biden-Harris Administration announced $6 billion for 33 clean manufacturing projects including for steel and aluminum, including the first new primary aluminum smelter in four decades, made possible by the Bipartisan Infrastructure Law and the Inflation Reduction Act. These investments will make the United States one of the first nations in the world to convert clean hydrogen into clean steel, bolstering the U.S. steel industry’s competitiveness as the world’s cleanest major steel producer.   American workers continue to face unfair competition from China’s non-market overcapacity in steel and aluminum, which are among the world’s most carbon intensive. China’s policies and subsidies for their domestic steel and aluminum industries mean high-quality, low-emissions U.S. products are undercut by artificially low-priced Chinese alternatives produced with higher emissions. Today’s actions will shield the U.S. steel and aluminum industries from China’s unfair trade practices.   Semiconductors   The tariff rate on semiconductors will increase from 25% to 50% by 2025.   China’s policies in the legacy semiconductor sector have led to growing market share and rapid capacity expansion that risks driving out investment by market-driven firms. Over the next three to five years, China is expected to account for almost half of all new capacity coming online to manufacture certain legacy semiconductor wafers. During the pandemic, disruptions to the supply chain, including legacy chips, led to price spikes in a wide variety of products, including automobiles, consumer appliances, and medical devices, underscoring the risks of overreliance on a few markets.   Through the CHIPS and Science Act, President Biden is making a nearly $53 billion investment in American semiconductor manufacturing capacity, research, innovation, and workforce. This will help counteract decades of disinvestment and offshoring that has reduced the United States’ capacity to manufacture semiconductors domestically. The CHIPS and Science Act includes $39 billion in direct incentives to build, modernize, and expand semiconductor manufacturing fabrication facilities as well as a 25% investment tax credit for semiconductor companies. Raising the tariff rate on semiconductors is an important initial step to promote the sustainability of these investments.   Electric Vehicles (EVs)   The tariff rate on electric vehicles under Section 301 will increase from 25% to 100% in 2024.   With extensive subsidies and non-market practices leading to substantial risks of overcapacity, China’s exports of EVs grew by 70% from 2022 to 2023—jeopardizing productive investments elsewhere. A 100% tariff rate on EVs will protect American manufacturers from China’s unfair trade practices.   This action advances President Biden’s vision of ensuring the future of the auto industry will be made in America by American workers. As part of the President’s Investing in America agenda, the Administration is incentivizing the development of a robust EV market through business tax credits for manufacturing of batteries and production of critical minerals, consumer tax credits for EV adoption, smart standards, federal investments in EV charging infrastructure, and grants to supply EV and battery manufacturing. The increase in the tariff rate on electric vehicles will protect these investments and jobs from unfairly priced Chinese imports.   Batteries, Battery Components and Parts, and Critical Minerals   The tariff rate on lithium-ion EV batteries will increase from 7.5%% to 25% in 2024, while the tariff rate on lithium-ion non-EV batteries will increase from 7.5% to 25% in 2026. The tariff rate on battery parts will increase from 7.5% to 25% in 2024.   The tariff rate on natural graphite and permanent magnets will increase from zero to 25% in 2026. The tariff rate for certain other critical minerals will increase from zero to 25% in 2024.   Despite rapid and recent progress in U.S. onshoring, China currently controls over 80 percent of certain segments of the EV battery supply chain, particularly upstream nodes such as critical minerals mining, processing, and refining. Concentration of critical minerals mining and refining capacity in China leaves our supply chains vulnerable and our national security and clean energy goals at risk. In order to improve U.S. and global resiliency in these supply chains, President Biden has invested across the U.S. battery supply chain to build a sufficient domestic industrial base. Through the Bipartisan Infrastructure Law, the Defense Production Act, and the Inflation Reduction Act, the Biden-Harris Administration has invested nearly $20 billion in grants and loans to expand domestic production capacity of advanced batteries and battery materials. The Inflation Reduction Act also contains manufacturing tax credits to incentivize investment in battery and battery material production in the United States. The President has also established the American Battery Materials Initiative, which will mobilize an all-of-government approach to secure a dependable, robust supply chain for batteries and their inputs.   Solar Cells   The tariff rate on solar cells (whether or not assembled into modules) will increase from 25% to 50% in 2024.   The tariff increase will protect against China’s policy-driven overcapacity that depresses prices and inhibits the development of solar capacity outside of China. China has used unfair practices to dominate upwards of 80 to 90% of certain parts of the global solar supply chain, and is trying to maintain that status quo. Chinese policies and nonmarket practices are flooding global markets with artificially cheap solar modules and panels, undermining investment in solar manufacturing outside of China.   The Biden-Harris Administration has made historic investments in the U.S. solar supply chain, building on early U.S. government-enabled research and development that helped create solar cell technologies. The Inflation Reduction Act provides supply-side tax incentives for solar components, including polysilicon, wafers, cells, modules, and backsheet material, as well as tax credits and grant and loan programs supporting deployment of utility-scale and residential solar energy projects. As a result of President Biden’s Investing in America agenda, solar manufacturers have already announced nearly $17 billion in planned investment under his Administration—an 8-fold increase in U.S. manufacturing capacity, enough to supply panels for millions of homes each year by 2030.   Ship-to-Shore Cranes   The tariff rate on ship-to-shore cranes will increase from 0% to 25% in 2024.   The Administration continues to deliver for the American people by rebuilding the United States’ industrial capacity to produce port cranes with trusted partners. A 25% tariff rate on ship-to-shore cranes will help protect U.S. manufacturers from China’s unfair trade practices that have led to excessive concentration in the market. Port cranes are essential pieces of infrastructure that enable the continuous movement and flow of critical goods to, from, and within the United States, and the Administration is taking action to mitigate risks that could disrupt American supply chains. This action also builds off of ongoing work to invest in U.S. port infrastructure through the President’s Investing in America Agenda. This port security initiative includes bringing port crane manufacturing capabilities back to the United States to support U.S. supply chain security and encourages ports across the country and around the world to use trusted vendors when sourcing cranes or other heavy equipment.   Medical Products   The tariff rates on syringes and needles will increase from 0% to 50% in 2024. For certain personal protective equipment (PPE), including certain respirators and face masks, the tariff rates will increase from 0–7.5% to 25% in 2024. Tariffs on rubber medical and surgical gloves will increase from 7.5% to 25% in 2026.   These tariff rate increases will help support and sustain a strong domestic industrial base for medical supplies that were essential to the COVID-19 pandemic response, and continue to be used daily in every hospital across the country to deliver essential care. The federal government and the private sector have made substantial investments to build domestic manufacturing for these and other medical products to ensure American health care workers and patients have access to critical medical products when they need them. American businesses are now struggling to compete with underpriced Chinese-made supplies dumped on the market, sometimes of such poor quality that they may raise safety concerns for health care workers and patients.   Today’s announcement reflects President Biden’s commitment to always have the back of American workers. When faced with anticompetitive, unfair practices from abroad, the President will deploy any and all tools necessary to protect American workers and industry.  

