risk analysis for a business plan

Uncovering Hidden Risks: A Comprehensive Guide to Business Plan Risk Analysis

A modern business plan that will lead your business on the road to success must have another critical element. That element is a part where you will need to cover possible risks related to your small business. So, you need to focus on  managing risk  and use  risk management processes  if you want to succeed as an entrepreneur.

How can you manage risks?

You can always plan and  predict  future things in a certain way that will happen, but your impact is not always in your hands. There are many  external factors  when it comes to the business world. They will always influence the realization of your plans. Not only the realization but also the results you will achieve in implementing the specific plan. Because of that, you need to look at these factors through the prism of the risk if you want to implement an appropriate management process while implementing your business plan.

By conducting a thorough risk analysis, you can manage risks by identifying potential threats and uncertainties that could impact your business. From market fluctuations and regulatory changes to competitive pressures and technological disruptions, no risk will go unnoticed. With these insights, you can develop contingency plans and implement risk mitigation strategies to safeguard your business’s interests.

This guide will provide practical tips and real-life examples to illustrate the importance of proper risk analysis. Whether you’re a startup founder preparing a business plan or a seasoned entrepreneur looking to reassess your risk management approach, this guide will equip you with the knowledge and tools to navigate the complex landscape of business risks.

Why is Risk Analysis Important for Business Planning?

Risk analysis is essential to business planning as it allows you to proactively identify and assess potential risks that could impact your business objectives. When you conduct a comprehensive risk analysis, you can gain a deeper understanding of the threats your business may face and can take proactive measures to mitigate them.

One of the key benefits of risk analysis is that it enables you to prioritize risks based on their potential impact and likelihood of occurrence . This helps you allocate resources effectively and develop contingency plans that address the most critical risks.

Additionally, risk analysis allows you to identify opportunities that may arise from certain risks , enabling you to capitalize on them and gain a competitive advantage.

It is important to adopt a systematic approach to effectively analyze risks in your business plan. This involves identifying risks across various market, operational, financial, and legal areas. By considering risks from multiple perspectives, you can develop a holistic understanding of your business’s potential challenges.

What is a Risk for Your Small Business?

In dictionaries, the risk is usually defined as:

The possibility of dangerous or bad consequences becomes true .

When it comes to businesses,  entrepreneurs , or in this case, the business planning process, it is possible that some aspects of the business plan will not be implemented as planned. Such a situation could have dangerous or harmful consequences for your small business.

It is simple. If you don’t implement something you have in your business plan, there will be some negative consequences for your small business.

Here is how you can  write the business plan in 30 steps .

Types of Risks in Business Planning

When conducting a business risk assessment for your business plan, it is essential to consider various types of risks that could impact your venture. Here are some common types of risks to be aware of:

1. Market risks

These risks arise from fluctuations in the market, including changes in consumer preferences, economic conditions, and industry trends. Market risks can impact your business’s demand, pricing, and market share.

2. Operational risk

Operational risk is associated with internal processes, systems, and human resources. These risks include equipment failure, supply chain disruptions, employee errors, and regulatory compliance issues.

3. Financial risks

Financial risks pertain to managing financial resources and include factors such as cash flow volatility, debt levels, currency fluctuations, and interest rate changes.

4. Legal and regulatory risks

Legal and regulatory risks arise from changes in laws, regulations, and compliance requirements. Failure to comply with legal and regulatory obligations can result in penalties, lawsuits, and reputational damage.

5. Technological risks

Technological risks arise from rapid technological advancements and the potential disruptions they can cause your business. These risks include cybersecurity threats, data breaches, and outdated technology infrastructure.

Basic Characteristics of Risk

Before you start with the development of your small  business risk  management process, you will need to know and consider the essential characteristics of the possible risk for your company.

What are the basic characteristics of a possible risk?

The risk for your company is partially unknown.

Your  entrepreneurial work  will be too easy if it is easy to predict possible risks for your company. The biggest problem is that the risk is partially unknown. Here we are talking about the future, and we want to prepare for that future. So, the risk is partially unknown because it will possibly appear in the future, not now.

The risk to your business will change over time.

Because your businesses operate in a highly dynamic environment, you cannot expect it to be something like the default. You cannot expect the risk to always exist in the same shape, form, or consequence for your company.

You can predict the risk.

It is something that, if we want, we can predict through a  systematic process . You can easily predict the risk if you install an appropriate risk management process in your small business.

The risk can and should be managed.

You can always focus your resources on eliminating or reducing risk in the areas expected to appear.

Risk Management Process You Should Implement

The risk management process cannot be seen as static in your company. Instead of that, it must be seen as an interactive process in which information will continuously be updated and analyzed. You and your small business members will act on them, and you will review all risk elements in a specified period.

Adopting a systematic approach to identifying and assessing risks in your business plan is crucial. Here are some steps to consider:

1. Risk Identification

First, you must identify risk areas . Ask and respond to the following questions:

• What are my company’s most significant risks?
• What are the risk types I will need to follow?

In business, identifying risk areas is the process of pinpointing potential threats or hazards that could negatively impact your business’s ability to conduct operations, achieve business objectives, or fulfill strategic goals.

Just as meteorologists use data to predict potential storms and help us prepare, you can use risk identification to foresee possible challenges and create plans to deal with them.

Risk can arise from various sources, such as financial uncertainty, legal liabilities, strategic management errors, accidents, natural disasters, and even pandemic situations. Natural disasters can not be predicted or avoided, but you can prepare if they appear.

For example, a retail business might identify risks like fluctuating market trends, supply chain disruptions, cybersecurity threats, or changes in consumer behavior. As you can see, the main risk areas are related to types of risk: market, financial, operational, legal and regulatory, and technological risks.

You can also use business model elements to start with something concrete:

• Value proposition,
• Customers ,
• Customers relationships ,
• Distribution channels,
• Key resources and
• Key partners.

It is not necessarily that there will be risk in all areas and that the risk will be with the same intensity for all areas. So, based on your business environment, the industry in which your business operates, and the business model, you will need to determine in which of these areas there is a possible risk.

Also, you must stay informed about external factors impacting your business, such as industry trends, economic conditions, and regulatory changes. This will help you identify emerging risks and adapt your risk management strategies accordingly.

The idea for this step is to create a table where you will have identified potential risks in each important area of your business.

2. Risk Profiling

Conduct a detailed analysis of each identified risk, including its potential impact on your business objectives and the likelihood of occurrence. This will help you develop a comprehensive understanding of the risks you face.

Qualitative Risk Analysis

The qualitative risk analysis process involves assessing and prioritizing risks based on ranking or scoring systems to classify risks into low, medium, or high categories. For this analysis, you can use customer surveys or interviews.

Qualitative risk analysis is quick, straightforward, and doesn’t require specialized statistical knowledge to conduct a business risk assessment. The main negative side is its subjectivity, as it relies heavily on thinking about something or expert judgment.

This method is best suited for initial risk assessments or when there is insufficient quantitative analysis data .

For example, if we consider the previously identified risk of a sudden shift in consumer preferences, a qualitative analysis might rate its likelihood as 7 out of 10 and its impact as 8 out of 10, placing it in the high-priority quadrant of our risk matrix. But, qualitative analysis can also use surveys and interviews where you can ask open questions and use the qualitative research process to make this scaling. This is much better because you want to lower the subjectivism level when doing business risk assessment.

Quantitative Risk Analysis

On the other side, the quantitative risk analysis method involves numerical and statistical techniques to estimate the probability and potential impact of risks. It provides more objective and detailed information about risks.

Quantitative risk analysis can provide specific, data-driven insights, making it easier to make informed decisions and allocate resources effectively. The negative side of this method is that it can be time-consuming, complex, and requires sufficient data.

You can use this approachfor more complex projects or when you need precise data to inform decisions, especially after a qualitative analysis has identified high-priority risks.

For example , for the risk of currency exchange rate fluctuations, a quantitative analysis might involve analyzing historical exchange rate data to calculate the probability of a significant fluctuation and then using your financial data to estimate the potential monetary impact.

Both methods play crucial roles in effectively managing risks. Qualitative risk analysis helps to identify and prioritize risks quickly, while quantitative analysis provides detailed insights for informed decision-making.

3. Business Risk Assessment Matrix

Once you have identified potential risks and analyzed their likelihood and potential impact, you can create a business risk assessment matrix to evaluate each risk’s likelihood and impact. This matrix will help you prioritize risks and allocate resources accordingly.

