7.2 Types of Risks
Risks can be broadly categorized into financial, operational, and strategic risks. Each type of risk poses different challenges and requires specific strategies for management.
Financial Risks
Financial risks are associated with the financial operations of a company. They include:
Market Risk: The risk of losses due to changes in market conditions, such as interest rates, currency exchange rates, and commodity prices.
Credit Risk: The risk of financial loss due to a borrower’s failure to repay a loan or meet contractual obligations.
Liquidity Risk: The risk that a company will not be able to meet its short-term financial obligations due to insufficient cash flow.
Operational Risks
Operational risks arise from the day-to-day operations of a company. They include:
Process Risk: Risks related to the failure of internal processes, such as production errors or supply chain disruptions.
People Risk: Risks associated with human resources, including employee errors, fraud, or turnover.
Technology Risk: Risks related to the failure or breach of information systems, such as cyber-attacks or software malfunctions.
Strategic Risks
Strategic risks are associated with the company’s long-term goals and objectives. They include:
Competitive Risk: The risk of losing market share to competitors due to changes in the competitive landscape.
Reputational Risk: The risk of damage to the company’s reputation due to negative publicity or unethical behavior.
Regulatory Risk: The risk of changes in laws or regulations that could impact the company’s operations or profitability.