What Are Risk Categories? (Types and Ways to Identify Them)
Updated September 30, 2022
Businesses, ventures, and projects typically come with some element of risk. There are ways to mitigate much of that risk. Understanding what risk is, its various categories, and how best to minimize any repercussions of risk can be a beneficial skill in many businesses and industries. In this article, we answer, "What are risk categories?", reveal why to use them, explain five ways to identify risk, and list common risk categories.
What are risk categories?
To answer the question, "What are risk categories?", it can often help to define risk. Risk is a commonly accepted part of doing business and can be a largely unpredictable situation or event. It can include any issue that might go wrong at any stage of a business, such as during the startup, planning, implementation, production, or distribution stage. Potential risks can often affect the company, its stakeholders, customers, or even the public, depending on the type of business or industry. Risks may cause issues, such as a loss of revenue, time, product or service quality, or customers.
To better identify and manage potential risks upfront, professionals often categorize them into various areas, like financial, business, technical, organizational, or health and safety risks. Some businesses, industries, or projects might be more prone to specific risk categories than others. For instance, banks or stock traders might be more susceptible to various financial risks, whereas a software or IT company might find technologically based risks affect them more often.
Why use risk categories?
When conducting business or implementing projects, it's often more beneficial to divide potential risks into various categories, based on the source, type, and area in which the potential risk occurs. This can help risk managers or other company officials identify which areas in the company or project are most affected and at risk. Often, analysts determine which category a risk might belong to by also determining its cause. For instance, if the root cause of a particular identified risk is cost-based, or affects specific budgets, a project manager might list those risks under financial risks.
Once analysts or project managers identify and label potential risks, they can further subdivide them by type within the broader category. For example, financial risks might include various market, funding, operational, commodity, or credit risks. By dividing these risks into smaller categories, it can allow a risk management team to more easily identify any underlying causes and pre-emptively address them, reducing the actual risk. Categorizing risks can have other benefits, including:
Eliminating or mitigating preventable risks
Creating an organized and targeted method for identifying potential risks
Establishing more practical risk-reduction strategies
Improving risk-finding systems, allowing for faster risk identification
Streamlining risk-monitoring practices to save time, money, and resources
Implementing specialized teams to address specific risk categories, resulting in more effective risk mitigation
Identifying potential risks and then narrowing these down to specific departments or processes that can help an organization predict future costs and budget accordingly
Identifying and separating risks into specific categories where risk management teams can mitigate or eliminate them to help ease any stakeholder or investor concerns
Assuring risk managers prioritize any legal or health and safety-related risks to meet rigid protocols and guidelines
5 ways to identify risk
Not all risks are inherently bad. For instance, positive risks often result in amazing opportunities. Negative risks, or threats, typically cause concern and are the type of risks businesses generally try to mitigate. Understanding and evaluating the extent of potential risks to a company, its operations, and employees can often help risk managers develop a more realistic strategy to deal with them. Creating a solid risk management plan using the company's available resources is a large part of this. Here are five other ways to identify risks:
1. Assess the business
Risk management teams might start by assessing the key components of a business' activities and operations. For example, an IT company relies on several critical services, resources, and its human capital to operate effectively. By thinking broadly of every potential threat to the company's crucial and vulnerable areas, the risk management team can more accurately and realistically develop contingency plans for threats.
For example, a company-wide power failure might trigger the loss of its internet services, which might be crucial to the company's operations. Understanding the breadth of potential threats can allow companies to develop pragmatic and cost-effective counter-strategies. Identified risks might never materialize, but by recognizing their potential to cause problems, risk managers can create options to handle them.
2. Play the "What if?" game
The goal of this risk management technique is to determine the company's most at-risk areas. This strategy asks risk managers to look at the business' operations through an omnipotent lens, identifying each of its activities. By determining each action, a risk manager can then ask "What if?" questions about these.
Risk analysis and management professionals can then look at various scenarios and determine which ones are more likely to occur and what threat level they might pose. In measuring the risk level of each activity, they might also consider looking at which scenarios pertain to the company's critical operations. This exercise can help risk managers, analysts, and project managers strengthen key areas of business operations while also mitigating other potential risk areas.
3. Look to past, present, and future activities
Risk analysis might include looking at a company's past activities. For instance, you can study checklists and post-project reviews of past product launches. These can reveal any risks they posed and how the company managed them, which might offer valuable information. Looking at the present situation can also provide vital information. There are several good risk management tools, like a SWOT analysis, assumption analysis, constraint analysis, and failure modes and effects analysis (FMEA). Each of these can help to highlight any weak or vulnerable points throughout a company's operations.
An organization might also look to the future for potential risks. For instance, brainstorming is a common risk-reduction technique. Risk managers might speak to a variety of people involved in various aspects of the company's operations. This can include production employees, vendors, distributors, financial team members, marketing or sales team members, or other relevant people or groups to get their perspectives on if and where risk might occur. While looking at the past, present, or future might help mitigate risk, this strategy often works best when risk managers use all three to create a more comprehensive overview and risk assessment.
4. Review the ABCs
Assumptions analysis, brainstorming, and checklists (ABCs), when used together, can be an effective tool for risk management. In assumption analysis, during the planning stage of a project, the planners typically make a variety of assumptions about the project. For instance, they might assume that production costs remain stable, that manufacturing equipment works without fail, or their suppliers consistently have the raw materials the company requires for its products. Assumptions are present-based and a normal part of doing business, but each assumption can also pose a risk if it turns out to be wrong.
Risk analysis looks at the probability of an assumption being wrong and the extent of any repercussions if it is. Assumptions are generally focused on the present. Brainstorming involves multiple perspectives, typically focused on potential future risks. Checklists typically offer a glimpse into past risks. They acknowledge the most common risks project managers encountered in similar past situations, such as working with a specific vendor or using a particular production method. Using ABCs simultaneously can often provide a more comprehensive risk analysis because it reviews past, present, and future risks.
5. Implement a root-cause analysis (RCA)
Identifying and understanding the root cause of an issue can often help to prevent future issues. Identifying the underlying cause of a problem before it becomes serious can be an essential tool for a company. In the past, investigators typically used RCA to determine what caused a problem, such as a chemical spill or a major equipment malfunction.
Risk managers can use RCA proactively by looking beyond just dealing with the symptoms of an issue. For example, technicians might fix a piece of equipment without identifying what caused the failure. Instead of addressing the symptoms of an issue, like a broken machine, risk managers might look at what caused the equipment to fail and apply this knowledge to future operations.
Common risk categories
Each business might have its own set of risk categories, which can often depend on factors like the type of business, the industry, or where it operates. These risk categories can also often contain multiple sub-risks. Here are some common examples of different risks a business or project might encounter:
Health and safety
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