A business risk assessment matrix, sometimes called a probability and impact matrix, is a tool you can use to assess and prioritize different types of risks based on their likelihood (probability) and potential damage (impact). Here’s a step-by-step process to create one:

• Step 1: Begin by listing out your risks . For our example, let’s consider four of the risks we identified earlier: a sudden shift in consumer preferences (Market Risk), currency exchange rate fluctuations (Financial Risk), an increase in the minimum wage (Legal), and cybersecurity threats (Technological Risk).
• Step 2: Determine the likelihood of each risk occurring . In the process of risk profiling, we’ve determined that a sudden shift in consumer preferences is highly likely, currency exchange rate fluctuations are moderately likely, an increase in the minimum wage, and cybersecurity threats are less likely but still possible.
• Step 3: Assess the potential impact of each risk on your business if it were to occur . In our example, we might find that a sudden shift in consumer preferences could have a high impact, currency exchange rate fluctuations a moderate impact, an increase in minimum wage minor impact, and cybersecurity threats a high impact.
• Step 4: Plot these risks on your risk matrix . The vertical axis represents the likelihood (high to low), and the horizontal axis represents the consequences (high to low).

By visualizing these risks in a risk assessment matrix format, you can more easily identify which risks require immediate attention and which ones might need long-term strategies.

4. Develop Risk Indicators for Each Risk You Have Identified

The question is, how will you measure the business risks for your company?

Risk indicators are metrics used to measure and predict potential threats to your business. Simply, a risk indicator is a measure that should tell you whether the risk appears or not in a particular area you have defined previously. They act like a business’s early warning system. When these indicators change, it’s a signal that the risk level may be increasing.

For example, for distribution channels, an indicator can be a delay in delivery for a minimum of three days. This indicator will tell you something is wrong with that channel, and you must respond appropriately.

Now, let’s consider some risk indicators for the risks we have already identified and analyzed:

If you conduct all the steps until now, you can have a similar table with risk indicators in your business plan. You should monitor these indicators regularly, and if you notice a significant change, such as a drop in sales or an increase in attempted breaches, it’s time to investigate and take some action steps. This might involve updating your product line, hedging against currency risk, budgeting for higher wages, or improving your cybersecurity measures.

Remember, risk indicators can’t predict the future with certainty. But they can give you valuable insights that can help you prepare for potential threats.

5. Define Possible Action Steps

The question is, what can you do regarding the risk if the risk indicator tells you that there is a potential risk?

Once the risk has appeared and is located, it is time to take concrete action steps. The goals of this step are not only to reduce or eliminate the impact of the risk for your company but also to prevent them in the future and reduce or eliminate their influence on the business operations or the execution of your business plan.

For example, for distribution channels with delivery delayed more than three days, possible activities can be the following:

• Apologizing to the customers for the delay,
• Determining the reasons for the delay,
• Analysis of the reasons,
• Removing the reasons,
• Consideration of alternative distribution channels, etc.

In this part of the business plan for each risk area and indicator, try to standardize all possible actions. You can not expect that they will be final. But, you can cover some basic guidelines that must be implemented if the risk appears. Here is an example of how this part will look in your business plan related to risks we have already identified through the risk assessment process.

6. Monitoring

Because this risk management process is dynamic , you must apply the monitoring process. In such a way, you can ensure the elimination of a specific kind of risk in the future, and you will allocate your resources to new possible risks.

After implementing the actions, you need to ask yourself the following questions:

• Are the actions taken regarding the risk the proper measures?
• Can you improve something regarding the risk management process? Is there a need for new risk indicators?

Techniques and Tools for Business Plan Risk Assessment

Various risk analysis methods, techniques, and tools are available to conduct an effective risk analysis for your business plan. Here are some commonly used ones:

1. SWOT analysis

A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis can help you identify internal strengths and weaknesses and external opportunities and threats. This analysis provides valuable insights into possible business risks and opportunities.

2. PESTEL analysis

A PESTEL (Political, Economic, Sociocultural, Technological, Environmental, Legal) analysis assesses the external factors that could impact your business. This analysis will help you identify risks and opportunities arising from these factors.

3. Scenario analysis

Consider different scenarios that could impact your business, such as best-case, worst-case, and most likely scenarios, as a part of your risk assessment process. You can anticipate potential risks and develop appropriate response strategies by analyzing these scenarios.

4. Monte Carlo simulation

Monte Carlo simulation uses random sampling and probability distributions to model various scenarios and assess their potential impact on your business. This technique provides you with a more accurate understanding of risk exposure.

5. Risk register

A risk register is a risk analysis tool that helps you record and track identified risks and their relevant details, such as impact, likelihood, mitigation strategies, and responsible parties. This tool ensures that risks are appropriately managed and monitored.

6. Business Impact Analysis (BIA)

Business impact analysis helps you understand the potential effects of various disruptions on your business operations and objectives. It’s about identifying what could go wrong and understanding how it could impact your bottom line. So, you can conduct business impact analysis as a part of your risk assessment inside your business plan.

7. Failure Mode and Effects Analysis (FMEA)

Using FMEA in your risk assessment process, you can proactively address potential problems, ensuring your business operations run as smoothly as you planned. It’s all about preparing for the worst while striving for the best.

8. Risk-Benefit Analysis (RBA)

The risk-benefit analysis allows you to make informed decisions, balancing the potential for gain against the potential for loss. It helps you choose the best path, even when the way forward isn’t entirely clear. This tool is a systematic approach to understanding the specific business risk and benefits associated with a decision, process, or project.

9. Cost-Benefit Analysis

By conducting a cost-benefit analysis as a part of your risk assessments, you can make data-driven decisions that consider both the possible risks (costs) and rewards (benefits). This approach provides a clear picture of the potential return on investment, enabling more effective and confident decision-making.

These techniques and tools allow you to conduct a comprehensive risk analysis for your business plan.

Mitigating and Managing Risks in a Business Plan

Identifying risks in your business plan is only the first step. To ensure the success of your venture, it is crucial to develop effective risk mitigation and management strategies. Here are some critical steps to consider:

• Risk avoidance : Some risks may be too high to justify taking. In such cases, consider avoiding these risks altogether by adjusting your business plan or exploring alternative strategies.
• Risk transfer : Transferring risks to third parties, such as insurance companies or outsourcing partners, can help mitigate their impact on your business. Evaluate opportunities for risk transfer and consider appropriate insurance coverage.
• Risk reduction : Implement measures to reduce the likelihood and impact of identified risks. This may involve improving internal processes, implementing safety protocols, or diversifying your supplier base .
• Risk acceptance : Some risks may be unavoidable or negatively impact your business. In such cases, accepting the risks and developing contingency plans can help minimize their impact.

In conclusion, a comprehensive risk analysis is essential for identifying, assessing, and managing different types of risk that could impact your success.

Conducting a thorough risk analysis can safeguard your business’s interests, capitalize on opportunities, and increase your chances of long-term success.

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Home / Resources / ISACA Journal / Issues / 2021 / Volume 2 / Risk Assessment and Analysis Methods

Risk assessment and analysis methods: qualitative and quantitative.

A risk assessment determines the likelihood, consequences and tolerances of possible incidents. “Risk assessment is an inherent part of a broader risk management strategy to introduce control measures to eliminate or reduce any potential risk- related consequences.” 1 The main purpose of risk assessment is to avoid negative consequences related to risk or to evaluate possible opportunities.

It is the combined effort of:

• “…[I]dentifying and analyzing possible future events that could adversely affect individuals, assets, processes and/or the environment (i.e.,risk analysis)”
• “…[M]aking judgments about managing and tolerating risk on the basis of a risk analysis while considering influencing factors (i.e., risk evaluation)” 2

Relationships between assets, processes, threats, vulnerabilities and other factors are analyzed in the risk assessment approach. There are many methods available, but quantitative and qualitative analysis are the most widely known and used classifications. In general, the methodology chosen at the beginning of the decision-making process should be able to produce a quantitative explanation about the impact of the risk and security issues along with the identification of risk and formation of a risk register. There should also be qualitative statements that explain the importance and suitability of controls and security measures to minimize these risk areas. 3

In general, the risk management life cycle includes seven main processes that support and complement each other ( figure 1 ):

• Determine the risk context and scope, then design the risk management strategy.
• Choose the responsible and related partners, identify the risk and prepare the risk registers.
• Perform qualitative risk analysis and select the risk that needs detailed analysis.
• Perform quantitative risk analysis on the selected risk.
• Plan the responses and determine controls for the risk that falls outside the risk appetite.
• Implement risk responses and chosen controls.
• Monitor risk improvements and residual risk.