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, how often should a business plan be updated, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

risks of business plan

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A business plan is a document that details a company's goals and how it intends to achieve them. Business plans can be of benefit to both startups and well-established companies. For startups, a business plan can be essential for winning over potential lenders and investors. Established businesses can find one useful for staying on track and not losing sight of their goals. This article explains what an effective business plan needs to include and how to write one.

Key Takeaways

  • A business plan is a document describing a company's business activities and how it plans to achieve its goals.
  • Startup companies use business plans to get off the ground and attract outside investors.
  • For established companies, a business plan can help keep the executive team focused on and working toward the company's short- and long-term objectives.
  • There is no single format that a business plan must follow, but there are certain key elements that most companies will want to include.

Investopedia / Ryan Oakley

Any new business should have a business plan in place prior to beginning operations. In fact, banks and venture capital firms often want to see a business plan before they'll consider making a loan or providing capital to new businesses.

Even if a business isn't looking to raise additional money, a business plan can help it focus on its goals. A 2017 Harvard Business Review article reported that, "Entrepreneurs who write formal plans are 16% more likely to achieve viability than the otherwise identical nonplanning entrepreneurs."

Ideally, a business plan should be reviewed and updated periodically to reflect any goals that have been achieved or that may have changed. An established business that has decided to move in a new direction might create an entirely new business plan for itself.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. These include being able to think through ideas before investing too much money in them and highlighting any potential obstacles to success. A company might also share its business plan with trusted outsiders to get their objective feedback. In addition, a business plan can help keep a company's executive team on the same page about strategic action items and priorities.

