business-risk-analysis

Simple But Effective Business Risk Analysis!

It is impossible that improbable will never happen.

Emil GumbelMathematician

Risk is part of every business endeavor. By analyzing your situation, you can determine the risks associated with a course of action and then reduce the risk to improve your chance of success.

I have spent a lot of time in risky situations and I have found that understanding the associated risks will improve your chance for success. As a military pilot, I accomplished an Operational Risk Management (ORM) evaluation before each mission. ORM allows you to quantify the risk you face and determine if a mission is worth the risk. I have used business risk analysis to determine if a startup business was worth the investment. I have also used risk analysis as an emergency manager and as an emergency management instructor; risk analysis allows the emergency manager to determine what mitigation steps should be taken or how to prepare for a possible disaster. I have diverse experience and I have found risk analysis improves the chance of success, saves lives, saves property and improves profitability.

What is risk? From Merriam-Webster: 1- possibility of loss or injury, 2- someone or something that creates a hazard. I have a simple definition; risk is the likelihood a hazard will occur. A hazard to a business is the loss of a large customer; a hazard to a combat mission is flying against an enemy with an SA-14 surface-to-air missile; and when a dam begins to crumble, that’s obviously a hazard for the emergency manager, or for anyone in the vicinity for that matter! What is the likelihood a hazard will cause damage? That tells you the risk.

In business risk analysis, we measure the likelihood of a hazard impacting your endeavor and the consequences it causes. There are complex risk analysis tools available and risk analysis consultants to evaluate your risks but I will present a simple method to capture your risks and rank them.

A Business Risk Analysis Example

During Business Risk Analysis, identify the hazards that directly impact your business, endeavor or operations’ processes. Obviously, there are many hazards in the world but we’re examining only those that directly affect you For example, a storm could affect the delivery of your products. The hazard to you is not the storm but the failure of your logistics operation to deliver products as scheduled.

  1. Brainstorm hazards: Which hazards affect your business?
  2. Determine the likelihood a hazard will affect you and assign a numerical value to the hazard: 1- low probability of a hazard will occur 5- a high likelihood that a hazard will occur.
  3. What is the consequence of a hazard’s impact on your business? Rank according to the problems associated with a hazard: 1- low to no effect on the business to 5- business operations may fail.
  4. Multiply likelihood by consequence to come up with a numeric representation of the risk to your business.
  5. Rank the hazards based on the risk value; highest risk rank highest.
  6. Consider methods to avoid, mitigate or prepare for the risk.

business-risk-analysis-example

From the above business risk analysis example, you can see that losing your top sales person has a highest risk. The good news is that this risk can be mitigated, perhaps by paying the salesperson more or assigning a backup salesperson early on.

Preparedness is always your fallback position. First, avoid risk if you can still accomplish your goals while doing so. Second, mitigate risk if the costs are affordable. Finally, be prepared to respond if the risk affects your operation.

What do you think? Will disaster strike? Lightning doesn’t strike twice?
Be prepared!