Qualitative and Quantitative Risk Analysis Techniques

Different techniques can be used to evaluate and prioritize risk. Depending on how well the risk is known, and if it can be evaluated and prioritized in a timely manner, it may be possible to reduce the possible negative effects or increase the possible positive effects and take advantage of the opportunities. 4 “Quantitative risk analysis tries to assign objective numerical or measurable values” regardless of the components of the risk assessment and to the assessment of potential loss. Conversely, “a qualitative risk analysis is scenario-based.” 5

Qualitative Risk The purpose of qualitative risk analysis is to identify the risk that needs detail analysis and the necessary controls and actions based on the risk’s effect and impact on objectives. 6 In qualitative risk analysis, two simple methods are well known and easily applied to risk: 7

• Keep It Super Simple (KISS) —This method can be used on narrow-framed or small projects where unnecessary complexity should be avoided and the assessment can be made easily by teams that lack maturity in assessing risk. This one-dimensional technique involves rating risk on a basic scale, such as very high/high/medium/low/very.
• Probability/Impact —This method can be used on larger, more complex issues with multilateral teams that have experience with risk assessments. This two-dimensional technique is used to rate probability and impact. Probability is the likelihood that a risk will occur. The impact is the consequence or effect of the risk, normally associated with impact to schedule, cost, scope and quality. Rate probability and impact using a scale such as 1 to 10 or 1 to 5, where the risk score equals the probability multiplied by the impact.

Qualitative risk analysis can generally be performed on all business risk. The qualitative approach is used to quickly identify risk areas related to normal business functions. The evaluation can assess whether peoples’ concerns about their jobs are related to these risk areas. Then, the quantitative approach assists on relevant risk scenarios, to offer more detailed information for decision-making. 8 Before making critical decisions or completing complex tasks, quantitative risk analysis provides more objective information and accurate data than qualitative analysis. Although quantitative analysis is more objective, it should be noted that there is still an estimate or inference. Wise risk managers consider other factors in the decision-making process. 9

Although a qualitative risk analysis is the first choice in terms of ease of application, a quantitative risk analysis may be necessary. After qualitative analysis, quantitative analysis can also be applied. However, if qualitative analysis results are sufficient, there is no need to do a quantitative analysis of each risk.

Quantitative Risk A quantitative risk analysis is another analysis of high-priority and/or high-impact risk, where a numerical or quantitative rating is given to develop a probabilistic assessment of business-related issues. In addition, quantitative risk analysis for all projects or issues/processes operated with a project management approach has a more limited use, depending on the type of project, project risk and the availability of data to be used for quantitative analysis. 10

The purpose of a quantitative risk analysis is to translate the probability and impact of a risk into a measurable quantity. 11 A quantitative analysis: 12

• “Quantifies the possible outcomes for the business issues and assesses the probability of achieving specific business objectives”
• “Provides a quantitative approach to making decisions when there is uncertainty”
• “Creates realistic and achievable cost, schedule or scope targets”

Consider using quantitative risk analysis for: 13

• “Business situations that require schedule and budget control planning”
• “Large, complex issues/projects that require go/no go decisions”
• “Business processes or issues where upper management wants more detail about the probability of completing on schedule and within budget”

The advantages of using quantitative risk analysis include: 14

• Objectivity in the assessment
• Powerful selling tool to management
• Direct projection of cost/benefit
• Flexibility to meet the needs of specific situations
• Flexibility to fit the needs of specific industries
• Much less prone to arouse disagreements during management review
• Analysis is often derived from some irrefutable facts

THE MOST COMMON PROBLEM IN QUANTITATIVE ASSESSMENT IS THAT THERE IS NOT ENOUGH DATA TO BE ANALYZED.

To conduct a quantitative risk analysis on a business process or project, high-quality data, a definite business plan, a well-developed project model and a prioritized list of business/project risk are necessary. Quantitative risk assessment is based on realistic and measurable data to calculate the impact values that the risk will create with the probability of occurrence. This assessment focuses on mathematical and statistical bases and can “express the risk values in monetary terms, which makes its results useful outside the context of the assessment (loss of money is understandable for any business unit). 15  The most common problem in quantitative assessment is that there is not enough data to be analyzed. There also can be challenges in revealing the subject of the evaluation with numerical values or the number of relevant variables is too high. This makes risk analysis technically difficult.

There are several tools and techniques that can be used in quantitative risk analysis. Those tools and techniques include: 16

• Heuristic methods —Experience-based or expert- based techniques to estimate contingency
• Three-point estimate —A technique that uses the optimistic, most likely and pessimistic values to determine the best estimate
• Decision tree analysis —A diagram that shows the implications of choosing various alternatives
• Expected monetary value (EMV) —A method used to establish the contingency reserves for a project or business process budget and schedule
• Monte Carlo analysis —A technique that uses optimistic, most likely and pessimistic estimates to determine the business cost and project completion dates
• Sensitivity analysis —A technique used to determine the risk that has the greatest impact on a project or business process
• Fault tree analysis (FTA) and failure modes and effects analysis (FMEA) —The analysis of a structured diagram that identifies elements that can cause system failure

There are also some basic (target, estimated or calculated) values used in quantitative risk assessment. Single loss expectancy (SLE) represents the money or value expected to be lost if the incident occurs one time, and an annual rate of occurrence (ARO) is how many times in a one-year interval the incident is expected to occur. The annual loss expectancy (ALE) can be used to justify the cost of applying countermeasures to protect an asset or a process. That money/value is expected to be lost in one year considering SLE and ARO. This value can be calculated by multiplying the SLE with the ARO. 17 For quantitative risk assessment, this is the risk value. 18

USING BOTH APPROACHES CAN IMPROVE PROCESS EFFICIENCY AND HELP ACHIEVE DESIRED SECURITY LEVELS.

By relying on factual and measurable data, the main benefits of quantitative risk assessment are the presentation of very precise results about risk value and the maximum investment that would make risk treatment worthwhile and profitable for the organization. For quantitative cost-benefit analysis, ALE is a calculation that helps an organization to determine the expected monetary loss for an asset or investment due to the related risk over a single year.

For example, calculating the ALE for a virtualization system investment includes the following:

• Virtualization system hardware value: US$1 million (SLE for HW)
• Virtualization system management software value: US$250,000 (SLE for SW)
• Vendor statistics inform that a system catastrophic failure (due to software or hardware) occurs one time every 10 years (ARO = 1/10 = 0.1)
• ALE for HW = 1M * 1 = US$100,000
• ALE for SW = 250K * 0.1 = US$25,000

In this case, the organization has an annual risk of suffering a loss of US$100,000 for hardware or US$25,000 for software individually in the event of the loss of its virtualization system. Any implemented control (e.g., backup, disaster recovery, fault tolerance system) that costs less than these values would be profitable.

Some risk assessment requires complicated parameters. More examples can be derived according to the following “step-by-step breakdown of the quantitative risk analysis”: 19

• Conduct a risk assessment and vulnerability study to determine the risk factors.
• Determine the exposure factor (EF), which is the percentage of asset loss caused by the identified threat.
• Based on the risk factors determined in the value of tangible or intangible assets under risk, determine the SLE, which equals the asset value multiplied by the exposure factor.
• Evaluate the historical background and business culture of the institution in terms of reporting security incidents and losses (adjustment factor).
• Estimate the ARO for each risk factor.
• Determine the countermeasures required to overcome each risk factor.
• Add a ranking number from one to 10 for quantifying severity (with 10 being the most severe) as a size correction factor for the risk estimate obtained from company risk profile.
• Determine the ALE for each risk factor. Note that the ARO for the ALE after countermeasure implementation may not always be equal to zero. ALE (corrected) equals ALE (table) times adjustment factor times size correction.
• Calculate an appropriate cost/benefit analysis by finding the differences before and after the implementation of countermeasures for ALE.
• Determine the return on investment (ROI) based on the cost/benefit analysis using internal rate of return (IRR).
• Present a summary of the results to management for review.