Business plans, even among competitors in the same industry, are rarely identical. However, they often have some of the same basic elements, as we describe below.

While it's a good idea to provide as much detail as necessary, it's also important that a business plan be concise enough to hold a reader's attention to the end.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, it's best to fit the basic information into a 15- to 25-page document. Other crucial elements that take up a lot of space—such as applications for patents—can be referenced in the main document and attached as appendices.

These are some of the most common elements in many business plans:

  • Executive summary: This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
  • Products and services: Here, the company should describe the products and services it offers or plans to introduce. That might include details on pricing, product lifespan, and unique benefits to the consumer. Other factors that could go into this section include production and manufacturing processes, any relevant patents the company may have, as well as proprietary technology . Information about research and development (R&D) can also be included here.
  • Market analysis: A company needs to have a good handle on the current state of its industry and the existing competition. This section should explain where the company fits in, what types of customers it plans to target, and how easy or difficult it may be to take market share from incumbents.
  • Marketing strategy: This section can describe how the company plans to attract and keep customers, including any anticipated advertising and marketing campaigns. It should also describe the distribution channel or channels it will use to get its products or services to consumers.
  • Financial plans and projections: Established businesses can include financial statements, balance sheets, and other relevant financial information. New businesses can provide financial targets and estimates for the first few years. Your plan might also include any funding requests you're making.

The best business plans aren't generic ones created from easily accessed templates. A company should aim to entice readers with a plan that demonstrates its uniqueness and potential for success.

2 Types of Business Plans

Business plans can take many forms, but they are sometimes divided into two basic categories: traditional and lean startup. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

  • Traditional business plans : These plans tend to be much longer than lean startup plans and contain considerably more detail. As a result they require more work on the part of the business, but they can also be more persuasive (and reassuring) to potential investors.
  • Lean startup business plans : These use an abbreviated structure that highlights key elements. These business plans are short—as short as one page—and provide only the most basic detail. If a company wants to use this kind of plan, it should be prepared to provide more detail if an investor or a lender requests it.

Why Do Business Plans Fail?

A business plan is not a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections to begin with. Markets and the overall economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All of this calls for building some flexibility into your plan, so you can pivot to a new course if needed.

How frequently a business plan needs to be revised will depend on the nature of the business. A well-established business might want to review its plan once a year and make changes if necessary. A new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is an option when a company prefers to give a quick explanation of its business. For example, a brand-new company may feel that it doesn't have a lot of information to provide yet.

Sections can include: a value proposition ; the company's major activities and advantages; resources such as staff, intellectual property, and capital; a list of partnerships; customer segments; and revenue sources.

A business plan can be useful to companies of all kinds. But as a company grows and the world around it changes, so too should its business plan. So don't think of your business plan as carved in granite but as a living document designed to evolve with your business.

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

U.S. Small Business Administration. " Write Your Business Plan ."

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Three leadership principles for navigating organizational change.

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Chris Williams, COO, Interaction Associates , a leading provider of training & consulting services to build collaborative leadership culture.

When John F. Kennedy delivered his address in Frankfurt in 1963, less than two decades after the end of World War II, he had a message for the German people: Change was unavoidable.

“Change is the law of life,” Kennedy told the crowd. “And those who look only to the past or the present are certain to miss the future.”

This may be true. But it’s also true that many people don't like change.

It’s scary, unpredictable and disruptive.

Even though we know that progress is the product of intentional, strategic change, many of us resist it, preferring to stay comfortable rather than take risks. This is especially true at work where change, manifesting as disruption, innovation, or evolution, can be especially unpleasant.

Some worry about what change will mean for job security, established workflows and coworker relationships. Others are skeptical that “change initiatives” will produce results.

As noted in the Harvard Business Review, just 43% of employees say they are willing to support enterprise change initiatives, down from 74% in 2016. Change fatigue makes people less likely to explore new visions or pursue new directions.

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At the same time, change is happening more robustly and more frequently.

From the emergence of artificial intelligence (AI), the real-world ramifications of the “ Year of Efficiency ,” and the long-term ramifications of remote or hybrid work, it’s clear that the pre-pandemic office is gone, and new organizational dynamics are ascendant. In this environment, people need more from their leaders than the status quo.

