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What is Operating Risk?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 September 2016
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Sometimes referred to as operational or business risk, operating risk is the basic or fundamental potential for failure that is associated with the ongoing function of any type of business entity. This type of fundamental risk is somewhat broad in scope, since it includes just about any potential factor or event that could undermine the function and profitability of the business. It is important to note that while the potential for financial issues is part of operating risk, finances are only one of many possible issues with the potential to cause a business to fail.

The idea of operational risk often focuses on the way that a business operates one a day to day basis. Factors like the way that the business is structured, how different departments or divisions communicate with one another, and the internal efficiency of each department are often considered areas where some degree of operating risk exist. The idea is that if all components of the business model do not work in harmony, the potential for loss is increased, which in turn means the degree of business risk is also higher.

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While businesses associated with different industries may identify any number of factors that constitute some type of operating risk, there are a few that tend to apply in just about every business setting. One common potential risk is the incidence of internal fraud. In the event that one or more officers or employees within the firm choose to mishandle assets in their care, attempt to engage in creative bookkeeping in order to create a more favorable perception among shareholders, or sell client lists to competitors, the damage may be so extensive that recovery is not possible. For this reason, many businesses implement procedures that help to minimize the risk of fraud and protect the company from this type of financial collapse.

Another common type of operating risk is theft and destruction of company property. Replacement of everything from office supplies to heavy equipment places an additional burden on the company. Along with the financial burden, there is also the possibility of losing customers when the business is unable to deliver services or goods in an efficient manner, due to the theft or damage.

The production of low quality goods and services is also a common operating risk for many businesses. Attempting to retain customers while manufacturing products using inferior raw materials presents a very real risk of undermining the good reputation of the company, as well as causing some customers to leave and never return. At the same time, activity of this type also increases the chances that former customers will share their unhappy experiences with other consumers, making it harder for the business to generate new business. In order to safeguard against this type of risk, many companies implement quality control procedures as a means of making sure each product sold is well within the standards of the business, and is highly likely to satisfy customer needs.

Failing to identify and deal with operating risk has been the cause for many businesses to fail. Taking the time to identify risk factors, no matter how remote they may seem, makes it possible to create processes and procedures that further minimize the potential for significant risk. For companies that operate in competitive markets, the need to properly assess and deal with risks of this type is especially important, since there is always another company that is ready and able to benefit from the failure of a competitor.

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