Using both approaches can improve process efficiency and help achieve desired security levels. In the risk assessment process, it is relatively easy to determine whether to use a quantitative or a qualitative approach. Qualitative risk assessment is quick to implement due to the lack of mathematical dependence and measurements and can be performed easily. Organizations also benefit from the employees who are experienced in asset/processes; however, they may also bring biases in determining probability and impact. Overall, combining qualitative and quantitative approaches with good assessment planning and appropriate modeling may be the best alternative for a risk assessment process ( figure 2 ). 20

Qualitative risk analysis is quick but subjective. On the other hand, quantitative risk analysis is optional and objective and has more detail, contingency reserves and go/no-go decisions, but it takes more time and is more complex. Quantitative data are difficult to collect, and quality data are prohibitively expensive. Although the effect of mathematical operations on quantitative data are reliable, the accuracy of the data is not guaranteed as a result of being numerical only. Data that are difficult to collect or whose accuracy is suspect can lead to inaccurate results in terms of value. In that case, business units cannot provide successful protection or may make false-risk treatment decisions and waste resources without specifying actions to reduce or eliminate risk. In the qualitative approach, subjectivity is considered part of the process and can provide more flexibility in interpretation than an assessment based on quantitative data. 21 For a quick and easy risk assessment, qualitative assessment is what 99 percent of organizations use. However, for critical security issues, it makes sense to invest time and money into quantitative risk assessment. 22 By adopting a combined approach, considering the information and time response needed, with data and knowledge available, it is possible to enhance the effectiveness and efficiency of the risk assessment process and conform to the organization’s requirements.

1 ISACA ® , CRISC Review Manual, 6 th Edition , USA, 2015, https://store.isaca.org/s/store#/store/browse/detail/a2S4w000004Ko8ZEAS 2 Ibid. 3 Schmittling, R.; A. Munns; “Performing a Security Risk Assessment,” ISACA ® Journal , vol. 1, 2010, https://www.isaca.org/resources/isaca-journal/issues 4 Bansal,; "Differentiating Quantitative Risk and Qualitative Risk Analysis,” iZenBridge,12 February 2019, https://www.izenbridge.com/blog/differentiating-quantitative-risk-analysis-and-qualitative-risk-analysis/ 5 Tan, D.; Quantitative Risk Analysis Step-By-Step , SANS Institute Information Security Reading Room, December 2020, https://www.sans.org/reading-room/whitepapers/auditing/quantitative-risk-analysis-step-by-step-849 6 Op cit Bansal 7 Hall, H.; “Evaluating Risks Using Qualitative Risk Analysis,” Project Risk Coach, https://projectriskcoach.com/evaluating-risks-using-qualitative-risk-analysis/ 8 Leal, R.; “Qualitative vs. Quantitative Risk Assessments in Information Security: Differences and Similarities,” 27001 Academy, 6 March 2017, https://advisera.com/27001academy/blog/2017/03/06/qualitative-vs-quantitative-risk-assessments-in-information-security/ 9 Op cit Hall 10 Goodrich, B.; “Qualitative Risk Analysis vs. Quantitative Risk Analysis,” PM Learning Solutions, https://www.pmlearningsolutions.com/blog/qualitative-risk-analysis-vs-quantitative-risk-analysis-pmp-concept-1 11 Meyer, W. ; “Quantifying Risk: Measuring the Invisible,” PMI Global Congress 2015—EMEA, London, England, 10 October 2015, https://www.pmi.org/learning/library/quantitative-risk-assessment-methods-9929 12 Op cit Goodrich 13 Op cit Hall 14 Op cit Tan 15 Op cit Leal 16 Op cit Hall 17 Tierney, M.; “Quantitative Risk Analysis: Annual Loss Expectancy," Netwrix Blog, 24 July 2020, https://blog.netwrix.com/2020/07/24/annual-loss-expectancy-and-quantitative-risk-analysis 18 Op cit Leal 19 Op cit Tan 20 Op cit Leal 21 ISACA ® , Conductin g a n IT Security Risk Assessment, USA, 2020, https://store.isaca.org/s/store#/store/browse/detail/a2S4w000004KoZeEAK 22 Op cit Leal

Volkan Evrin, CISA, CRISC, COBIT 2019 Foundation, CDPSE, CEHv9, ISO 27001-22301-20000 LA

Has more than 20 years of professional experience in information and technology (I&T) focus areas including information systems and security, governance, risk, privacy, compliance, and audit. He has held executive roles on the management of teams and the implementation of projects such as information systems, enterprise applications, free software, in-house software development, network architectures, vulnerability analysis and penetration testing, informatics law, Internet services, and web technologies. He is also a part-time instructor at Bilkent University in Turkey; an APMG Accredited Trainer for CISA, CRISC and COBIT 2019 Foundation; and a trainer for other I&T-related subjects. He can be reached at [email protected] .

Strategic Risk Assessment Template, Examples, & Checklist for 2022

July 29, 2020

The first step in building a risk management plan is to conduct an initial risk assessment. What sets a strategic risk assessment apart from other risk assessment methods is that it is driven by the business’s core strategies. Get up to speed on strategic risk assessment with a checklist, template, and examples below. 

What Is a Strategic Risk Assessment?

A strategic risk assessment is a systematic, continuous process for organizations to identify its strategic risks and understand how those risks are being managed across the business. “Strategic risks” are the risks that are most consequential to the organization’s ability to execute its strategy and achieve its objectives. They entail the risk exposures that can ultimately impact shareholder value or even threaten the business’s survival. 

Planning a Strategic Risk Assessment

The strategic risk assessment process should be led by management, but receive input from and be reviewed in conjunction with the Board. The outcome of this risk assessment is to achieve consensus, among Board members and management, around the top key risks facing the organization. This process aligns with COSO’s 2017 ERM framework and is based on research by Dr. Mark Frigo, Director of the Center for Strategy, Execution, and Valuation at DePaul University, and Richard Anderson, a retired Partner at PwC and a clinical professor at the Strategic Risk Management Lab at DePaul. 

Risk Assessment Checklist

Strategic Risk Assessment Template

1. understand the strategies of the organization.

The first step of the risk assessment is to develop an overview of the organization’s key strategies and business objectives. For some businesses, this data may already be well-developed and formally documented. If not, the risk assessment team can leverage examples such as The Return Driven Strategy model to understand and identify the strategies most critical to achieving the organization’s overall objectives. This is a crucial step in helping management and the Board eventually prioritize the potential risks to these strategies.  

2. Collect data and views on strategic risks from the organization

The second step is to collect information from the organization regarding its strategic risks. This can be achieved by:

• Reviewing financial reports and investor presentations
• Interviewing key executive leaders regarding what they view as strategic risks
• Surveying business leaders and other personnel with views on risks, e.g. compliance, internal audit , and external audit teams

It can be helpful to use the information gathered on strategic risks in Step 1 to frame these interviews and surveys around the business’s key strategies. It can also be useful to interview key executive leaders regarding what they view as potential emerging risks in addition to gathering their feedback on strategic risks. This is a good time to consider incorporating  risk assessment analytics  to the data you gather on strategic risks. 

3. Prepare a preliminary strategic risk profile

The next step is to utilize the results from steps 1 and 2 of the risk assessment planning to develop a preliminary profile of the organization’s strategic risks. The risk assessment team can use the Strategic Risk Management Model as a template to help assess the risks related to each of the top strategies identified. Ultimately, this profile should contain a list of the top risks to the organization’s strategy and objectives and their potential severity or ranking. How detailed this profile is, and how it will be presented, should be carefully catered to the culture of your organization. Color-coding risks and using visual heat maps may be helpful in presenting this information to management and the Board for review and discussion.

4. Validate and finalize the strategic risk profile with management and the Board

Upon presenting the preliminary strategic risk profile to leadership, the next step is for the risk assessment team to facilitate a discussion among key executives to help refine, validate, and finalize the risk profile. The ensuing cross-dialogue and conversations about risk and opportunity are among the most valuable conversations for shaping business strategy, as they unite executives across the organization to share their unique perspectives and collectively vet and prioritize the organization’s top key risks. 

5. Develop a strategic risk management action plan

This step entails leveraging the results of the previous steps to produce a strategic risk management action plan to help manage and monitor the identified strategic risks. The action plan involves developing an appropriate risk response (accept, avoid, pursue, reduce, share) to each critical risk identified in accordance with the organization’s risk appetite. The consolidated action plan should prioritize these risk responses and allocate resources across them. Best practice indicates the action plan should also include a charter that: 

• Has a formal statement on the organization’s risk appetite
• Assigns responsibilities and accountability for risk monitoring and actions among management, internal audit and compliance

6. Communicate the strategic risk profile and action plan

Once the strategic risk management action plan has been developed, it should be validated and finalized by management and the Board. Once finalized, this profile and plan must be communicated with the organization in order to help develop and build the organization’s risk culture. 

