Business Risk Analysis Explained
Running a business carries several risks. Some hazards can destroy a business, while others can lead to severe damage, which can be time-consuming and costly to repair.
Business risk management and analysis help illuminate the risk factors in a business, allowing business leaders and risk management officers to prepare and anticipate future problems.
With that in mind, let’s look at some of the different types of risk management, identify how to mitigate risk in business, and outline some business risk management procedures.
So, ‘what is risk management in business?' Let us explain.
Business Risk Analysis Summary
Business risk analysis describes a process that helps you identify and manage any potential problems that could disrupt future business projects or initiatives. To undertake a risk analysis, you can either employ a risk management company or ask your current staff to identify possible threats that your business could face.
Once you have identified potential threats, you should list them in order of the likelihood that they will materialize.
Business risk analysis can be complicated, as you'll use complex information such as security protocols, marketing forecasts, financial data, and project plans to assess your overall levels of risk as a business.
That said, risk analysis is an essential planning tool that could save money, time, and reputation.
How to Conduct a Business Risk Analysis
Conducting risk management in business can be a lengthy process and sometimes best left to risk analysis companies.
However, if you plan to conduct your own business risk analysis, you should:
Identify all risks
First, you need to understand the difference between a 'risk' and a 'hazard.' A hazard is something that could potentially cause harm. Risk refers to the chance that that harm will be realized. Make a list of all potential risks that could threaten your company.
Determine how these risks could impact your business
Once you've identified potential risks, you need to understand how they could impact your business. Are they financial risks? Are they COVID-19 related? Will these risks cause temporary disruptions to business continuity?
Evaluate the risks and control measures
Now that all your risks have been identified, you need to decide what measures to put in place to prevent or mitigate these events. You can remove some risk, but for the events that you can’t control, such as natural disasters, you should put measures in place to lessen their impact.
Record this information
Record your findings so that you have a reference to use if and when disruption occurs.
Review your analysis and update it regularly
Don't forget that new risks can present themselves at any time. Therefore, it helps to review and update your risk analysis periodically or as required.
Photo by Michael Shannon on Unsplash
How to Identify Risks
Risks come in many forms. Below are some of the most common business risks:
Compliance risk refers to companies having to adapt and comply with new rules set by a regulatory body or government. This could be a new minimum wage, COVID-19 restrictions, or changes to public holiday dates.
Strategic risks can occur at any time. For instance, a company that sells red meat could see a sharp decline in sales after a published study links red meat consumption to cancer. To deal with such risks, companies must conduct strategic risk analyses and create plans for all manner of disruption.
Financial risk refers to the financial circumstances of a company. Is the company struggling to get out of the red? Can the business realistically take on any more debt? Are sales forecasts accurate?
Operational risk refers to a business's processes or systems. For example, if a machine operator has an accident at work and cannot perform, what plans are put in place to ensure business continuity?
What plans do you have in place in case of technical failure or advances in technology?
Are you prepared for extreme weather, natural disasters, or disease?
Political risk refers to changes in public opinion, taxes, foreign influence, or government policy.
Structural risk refers to any situation in which products, staff, or technology could be harmed. This could include falling debris, insufficient lighting, or exposure to dangerous chemicals.
The Importance of Business Risk Analysis
Conducting a business risk analysis can help you avoid any hazards that could damage your finances or your organization's future. Using research, you can determine the steps you must put in place to protect your business.
Effective risk management allows you to prepare for future situations that may need to be addressed or avoided.
Financial risk analyses can help you develop the proper insight you need before talking with investors. After all, potential investors will want to assess your business's risk level before agreeing to invest.
If you want to make smarter financial decisions and successfully analyze risks, our financial modeling software can help. Try Synario today.