10-day MBA: D6 Finance – about Risk Analysis

Almost everything we do in today's business world involves a risk of some kind: customer habits change, new competitors appear, factors outside your control could delay your project. But formal risk analysis and risk management can help you to assess these risks and decide what actions to take to minimize disruptions to your plans. They will also help you to decide whether the strategies you could use to control risk are cost-effective.

Different people will have different views of the impact of a particular risk – what may be a small risk for one person may destroy the livelihood of someone else. Risk analysis allows you to examine the risks that you or your organization face. It is based on a structured approach to thinking through threats, followed by an evaluation of the probability and cost of events occurring.
As such, it forms the basis for risk management and crisis prevention. Here the emphasis is on cost effectiveness. Risk management involves adapting the use of existing resources, contingency planning and good use of new resources.

To carry out a risk analysis, follow these steps:

1. Identify Threats:
The first stage of a risk analysis is to identify threats facing you. Threats may be:
· Human - from individuals or organizations, illness, death, etc.
· Operational - from disruption to supplies and operations, loss of access to essential assets, failures in distribution, etc.
· Reputational - from loss of business partner or employee confidence, or damage to reputation in the market.
· Procedural - from failures of accountability, internal systems and controls, organization, fraud, etc.
· Project - risks of cost over-runs, jobs taking too long, of insufficient product or service quality, etc.
· Financial - from business failure, stock market, interest rates, unemployment, etc.
· Technical - from advances in technology, technical failure, etc.
· Natural - threats from weather, natural disaster, accident, disease, etc.
· Political - from changes in tax regimes, public opinion, government policy, foreign influence, etc.
· Others
2. Estimate Risk:
Once you have identified the threats you face, the next step is to work out the likelihood of the threat being realized and to assess its impact.
One approach to this is to make your best estimate of the probability of the event occurring, and to multiply this by the amount it will cost you to set things right if it happens. This gives you a value for the risk.
3. Managing Risk:
Once you have worked out the value of risks you face, you can start to look at ways of managing them. When you are doing this, it is important to choose cost effective approaches - in most cases, there is no point in spending more to eliminating a risk than the cost of the event if it occurs. Often, it may be better to accept the risk than to use excessive resources to eliminate it.
4. Reviews:
Once you have carried out a risk analysis and management exercise, it may be worth carrying out regular reviews. These might involve formal reviews of the risk analysis, or may involve testing systems and plans appropriately.