7. Implement the  enterprise risk management action plan

The value of performing a strategic risk assessment is realized when the organization implements the resulting action plan to manage and monitor its strategic risks. However, enterprise risk management should not be regarded as a one-time, annual procedure, but as a continual, ongoing process that can be built upon and strengthened. As such, these steps should be repeated as frequently as needed in response to significant external events that can affect the business, such as the 2008 financial crisis or the COVID-19 crisis. Furthermore, leveraging risk management software can help streamline and centralize the risk assessment process, creating the foundation for a mature ERM program. To learn how AuditBoard can help you manage your risk management plan from end to end, contact us by filling out the form below. 

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Understanding Risk Analysis

How to perform a risk analysis.

• Qualitative vs. Quantitative
• Advantages and Disadvantages
• Risk Analysis FAQs

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Risk Analysis: Definition, Types, Limitations, and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.

Investopedia / Zoe Hansen

Risk analysis is the process of assessing the likelihood of an adverse event occurring within the corporate, governmental, or environmental sectors.

The term risk analysis refers to the assessment process that identifies the potential for any adverse events that may negatively affect organizations and the environment. Risk analysis is commonly performed by corporations (banks, construction groups, health care, etc.), governments, and nonprofits. Conducting a risk analysis can help organizations determine whether they should undertake a project or approve a financial application, and what actions they may need to take to protect their interests. This type of analysis facilitates a balance between risks and risk reduction. Risk analysts often work in with forecasting professionals to minimize future negative unforeseen effects.

Key Takeaways

• Risk analysis seeks to identify, measure, and mitigate various risk exposures or hazards facing a business, investment, or project.
• Quantitative risk analysis uses mathematical models and simulations to assign numerical values to risk.
• Qualitative risk analysis relies on a person's subjective judgment to build a theoretical model of risk for a given scenario.
• Risk analysis can include risk benefit, needs assessment, or root cause analysis.
• Risk analysis entails identifying risk, defining uncertainty, completing analysis models, and implementing solutions.

Risk assessment enables corporations, governments, and investors to assess the probability that an adverse event might negatively impact a business, economy, project, or investment. It is essential for determining the worth of a specific project or investment and the best process(es) to mitigate those risks. Risk analysis provides different approaches that can be used to assess the risk and reward tradeoff of a potential investment opportunity.

A risk analyst starts by identifying what could potentially go wrong. These negatives must be weighed against a probability metric that measures the likelihood of the event occurring.

Finally, risk analysis attempts to estimate the extent of the impact that will be made if the event happens. Many identified risks, such as market risk , credit risk, currency risk, and so on, can be reduced through hedging or by purchasing insurance.

Almost all large businesses require a minimum level of risk analysis. For example, commercial banks need to properly hedge the foreign exchange exposure of overseas loans, while large department stores must factor in the possibility of reduced revenues due to a global recession. Risk analysis allows professionals to identify and mitigate risks but not completely avoid them.

Types of Risk Analysis

Risk-benefits.

Many people are aware of a cost-benefit analysis. In this type of analysis, an analyst compares the benefits a company receives to the financial and non-financial expenses related to the benefits. The potential benefits may cause other, new types of potential expenses to occur. In a similar manner, a risk-benefit analysis compares potential benefits with associated potential risks. Benefits may be ranked and evaluated based on their likelihood of success or the projected impact the benefits may have.

Needs Assessment

A needs risk analysis is an analysis of the current state of a company. Often, a company will undergo a needs assessment to better understand a need or gap that is already known. Alternatively, a needs assessment may be done if management is not aware of gaps or deficiencies. This analysis lets the company know where they need to spending more resources in.

Business Impact Analysis

In many cases, a business may see a potential risk looming and wants to know how the situation may impact the business. For example, consider the probability of a concrete worker strike to a real estate developer . The real estate developer may perform a business impact analysis to understand how each additional day of the delay may impact their operations.

Root Cause Analysis

Opposite of a needs analysis, a root cause analysis is performed because something is happening that shouldn't be. This type of risk analysis strives to identify and eliminate processes that cause issues. Whereas other types of risk analysis often forecast what needs to be done or what could be getting done, a root cause analysis aims to identify the impact of things that have already happened or continue to happen.

Though there are different types of risk analysis, many have overlapping steps and objectives. Each company may also choose to add or change the steps below, but these six steps outline the most common process of performing a risk analysis.

Step #1: Identify Risks

The first step in many types of risk analysis to is to make a list of potential risks you may encounter. These may be internal threats that arise from within a company, though most risks will be external that occur from outside forces. It is important to incorporate many different members of a company for this brainstorming session as different departments may have different perspectives and inputs.

A company may have already addressed the major risks of the company through a SWOT analysis. Although a SWOT analysis may prove to be a launching point for further discussion, risk analysis often addresses a specific question while SWOT analysis are often broader. Some risks may be listed on both, but a risk analysis should be more specific when trying to address a specific problem.

Step #2: Identify Uncertainty

The primary concern of risk analysis is to identify troublesome areas for a company. Most often, the riskiest aspects may be the areas that are undefined. Therefore, a critical aspect of risk analysis is to understand how each potential risk has uncertainty and to quantify the range of risk that uncertainty may hold.

Consider the example of a product recall of defective products after they have been shipped. A company may not know how many units were defective, so it may project different scenarios where either a partial or full product recall is performed. The company may also run various scenarios on how to resolve the issue with customers (i.e. a low, medium, or high engagement solution.

Step #3: Estimate Impact

Most often, the goal of a risk analysis is to better understand how risk will financially impact a company. This is usually calculated as the risk value, which is the probability of an event happening multiplied by the cost of the event.

For example, in the example above, the company may assess that there is a 1% chance a product defection occurs. If the event were to occur, it would cost the company $100 million. In this example, the risk value of the defective product would be assigned $1 million.

The important piece to remember here is management's ability to prioritize avoiding potentially devastating results. For example, if the company above only yielded $40 million of sales each year, a single defect product that could ruin brand image and customer trust may put the company out of business. Even though this example led to a risk value of only $1 million, the company may choose to prioritize addressing this due to the higher stakes nature of the risk.

Step #4: Build Analysis Model(s)

The inputs from above are often fed into an analysis model. The analysis model will take all available pieces of data and information, and the model will attempt to yield different outcomes, probabilities, and financial projections of what may occur. In more advanced situations, scenario analysis or simulations can determine an average outcome value that can be used to quantify the average instance of an event occurring.

Step #5: Analyze Results

With the model run and the data available to be reviewed, it's time to analyze the results. Management often takes the information and determines the best course of action by comparing the likelihood of risk, projected financial impact, and model simulations. Management may also request to see different scenarios run for different risks based on different variables or inputs.

Step #6: Implement Solutions

After management has digested the information, it is time to put a plan in action. Sometimes, the plan is to do nothing; in risk acceptance strategies, a company has decided it will not change course as it makes most financial sense to simply live with the risk of something happening and dealing with it after it occurs. In other cases, management may want to reduce or eliminate the risk.

Implementing solutions does not necessarily mean risk avoidance. A company can decide to simply live with the current risks it faces. Other potential solutions may include buying insurance, divesting from a product, restricting trade in certain geographical regions, or sharing operational risk with a partner company.

Qualitative vs. Quantitative Risk Analysis

Quantitative risk analysis.

Under quantitative risk analysis, a risk model is built using simulation or deterministic statistics to assign numerical values to risk. The inputs are mostly assumptions and  random variables .

For any given range of input, the model generates a range of output or outcomes. Risk managers analyze the model's output using graphs,  scenario analysis , and/or  sensitivity analysis  to make decisions about mitigating and dealing with the risks.

A Monte Carlo simulation can generate a range of possible outcomes of a decision or action. The simulation is a quantitative technique that repeatedly calculates results for the random input variables using a different set of input values. The resulting outcome from each input is recorded, and the final result of the model is a probability distribution of all possible outcomes.

The outcomes can be summarized on a distribution graph showing some measures of central tendency such as the mean and median, and assessing the variability of the data through standard deviation and variance. The outcomes can also be assessed using risk management tools such as scenario analysis and sensitivity tables. A scenario analysis shows the best, middle, and worst outcome of any event. Separating the different outcomes from best to worst provides a reasonable spread of insight for a risk manager.

