What Is Company Risk?

Geri Terzo

There are many risks facing companies and those vulnerabilities tend to evolve throughout different business cycles. One primary company risk is the possibility for failure, which can unfold in the form of a bankruptcy filing. Businesses also face the possibility of security breaches where data is purged or sensitive client information is intercepted. There are ways to protect an organization from any threats but safeguarding against loss is really an ongoing effort on the part of management executives, technology, and personnel.

Company risk is the potential that a business will be unable to honor its debt obligations.
Company risk is the potential that a business will be unable to honor its debt obligations.

Company risk can vary depending on the culture of a business as well as the industry in which the organization belongs. Some places are more willing to accept financial liabilities or take chances than others. This factor could be determined by the type of management that is in place and the past experiences that have led to success. Even the most conservative executives, however, face some uncertainties. Businesses often spend large sums of money on top-quality software solutions and hire risk management professionals to protect against vulnerabilities in internal systems.

Businesses do not start with the expectation to ever face insolvency when there is not enough cash to meet financial obligations and bankruptcy protection is the only way out. Nonetheless, this is a company risk that businesses face throughout changing conditions. Some of the factors that can trigger a bankruptcy are mismanagement of resources or a change in economic conditions that interferes with commerce activity.

When an economy is strained, it can cause a slowdown in demand, which in turn hurts profits for suppliers and other types of big and small businesses. The most extreme financial pullback that occurs during an economic recession or depression may lead to a bankruptcy. Companies can manage this risk by reducing the size of the staff or cutting other expenses before facing a possible failure.

There is company risk for an organization that lists its shares publicly in the financial markets. Through the purchase of equity shares, investors obtain a stake in that business and have a say in major decisions that are made. Corporate executives are expected to provide transparency to shareholders on the direction of the business.

Managers face the possibility of revolt from investors who are not pleased with the stock performance or leadership of a company. Subsequently, there is a potential threat from shareholders who obtain large ownership stakes in companies as these individuals or institutions can influence the way that a business is run. Another company risk for publicly traded corporations is the possibility that shareholders will not place a proper value on the business, which translates into a lower stock price.

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