Simply put, we live in a VUCA world where volatility, uncertainty, complexity and ambiguity are the new normal. This doesn’t have to be a bad thing. It just requires that leaders develop the skills to impactfully lead others through change.

Here are three principles that can help leaders navigate organizational change effectively.

Principle 1: Have a clear vision and plan.

Effective change starts at the top. Leaders must have a clear vision and a well-defined plan.

Just as importantly, leaders must be able to clearly articulate the reason for change. Often, change efforts provide a rational explanation but fail to address the emotional aspects of change. I've found the most effective leaders address both.

Change-ready leaders will be able to answer employees’ questions, including:

• What is happening now that merits our attention and the need for change?

• What specific changes are required in our current situation?

• What are the consequences if we do not address this problem?

• What is the burning platform?

• What is the vision of what the future looks like?

• What specific advantages or gains will result from achieving the desired future state?

• What are the emotional realities and impacts of this change?

By seeing the plan and understanding the rationale, people can be inspired to action, more comfortable with the change and more willing to embrace and support it.

Principle 2: Involve others in the change.

Change is hard. It is impossible for a single individual to enact the change in an organization. Navigating change successfully requires a team.

Many people don’t like being told what to do. By involving others, you are more likely to create engagement.

Effective leaders understand that involving others in the change process makes employees more likely to be engaged and buy in. Involvement creates and builds ownership.

Involving others also has a quick upside: the ability to not miss something important and gather input from frontline employees. This is especially useful when implementing a technical system change where the senior leader may not know the specifics. It is only by involving those doing the day-to-day details that the change requirements or process is made clear.

Some leaders struggle to involve others in the change process because they lack the shared language and framework for decision-making.

Leaders can use a simple but powerful framework called the “decision-making method.” There are two main elements:

1. Being clear on the decision to be made.

2. Deciding how much to involve others in the decision-making process.

For example, the decision to be made might be: how might we reduce our operating budget by 10%? The level of involvement might be: leader gathers input from individuals and decides . Or, if the decision is very important, it may be: consensus . If there is a safety issue or speed is paramount, the decision-making method might be: decide and announce .

This framework helps leaders consider how they can increase ownership and buy in. This is especially important in navigating organizational change as generally the more people are involved in a process or decision, the more buy-in you'll get. It provides a common language where people can ask, "How is this decision going to be made?"

Principle 3: Celebrate accomplishments.

Change efforts can often feel like a big project plan. We frequently forget the most important element of change—the people. By focusing our attention on people, we can be reminded of who we ultimately aim to serve and who we should acknowledge for their success.

As a leader, I challenge you to think about specific examples of employees, teams or divisions that are doing excellent work. How might you use this as an opportunity to acknowledge and celebrate this success?

Remember, the people make change happen at the end of the day.

One way to link these principles together is to consider:

• Do we have a clear vision and plan?

• Are there certain milestones we’ve achieved that demand recognition?

• How are we doing involving others in the change process?

• Are we seeing an increase in ownership, commitment and discretionary effort? If so, let’s acknowledge and celebrate this.

Change on purpose.

For many people, work is more than just a job. It’s where they create formative relationships, apply their creativity and find a sense of purpose and accomplishment.

Organizational change can disrupt that dynamic. That doesn’t mean it has to be chaotic or ineffective.

When leaders are visionary yet empathetic, well-prepared yet adaptable, and involved and involving others, they can transform potential disruptions into opportunities for growth, innovation and positive change.

Change isn’t ultimately about organizational priorities. It’s about catalyzing people around a shared vision. It’s people first, and that’s where the real power comes from.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?

Chris Williams

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AI companies make fresh safety promise at Seoul summit, nations agree to align work on risks

World leaders are expected to adopt a new agreement on artificial intelligence when they gather virtually on Tuesday to discuss AI’s potential risks but also ways to promote its benefits and innovation. The AI Seoul Summit is a follow-up to November’s inaugural AI Safety Summit at Bletchley Park in the United Kingdom, where participating countries agreed to work together to contain the potentially “catastrophic” risks posed by galloping advances in AI.