For example, an American company that operates globally might want to know how its bottom line would fare if the exchange rate of select countries strengthened. A sensitivity table shows how outcomes vary when one or more random variables or assumptions are changed.

Elsewhere, a portfolio manager might use a sensitivity table to assess how changes to the different values of each security in a portfolio will impact the portfolio's variance. Other types of risk management tools include decision trees and break-even analysis.

Qualitative Risk Analysis

Qualitative risk analysis is an analytical method that does not identify and evaluate risks with numerical and quantitative ratings. It involves a written definition of the uncertainties, an evaluation of the extent of the impact (if the risk ensues), and countermeasure plans in the case of a negative event.

Examples of qualitative risk tools include SWOT analysis , cause-and-effect diagrams, decision matrixes, and  game theory . A firm that wants to measure the impact of a security breach on its servers may use a qualitative risk technique to help prepare it for any lost income that may occur from a data breach.

While most investors are concerned about downside risk, mathematically, the risk is the variance both to the downside and the upside.

Example of Risk Analysis: Value at Risk (VaR)

Value at risk (VaR) is a statistic that measures and quantifies the level of financial risk within a firm, portfolio , or position over a specific time frame. Investment and commercial banks often use this metric to determine the extent and occurrence ratio of potential losses in their institutional portfolios. Risk managers use VaR to measure and control the level of risk exposure. One can apply VaR calculations to specific positions or whole portfolios or to measure firm-wide risk exposure.

VaR is calculated by shifting historical returns from worst to best, assuming that returns will be repeated, especially where risk is concerned. As a historical example, let's look at the Nasdaq 100  ETF , which trades under the symbol QQQ (sometimes called the "cubes") and started trading in March 1999.

In January 2000, the ETF returned 12.4%. However, there are points at which the ETF resulted in losses as well. At its worst, the ETF ran daily losses of 4% to 8%. This period is referred to as the ETF's worst 5%. Based on these historic returns, we can assume with 95% certainty that the ETF's largest losses won't go beyond 4%. So if we invest $100, we can say with 95% certainty that our losses won't go beyond $4.

One important thing to remember is that VaR doesn't provide analysts with absolute certainty. Instead, it's an estimate based on probabilities. The probability gets higher if you consider the higher returns and only consider the worst 1% of the returns. The Nasdaq 100 ETF's losses of 7% to 8% represent the worst 1% of its performance. We can thus assume with 99% certainty that our worst return won't lose us $7 on our investment. We can also say with 99% certainty that a $100 investment will only lose us a maximum of $7.

Advantages and Disadvantages of Risk Analysis

Risk analysis.

May aid in minimizing losses due to management preemptively forming a risk plan

May allow management to quantify risks and assign dollars to future events

May protect company resources, produce better processes, and mitigate overall risk

Relies heavily on estimates, so it may be difficult to perform for certain risks

Can not predict unpredictable, black swan events

May underestimate risk magnitude or occurence, leading to overconfident operations

Pros of Risk Analysis

Risk analysis allows companies to make informed decisions and plan for contingencies before bad things happen. Not all risks may materialize, but it is important for a company to understand what may occur so it can at least choose to make plans ahead of time to avoid potential losses.

Risk analysis also helps quantify risk, as management may not know the financial impact of something happening. In some cases, the information may help companies avoid unprofitable projects. In other cases, the information may help put plans in motion that reduce the likelihood of something happen that would have caused financial stress on a company.

Risk analysis may detect early warning signs of potentially catastrophic events. For example, risk analysis may identify that customer information is not being adequately secured. In this example, risk analysis can lead to better processes, stronger documentation, more robust internal controls , and risk mitigation.

Cons of Risk Analysis

Risk is a probabilistic measure and so can never tell you for sure what your precise risk exposure is at a given time, only what the distribution of possible losses is likely to be if and when they occur. There are also no standard methods for calculating and analyzing risk, and even VaR can have several different ways of approaching the task. Risk is often assumed to occur using normal distribution probabilities, which in reality rarely occur and cannot account for extreme or " black swan " events.

The  financial crisis of  2008 , for example, exposed these problems as relatively benign VaR calculations that greatly understated the potential occurrence of risk events posed by portfolios of subprime mortgages .

Risk magnitude was also underestimated, which resulted in extreme leverage ratios within subprime portfolios. As a result, the underestimations of occurrence and risk magnitude left institutions unable to cover billions of dollars in losses as subprime mortgage values collapsed.

What Is Meant by Risk Analysis?

Risk analysis is the process of identifying and analyzing potential future events that may adversely impact a company. A company performs risk analysis to better understand what may occur, the financial implications of that event occurring, and what steps it can take to mitigate or eliminate that risk.

What Are the Main Components of a Risk Analysis?

Risk analysis is sometimes broken into three components. First, risk assessment is the process of identifying what risks are present. Second, risk management is the procedures in place to minimize the damage done by risk. Third, risk communication is the company-wide approach to acknowledging and addressing risk. These three main components work in tandem to identify, mitigate, and communicate risk.

Why Is Risk Analysis Important?

Sometimes, risk analysis is important because it guides company decision-making. Consider the example of a company considering whether to move forward with a project. The decision may be as simple as identifying, quantifying, and analyzing the risk of the project.

Risk analysis is also important because it can help safeguard company assets. Whether it be proprietary data, physical goods, or the well-being of employees, risk is present everywhere. Companies must be mindful of where it most likely to occur as well as where it is most likely to have strong, negative implications.

Risk analysis is the process of identifying risk, understanding uncertainty, quantifying the uncertainty, running models, analyzing results, and devising a plan. Risk analysis may be qualitative or quantitative, and there are different types of risk analysis for various situations.

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How Risk Management’s Meaning Shapes Business Strategy and Mitigation Plans

Last Updated on September 19, 2024 by Tanya Janse van Rensburg

Risk is part of every business. Unexpected challenges can arise whether running a small store or managing a large corporation.

The way a company handles these risks can make or break its success. That's where risk management comes in.

By planning for the worst and hoping for the best, businesses can prepare for problems before they happen.

This proactive approach helps avoid unnecessary surprises and ensures a smooth operation.

This article introduces the definition of risk management , how it shapes company strategies, and how it improves companies' plans for potential issues.

Concept of Risk in Business Strategy

Risk can include anything from market changes to natural disasters. Businesses must always be ready to face these uncertainties.

Identifying what could go wrong is the first step toward handling them. While risk is sometimes adverse, it can also offer growth opportunities.

By viewing risks as chances for improvement, companies can adapt and find new paths forward.

Its Importance in Decision-Making

Intelligent decision-making requires a clear understanding of potential risks. With it, companies might make better choices.

Risk management gives businesses insight into how to choose wisely.

For example, before launching a new product, a company might evaluate market conditions to avoid a flop.

By identifying potential challenges early on, businesses can adjust their plans to increase success.

Steps Involved in the Process

Risk management involves several key steps:

• Identify the risks. This includes everything that could go wrong in daily operations or long-term plans.
• Assess these risks by figuring out how likely they will happen and how serious they might be.
• Develop plans to reduce or avoid these risks.
• Keep an eye on risks and adjust as needed.

It’s a continuous process that ensures companies stay prepared for the unexpected.

Risk Identification and Its Role

Identifying risks early on allows businesses to include them in their strategy.

If a company plans to expand, for example, it needs to consider risks like new competition or changes in the market.

By identifying these risks, businesses can prepare. They might decide to adjust their strategy or develop backup plans.

The earlier risks are identified, the easier it becomes to handle them effectively.

Risk Analysis for Informed Business Decisions

Once risks are identified, businesses need to analyze them.

This means looking at how likely they are to happen and what the impact might be.

For example, a company might decide a risk is worth taking because the potential rewards outweigh the possible harm.

On the other hand, they might avoid specific actions if the risks seem too high.

Risk Evaluation and Prioritization

Not all risks are equal. Some are more urgent than others.

Risk evaluation helps businesses understand which risks require immediate attention and which can be addressed later.

By prioritizing risks, companies can focus their efforts where needed most.

This ensures that the most dangerous risks are handled first while lower-level risks are still kept in check.

Developing Effective Strategies

Mitigation means finding ways to reduce the impact of risks.

Businesses need solid plans for reducing risks and their consequences.

