There are many roles in the business that may require you to make a decision that may have some element of risk involved. This is why it’s important to do a risk analysis before making that decision. It can help you to plan ahead so that the impact is not as bad as it would be if you had no plan in place at all.
When dealing with risk analysis, you have two types of risk to consider. The first is considering what the potential or probability is for something to go wrong. The second is looking at what negative impact it could have if it does go wrong.
What is Risk Analysis?
This is an essential tool that should be used in any business. The process of risk analysis will help you to identify potential issues that could affect key business projects and initiatives in a negative way. A risk assessment can be quite complex, and it’s important that you first identify what the possible threats to your business are. You can then look at how probably it is that these threats occur. Analyzing risk requires a lot of detailed information for you to draw from, which includes financial data, market forecasts, project plans, and security protocols.
When you should Risk Analysis
There are a number of scenarios where using risk analysis can be helpful to your business:
- Project planning – helps to both analyze potential issues and neutralize them
- Deciding if a project is safe to move forward
- For improving the safety of your business and managing any potential risks.
- As a way to prepare for potential events that could cause technological or equipment failure, natural disasters, an influx of staff illness, or theft.
- For planning for environmental changes, such as new government policies that will have an impact on business.
Using Risk Analysis
While risk analysis can be different for each situation, there are some basic steps that everyone needs to take when using this tool.
Step 1 – Identifying Threats
This is the first thing that you need to do. Some examples of potential threats are:
- Workforce – preparing for illnesses, injuries, deaths, or losing a key person in the business.
- Operations – preparing for potential operation and supply disruptions, distribution failures, and a loss of assets.
- Reputation – preparing for a loss of confidence from customers or employees, or market operations being damaged.
- Procedures – preparing for internal system, accountability, or control failures, or fraud.
- Projects – preparing for projects by going over budgets, determining why key tasks may be taking longer, or dealing with issues relating to service or product quality.
- Financial – preparing for an impact on company finances such as fluctuations in the stock market, changes in interest rates, a failure in business, or finding that funding is not available.
- Technical – preparing against technical failures, as well as technical advances.
- Natural – preparing against large scale disease, inclement weather, or natural disasters.
- Political – preparing for tax changes, changes in government policies, the opinion of the public, or foreign-based influences.
- Structural – preparing against any situation where your staff, technology, or products can be harmed, such as from bad lighting or the use of dangerous chemicals.
Step 2 – Risk Estimation
Once you have a list of potential threats, you will need to determine what the chances are that such a threat will occur and what that threat’s potential impact could be. For example, let’s say one of your risks is the loss of the main supplier. To determine the value of the risk, you would take the probability of the threat (let’s say 80%) and multiply this by how much it would cost your business to fix the issue (let’s say $50,000). This would give you a risk value of $40,000.
Now you have a few choices in how you deal with the risk
Risk Management – when you know what the value is of the risk, you can begin finding ways to manage it. Sometimes, the impact of the risk can cost less than it would to eliminate it. In these instances, you need to use a cost-effective means to address the problem.
Risk Avoidance – Sometimes, avoiding the risk makes more sense, such as not getting involved in a project or business venture, or not taking part in an activity that is considered high-risk.
Risk Sharing – In some cases, where the potential for gain outweighs the possible risks, you may choose to share risk responsibility and impact with other groups or individuals.
Risk Acceptance – Sometimes, the only option you will have is to accept the risk if you are unable to prevent it, especially if the cost of a risk insuring outweighs the potential cost of loss, or in situations where what you will gain is worth the risk being taken. If you choose this option, you will then move on to Risk Control.
Risk Control – one way to work out how to control risk is by experimenting on a smaller scale to get an idea of what preventative measures you can take. Preventative action can help balance out any potential loss and may mean training employees and having a backup plan if the first one doesn’t work. It’s better to have a plan in place than be impacted by an event and trying to put together a plan after it has happened.
Risk Analysis Templates
You can download one of our free templates or samples to get an idea of what a typical Risk Analysis would look like.
Risk Ranking and Mitigation Template
Risk Assessment and Mitigation Plan
Risk Analysis Template (Word)
Threat and Risk Assessment Template
Risk Analysis Templates (Excel)
Frequently Asked Questions
While risk analysis isn’t mandatory, it is the responsible thing to do to protect your business and employees. A failure to plan for and control risks could cost you money or your entire business.
Ideally, risk analysis should be done before making any decision that will impact the business and its employees. It’s also advised that you go over your risk analysis and assessments every 3 years, or anytime a change needs to be made.
Reasonably practicable means finding a balance between the risk levels and what is needed to control it. For example, determining if the action needed is grossly out of proportion to the risk itself.