when a company experiences a high degree of business risk it may impair its ability to provide investors and stakeholders with adequate returns for example the chief executive officer ceo of a company may make certain decisions that affect its profits or the ceo may not accurately anticipate certain events in the future causing the business to incur losses or fail 
business risk is influenced by a number of different factors including a company with a higher amount of business risk may decide to adopt a capital structure with a lower debt ratio to ensure that it can meet its financial obligations at all times with a low debt ratio when revenues drop the company may not be able to service its debt and this may lead to bankruptcy on the other hand when revenues increase a company with a low debt ratio experiences larger profits and is able to keep up with its obligations to calculate risk analysts use four ratios contribution margin operation leverage effect financial leverage effect and total leverage effect for more complex calculations analysts can incorporate statistical methods business risk usually occurs in one of four ways strategic risk compliance risk operational risk and reputational risk types of business riskstrategic risk arises when a business does not operate according to its business model or plan when a company does not operate according to its business model its strategy becomes less effective over time and the company may struggle to reach its defined goals for example imagine abc store is a big box store that strategically positions itself as a low cost provider for working class shoppers its main competitor is xyz store which is seen as a destination for more middle class consumers however if xyz decides to undercut abc s prices this becomes a strategic risk for abc the second form of business risk is compliance risk sometimes known as regulatory risk compliance risk primarily arises in industries and sectors that are highly regulated for example in the wine industry there is a three tier system of distribution that requires wholesalers in the united states to sell wine to a retailer which then sells it to consumers this system prohibits wineries from selling their products directly to retail stores in some states 1however many u s states do not have this type of distribution system compliance risk arises when a brand fails to understand the individual requirements of the state in which it is operating in this situation a brand risks becoming noncompliant with state specific distribution laws and may face fines or other legal action 12the third type of business risk is operational risk this risk arises from within the corporation especially when the day to day operations of a company fail to perform for example in 2012 the multinational bank hsbc faced a high degree of operational risk and as a result incurred a large fine from the u s department of justice when its internal anti money laundering aml operations team was unable to adequately stop money laundering in mexico 3anytime a company s reputation is ruined either by an event that was the result of a previous business risk or by a different occurrence it runs the risk of losing customers and its brand loyalty suffering the reputation of hsbc faltered in the aftermath of the fine it was levied for poor anti money laundering practices reducing business riskbusiness risk cannot be entirely avoided because it is unpredictable however there are many strategies that businesses employ to cut back the impact of all types of business risk including strategic compliance operational and reputational risk the first step that brands typically take is to identify all sources of risk in their business plan these aren t just external risks they may also come from within the business itself taking action to cut back the risks as soon as they present themselves is key management should come up with a plan to deal with any identifiable risks before they become too great finally most companies adopt a risk management strategy this can be done either before the business begins operations or after it experiences a setback ideally a risk management strategy will help the company be better prepared to deal with risks as they present themselves the plan should have tested ideas and procedures in place in case risk presents itself once the management of a company has come up with a plan to deal with the risk it s important that they take the extra step of documenting everything in case the same situation arises again after all business risk isn t static it tends to repeat itself during the business cycle by recording what led to risk the first time as well as the processes used to mitigate it the business can implement those strategies a second time with greater ease this reduces the time frame in which unaddressed risk can impact the business as well as lowering the cost of risk management 