For example, if a company worries about supply chain disruptions, it might develop relationships with multiple suppliers.

This way, if one supplier fails, it has a backup. Developing effective mitigation strategies ensures that risks don’t cause long-term harm.

Continuous Risk Monitoring and Adjustment 

Risks can change over time. A risk that seems small today might become a significant concern tomorrow.

Continuous monitoring allows businesses to adjust their strategies as new risks arise.

Companies can stay ahead of the curve by monitoring changes in the market, technology, or customer needs closely.

Monitoring also ensures that companies are always prepared to face new challenges.

The Role of Stakeholders

Stakeholders, such as employees, investors, and customers, are essential in risk management.

They are people or groups affected by the business, and it’s important to consider their views when identifying and managing risks.

Businesses can gain valuable insights and make better decisions by including stakeholders in the process.

Stakeholders can also help spread awareness about potential risks.

Embedding Risk Culture

A strong risk culture means everyone in the organization knows risks and their importance.

Employees at all levels should understand how to identify and report risks.

This culture ensures that everyone takes responsibility for managing risks.

When risk management becomes part of the company’s DNA, it leads to better decision-making and fewer surprises.

Ensuring Effective Communication in

Clear communication is essential in managing risks.

If employees, managers, and stakeholders are not on the same page, risks can quickly spiral out of control.

Companies can ensure a smooth response when issues arise by informing everyone about potential risks and mitigation plans.

Communication also helps build trust within the organization, as everyone knows what to expect.

Utilizing Frameworks for Strategy Development

Risk management frameworks offer a structured approach to handling risks.

These frameworks outline the steps for identifying, analyzing, and mitigating risks.

By using a standardized framework, businesses can ensure consistency in their approach.

This makes it easier to handle risks across different departments or teams.

A well-implemented framework also speeds up the decision-making process by providing clear guidelines.

Best Practices for Mitigating Financial and Operational Risks

Financial and operational risks are common in business. Mitigating these risks requires careful planning.

For financial risks, companies can develop contingency plans or invest in insurance.

For operational risks, businesses might focus on improving internal processes.

By following best practices, companies can reduce the chances of financial loss or operational breakdowns.

How it Influences Long-term Business Resilience

Long-term resilience comes from the ability to handle risks effectively.

Companies that manage risks well are better equipped to survive unexpected challenges.

Over time, this resilience leads to growth and stability.

Risk management helps businesses stay flexible and ready to adapt to changing environments, ensuring long-term success.

How Platforms Enhance Mitigation and Strategy Execution

Risk management platforms offer tools that simplify tracking, assessing, and mitigating risks.

These platforms provide real-time data, allowing businesses to respond quickly to new threats.

With automated systems, companies can monitor risks continuously without manual input.

Platforms also allow for better collaboration by keeping everyone in the organization informed about risks and how to handle them.

By understanding risk management and its associated potential risks, companies can make better decisions, stay competitive, and avoid major setbacks.

A proactive approach to managing risks ensures companies are always ready for the unexpected.

In the end, strong risk management leads to long-term success, keeping companies on track no matter what challenges arise.

Effective risk management is crucial for businesses of all sizes.

By proactively identifying, analyzing, and mitigating risks, companies can make informed decisions, develop robust strategies, and ensure long-term success .

Businesses must embed a strong risk culture, prioritize continuous risk monitoring, and maintain open and transparent communication with stakeholders.

With a comprehensive understanding of risk management, businesses can confidently navigate uncertainties and adapt to ever-changing market conditions, ultimately positioning themselves for sustainable growth and resilience.

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Business risk assessment: what it is & why you need it

Find out what a business risk assessment is, why you need one, what types of risks to consider and how to mitigate your risk.

20 June 2024

What is a business risk assessment? 

A business risk assessment helps you identify, analyse and prioritise risks. Businesses use risk assessments to:

minimise or eliminate risks

protect against potential threats

improve decision-making.

Risk assessment for business plan

When you’re putting together a business plan , it’s important to include a business risk assessment. Completing this section helps business owners to: 

understand what risks they face

develop strategies for minimising or eliminating those risks

allocate resources effectively to manage risks

monitor and review risks on an ongoing basis.

This means that the business owner has a documented strategy in place to handle when things can — and do — go wrong. This gives them better control over the business and its trajectory, while also giving potential investors assurance that the business is well managed and their investment is sound.  

The different types of risks businesses face

While it may be difficult to catalogue every risk a business may face, you can do a risk assessment based on types of risk. These categories may include:  

Hazard-based

These are risks from dangerous workplace situations that could cause harm to people, property or the environment. Examples include fires, floods and chemical spills.

Opportunity-based

This risk comes from choosing one opportunity over another. When you dedicate your resources to one opportunity, there’s always the chance that a better one will come along or the current one won’t go as planned. Examples include investing in a new product line or moving to a new location.

Uncertainty-based

This risk is present when the outcome of a situation is uncertain. Examples of business risks include legal action, damage from natural disasters, and the loss of important customers or suppliers.

Operational 

This type of risk comes from the day-to-day running of your business. Examples of operational risk may include equipment failure, employee error or theft.

Reputational

A risk to your business' reputation can include negative media coverage, product recalls and data breaches. 

Cyber security

Cyber security is a risk for all businesses, including small and medium-sized organisations. Any data loss, leak or compromise can cost a business severely — both financially and in reputational damage. 

How to do a business risk assessment (plus template and example)

1. identify the different types of risks for your business..

To identify the risks to your business, consider what could go wrong and why that might happen. Consider holding brainstorming sessions with your employees or reviewing past incidents to get started.

2. Assess the likelihood and potential impact of each type of risk.

You’ll want to decide the likelihood and potential impact of each type of risk. For example, the risk may be unlikely to occur through to very likely to occur. Likewise, the impact of the risk may be negligible through to severe. Doing this assessment will help you decide what to prioritise and where to allocate resources.   

3. Prioritise the risks and develop strategies for mitigating them.

Once you’ve identified and assessed your risks, you’ll need to develop strategies to mitigate them and lessen their potential negative impact. This could involve taking out adequate business insurance or putting business continuity plans in place. 

Business risk assessment template

The Australian Taxation Office (ATO) has developed a business risk assessment template that you can use for your risk assessment.

The template includes questions to help you identify and assess risks.

Business risk assessment example

If you own a small business, you might not think you need to worry about conducting risk assessments. But all businesses can face risks that could significantly affect their operations. Consider the following example:

You own a small retail business with one store. Your primary source of income is from selling products online, but you also have a small number of customers who visit your store in person.

A customer tells you they see a mouse in your store. This is a reputational risk, as it could damage your business’ reputation if word gets out. It’s also an operational risk if it leads to damaged inventory.

In this case, you'd need to assess the likelihood of that risk and the potential damage it could do to your business reputation or operations. Based on this assessment, you can decide how best to deal with the risk.

This is just one example of the innumerable risks businesses can face. Conducting a thorough business risk assessment prepares you for just about anything that comes your way.

Tips for mitigating risk in your business

Risk is part of life — it can’t always be avoided, but there are strategies you can put in place to mitigate its impacts. Consider the following: 

Have adequate insurance coverage to help mitigate the financial impact of risks such as fire, theft or liability.

Develop contingency plans so that you can continue operating if an incident, such as a natural disaster or power outage, occurs.

Implement risk management processes and procedures. This could involve anything from regular risk assessments to employee training on identifying and dealing with potential risks.

Regularly monitor and review risks and make sure you have effective mitigation strategies in place.

Maintain good relationships with suppliers and customers. This can help to minimise the impact of risks such as supply chain disruptions. Also, ask for feedback on their experience with your products or services, so you can identify potential risks before they become major problems.

Have strong internal financial controls and IT security measures.

Stay up to date on changes in laws and regulations. This will help you avoid compliance-related issues, including risks specific to your industry and general risks all businesses face.

Disclaimer: This is general advice not meant to replace professional guidance. When seeking out someone to help advise you on business decisions, find somebody with the accreditations to assist you.

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Disclaimer:  Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.

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How to Perform a Risk Assessment

Identify, analyze, and mitigate potential hazards and the risks associated with them by conducting risk assessments.

What is a Risk Assessment?

A risk assessment is a systematic process used to identify potential hazards and risks in a situation, then analyze what would happen should these hazards take place. As a decision-making tool, risk assessment aims to determine which measures should be implemented to eliminate or control those risks, as well as specify which of them should be prioritized according to their likelihood and impact on the business.

