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Risk and the risk management process

3.2 Operational Risks

 refer to potential losses that might arise in business operations

 include risks of fraud or employee malfeasance, poor quality production or lack of
inputs for production

 can be managed by internal control systems.

3.3 Categories of Risks

NB In the exam you may be required to identify risks, or types of risk, facing a
business. The risks listed below are not exhaustive but illustrate many of the typical
risks that affect a business.

 Business risk refers to the classic risks of the world of business such as
uncertainty about demand for product (Product risk.)

 The risks businesses face will vary greatly between companies and derive from
a number of different sources, including those shown below.
 Political risk Risk due to political instability

 Legal/litigation risk Risk that litigation will be brought against business

 Regulatory risk Risk of changes in regulation affecting business

 Compliance risk Risk of non-compliance with law resulting in fines,
penalties, etc.

 Strategic risk Risk that business strategies (e.g. acquisitions) will fail

 Product risk Risk of failure of new products/loss of interest in existing
products

 Commodity price Risk of a rise in commodity prices (e.g. oil)
risk
 Product reputation Risk of change in product’s reputation or image
risk

 Operational risk Risk that business operations may be inefficient or
business changes may fail
 Contractual Risk that the terms of a contract do not fully cover a
inadequacy risk business against all potential outcomes

 Market risks. Risks which derive from the sector in which the business
is operating, and from its customers.

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