CLASSIFICATION OF BUSINESS RISK

 Classification of Business Risk
Business risks are of a diverse nature. For example, risks can be classified as internal and external risks; controllable and uncontrollable risks, etc. These classifications help in risk identification and a better understanding of the interplay between the risks themselves and between objectives, strategies, processes, risks and controls during risk assessment.

Business Risks: Internal and External

Internal risks arise from events taking place within the business enterprise. Such risks arise during the ordinary course of a business. These risks can be forecasted and the probability of their occurrence can be determined. Hence, they can be controlled by management significantly. Internal factors giving rise to such risks include:

•  Human factors as strikes and lock-outs by trade unions; negligence and dishonesty of an employee; accidents or deaths in the factory, etc. 
•  Technological factors unforeseen changes in the techniques of production or distribution resulting into technological obsolescence, etc. 
•  Physical factors such as fire in the factory, damages to goods in transit, etc. 

External risks arise due to events occurring outside the business organisation. Such events are generally beyond the control of the management. Hence, determining the likelihood of the resulting risks cannot be done with accuracy.

External factors giving rise to such risks include:

•  Economic factors as price fluctuations, changes in consumer preferences, inflation, etc. 
•  Natural factors as natural calamities such as earthquake, flood, cyclone, etc. 
•  Political factors as fall or change in the Government resulting into changes in government policies and regulations, communal violence or riots, hostilities with the neighboring countries, etc.

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