Business Risks

Business risks are strategic risks that threaten the health and survival of a whole business. 

A number of factors can increase business risk and one of the purpose of the annual audit is to review the factors that might increase business risk such as the presence of any operational, financial or compliance failure that may affect the business as ‘going concern’.

Business risk varies greatly between companies and sometimes over time, and is generally thought to be greatest for young businesses or those in cyclical industries such as tourism. The banking crisis in 2008 and 2009 taught us, however, that business risk can also apply to much older and more established companies.

A typical way of considering business risk is to examine the probability of a period of poor earnings and possible failure and also to consider the potential impact of that failure, and the impact upon whom?

Importance of business risks

The stakeholders most affected by business risk depend on the situation. If the business fails altogether, the employees will be greatly affected but the shareholder loss will depend on the individual exposure (the proportion of the portfolio invested in the failing company). If the business experiences a period of poor performance, the shareholders may be more adversely affected than the employees.