A screen shows an announcement of the AI Seoul Summit in Seoul, South Korea, Tuesday, May 21, 2024. World leaders are expected to adopt a new agreement on artificial intelligence when they gather virtually Tuesday to discuss AI’s potential risks but also ways to promote its benefits and innovation. (AP Photo/Ahn Young-joon)

A screen shows an announcement of the AI Seoul Summit in Seoul, South Korea, Tuesday, May 21, 2024. World leaders are expected to adopt a new agreement on artificial intelligence when they gather virtually Tuesday to discuss AI’s potential risks but also ways to promote its benefits and innovation. (AP Photo/Ahn Young-joon)

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FILE - Britain’s Prime Minister Rishi Sunk, center, speaks during a plenary session at the AI Safety Summit at Bletchley Park in Milton Keynes, England, on Nov. 2, 2023. South Korea is set to host a mini-summit this week on risks and regulation of artificial intelligence, following up on an inaugural AI safety meeting in Britain in 2023 that drew a diverse crowd of tech luminaries, researchers and officials. (AP Photo/Alastair Grant, Pool, File)

SEOUL, South Korea (AP) — Leading artificial intelligence companies made a fresh pledge at a mini-summit Tuesday to develop AI safely, while world leaders agreed to build a network of publicly backed safety institutes to advance research and testing of the technology.

Google, Meta and OpenAI were among the companies that made voluntary safety commitments at the AI Seoul Summit , including pulling the plug on their cutting-edge systems if they can’t rein in the most extreme risks.

The two-day meeting is a follow-up to November’s AI Safety Summit at Bletchley Park in the United Kingdom, and comes amid a flurry of efforts by governments and global bodies to design guardrails for the technology amid fears about the potential risk it poses both to everyday life and to humanity.

Leaders from 10 countries and the European Union will “forge a common understanding of AI safety and align their work on AI research,” the British government, which co-hosted the event, said in a statement. The network of safety institutes will include those already set up by the U.K., U.S., Japan and Singapore since the Bletchley meeting, it said.

U.N. Secretary-General Antonio Guterres told the opening session that seven months after the Bletchley meeting, “We are seeing life-changing technological advances and life-threatening new risks — from disinformation to mass surveillance to the prospect of lethal autonomous weapons.”

FILE - Alphabet CEO Sundar Pichai speaks at a Google I/O event in Mountain View, Calif., May 14, 2024. Bloopers — some funny, others disturbing — have been shared on social media since Google unleashed a makeover of its search page that frequently puts AI-generated summaries on top of search results. (AP Photo/Jeff Chiu, File)

The U.N. chief said in a video address that there needs to be universal guardrails and regular dialogue on AI. “We cannot sleepwalk into a dystopian future where the power of AI is controlled by a few people — or worse, by algorithms beyond human understanding,” he said.

The 16 AI companies that signed up for the safety commitments also include Amazon, Microsoft, Samsung, IBM, xAI, France’s Mistral AI , China’s Zhipu.ai, and G42 of the United Arab Emirates . They vowed to ensure the safety of their most advanced AI models with promises of accountable governance and public transparency.

It’s not the first time that AI companies have made lofty-sounding but non-binding safety commitments. Amazon, Google, Meta and Microsoft were among a group that signed up last year to voluntary safeguards brokered by the White House to ensure their products are safe before releasing them.

The Seoul meeting comes as some of those companies roll out the latest versions of their AI models .

The safety pledge includes publishing frameworks setting out how the companies will measure the risks of their models. In extreme cases where risks are severe and “intolerable,” AI companies will have to hit the kill switch and stop developing or deploying their models and systems if they can’t mitigate the risks.

Since the U.K. meeting last year, the AI industry has “increasingly focused on the most pressing concerns, including mis- and dis- information, data security, bias and keeping humans in the loop,” said Aiden Gomez CEO of Cohere, one of the AI companies that signed the pact. “It is essential that we continue to consider all possible risks, while prioritizing our efforts on those most likely to create problems if not properly addressed.”

Governments around the world have been scrambling to formulate regulations for AI even as the technology makes rapid advances and is poised to transform many aspects of daily life, from education and the workplace to copyrights and privacy. There are concerns that advances in AI could eliminate jobs, spread disinformation or be used to create new bioweapons.

This week’s meeting is just one of a slew of efforts on AI governance. The U.N. General Assembly has approved its first resolution on the safe use of AI systems, while the U.S. and China recently held their first high-level talks on AI and the European Union’s world-first AI Act is set to take effect later this year.

Chan contributed to this report from London. Associated Press writer Edith M. Lederer contributed from the United Nations.

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