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Operational Risk

Reviewed by Vishnu | Updated on Jan 05, 2021


What is Operational Risk?

Operational risk is defined as the uncertainties that an organisation is expected to face during its day to day business operations in a particular sector or industry.

Operational risks might result in the breakdown of an organisation’s internal operations. Unlike external factors, such as economic or political events which are also referred to as systematic risks, operational risk is entirely internal.

Breaking Down Operational Risk

Operational risk is often referred to as a type of unsystematic risk which depend on the industry or company. This type of risk generally focusses on the operations being performed in an entity and not on what is inherent within the sector.

Although the risks are not expected to result in the breakdown of the business, the level of risk is dependent on the decisions made by the internal management of the organisation.

Operational risk describes the risk and difficulties that an organisation could face in carrying out its day-to-day operations, processes and systems. Also, the risk is predominantly dependant on the human factor, i.e. failures which are caused due to the decisions made by the internal management of an organisation. While operational risk is a form of business risk, it is quite different from financial and systematic risks.

Unlike operational risk, financial risk refers to the possibility of the cash flow of a business that can prove insufficient to cater to its obligations, such as its loan debts. This inadequacy may contribute to the management’s decisions, as well as business performance. However, financial risk is quite different from operational risk.

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