Risk assessment is one of the major components of a risk analysis . Risk analysis is a process with multiple steps that intends to identify and analyze all of the potential risks and issues that are detrimental to the business or enterprise .

Why is it Important?

Risk assessments are essential to identify hazards and risks that may potentially cause harm to workers. Identifying hazards by using the risk assessment process is a key element in ensuring the health and safety of your employees and customers. OSHA requires businesses to conduct risk assessments. According to regulations set by OSHA, assessing hazards or potential risks will determine the personal protective gears and equipment a worker may need for their job.

Risk Analysis Framework

When Do You Perform a Risk Assessment?

Beyond complying with legislative requirements, the purpose of risk assessments is to eliminate operational risks and improve the overall safety of the workplace. It is the employer’s responsibility to perform risk assessments when:

• new processes or steps are introduced in the workflow;
• changes are made to the existing processes,
• equipment, and tools; or new hazards arise.

Risk assessments are also performed by auditors when planning an audit procedure for a company.

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HSE distinguishes three general risk assessment types:

Large Scale Assessments

This refers to risk assessments performed for large scale complex hazard sites such as the nuclear, and oil and gas industry. This type of assessment requires the use of an advanced risk assessment technique called Quantitative Risk Assessment (QRA).

Required specific assessments

This refers to assessments that are required under specific legislation or regulations, such as the handling of hazardous substances (according to COSHH regulations, 1998) and manual handling (according to Manual Handling Operations Regulations, 1992).

General assessments

This type of assessment manages general workplace risks and is required under the management of legal health and safety administrations such as OSHA and HSE.

Here is an example of a completed risk assessment. See more risk assessment examples in various industries.

How to Perform Risk Assessment in 5 Steps

Below are the 5 steps on how to efficiently perform risk assessments :

1. Identify hazards

Survey the workplace and look at what could reasonably be expected to cause harm. Identify common workplace hazards . Check the manufacturer’s or suppliers’ instructions or data sheets for any obvious hazards. Review previous accident and near-miss reports.

2. Evaluate the risks

Risk evaluation helps determine the probability of a risk and the severity of its potential consequences. To evaluate a hazard’s risk, you have to consider how, where, how much, and how long individuals are typically exposed to a potential hazard. Assign a risk rating to your hazards with the help of a risk matrix.

3. Decide on control measures to implement

After assigning a risk rating to an identified hazard, it’s time to come up with effective controls to protect workers, properties, civilians, and/or the environment. Follow the hierarchy of controls in prioritizing implementation of controls.

4. Document your findings

It is important to keep a formal record of risk assessments . Documentation may include a detailed description of the process in assessing the risk, an outline of evaluations, and detailed explanations on how conclusions were made.

5. Review your assessment and update if necessary

Follow up with your assessments and see if your recommended controls have been put in place. If the conditions in which your risk assessment was based change significantly, use your best judgment to determine if a new risk assessment is necessary.

Risk Assessment Tools and Techniques

There are options on the tools and techniques that can be seamlessly incorporated into a business’ process. The four common risk assessment tools are: risk matrix, decision tree, failure modes and effects analysis (FMEA), and bowtie model. Other risk assessment techniques include the what-if analysis, failure tree analysis , Layer of Protection Analysis (LOPA) and Hazard and Operability (HAZOP) analysis.

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How to use a Risk Matrix?

A risk matrix is often used to measure the level of risk by considering the consequence/ severity and likelihood of injury to a worker after being exposed to a hazard. Two key questions to ask when using a risk matrix should be:

• Consequences: How bad would the most severe injury be if exposed to the hazard?
• Likelihood: How likely is the person to be injured if exposed to the hazard?

The most common types are the 3×3 risk matrix, 4×4 risk matrix, and 5×5 risk matrix .

How to Assess Consequences?

It is common to group the injury severity and consequence into the following four categories:

• Fatality – leads to death
• Major or serious injury – serious damage to health which may be irreversible, requiring medical attention and ongoing treatment
• Minor injury – reversible health damage which may require medical attention but limited ongoing treatment). This is less likely to involve significant time off work.
• Negligible injuries – first aid only with little or no lost time.

How to Assess Likelihood?

It is common to group the likelihood of a hazard causing worker injury into the following four categories:

• Very likely – exposed to hazard continuously.
• Likely – exposed to hazard occasionally.
• Unlikely – could happen but only rarely.
• Highly unlikely – could happen, but probably never will.

We recommend OSHA’s great learning resources in understanding how to assess consequence and likelihood in your risk assessments.

Risk Assessment Training

“Safety has to be everyone’s responsibility… everyone needs to know that they are empowered to speak up if there’s an issue.” – Captain Scott Kelly, at the SafetyCulture Virtual Summit.

A good and effective hazard identification and risk assessment training  should orient new and existing workers on various hazards and risks that they may encounter. It should also be able to easily walk them through safety protocols. With today’s technology like SafetyCulture’s Training feature, organizations can create and deploy more tailored-fit programs based on the needs of their workers.

Perform Effective Risk Assessments with SafetyCulture

Why use safetyculture.

SafetyCulture is a mobile-first operations platform adopted across industries such as manufacturing, mining, construction, retail, and hospitality. It’s designed to equip leaders and working teams with the knowledge and tools to do their best work—to the safest and highest standard.

Promote a culture of accountability and transparency within your organization where every member takes ownership of their actions. Align governance practices, enhance risk management protocols, and ensure compliance with legal requirements and internal policies by streamlining and standardizing workflows through a unified platform.

✓ Save time and reduce costs ✓ Stay on top of risks and incidents ✓ Boost productivity and efficiency ✓ Enhance communication and collaboration ✓ Discover improvement opportunities ✓ Make data-driven business decisions

FAQs About Risk Assessment

What is the difference between risk assessment and job safety analysis (jsa).

The key difference between a risk assessment and a JSA is scope. Risk assessments assess safety hazards across the entire workplace and are oftentimes accompanied with a risk matrix to prioritize hazards and controls. Whereas a JSA focuses on job-specific risks and is typically performed for a single task, assessing each step of the job.

What are the 3 main tasks of risk assessment?

The three main tasks of risk assessment include identifying the hazards, assessing the risks that come along with them, and placing control measures to either eliminate them totally or at least minimize their impact on the business and its people.

What are the top 5 operational risk categories?

The five most common categories of operational risks are people risk, process risk, systems risk, external events risk or external fraud, and legal and compliance risk. Operational risks refer to the probability of issues relating to people, processes, or systems negatively impacting the business’s daily operations.

How often should risk assessments be performed?

As stated above, risk assessments are ideally performed when there’s a new process introduced or if there are changes to the existing ones, as well as when there are new equipment or tools for employees to use. Outside of these instances, however, it is recommended that businesses schedule risk assessments at least once a year so that the procedures are updated accordingly.

Who should perform risk assessments?

Risk assessments should be carried out by competent persons who are experienced in assessing hazard injury severity, likelihood, and control measures.

Jairus Andales

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How To Create A Risk Management Plan + Template & Examples

Emily has been working in project management for over 13 years. In this time, she has worked using a variety of project management methodologies and has been a strategic project manager, facilitator, and Scrum master. She is also an avid coach and trainer, who wants to ensure the development of the next generation of project professionals through training, knowledge sharing and team building.

Sarah is a project manager and strategy consultant with 15 years of experience leading cross-functional teams to execute complex multi-million dollar projects. She excels at diagnosing, prioritizing, and solving organizational challenges and cultivating strong relationships to improve how teams do business. Sarah is passionate about productivity, leadership, building community, and her home state of New Jersey.

Dramatically reduce your chances of project failure with a risk management plan: learn how to create one for your projects, get some examples, and download our template!

A clear and detailed risk management plan helps you assess the impact of project risks and understand the potential outcomes of your decisions. It can be a useful tool to support decision making in the face of uncertainty.

However, I have seen projects fail because stakeholders did not take the risk management plan seriously or because the project failed to implement a risk management strategy.

Read on to learn how you can avoid these mistakes for your projects.

What Is A Risk Management Plan?

A risk management plan, or RMP, is a document describing how your project team will monitor and respond to unexpected or uncertain events that could impact the project.

The risk management plan:

• analyzes the potential risks that exist in your organization or project
• identifies how you will respond to those risks if they arise
• assigns a responsible person to monitor each risk and take action, if needed.

Team members and stakeholders should collaborate to create a project risk management plan after starting to develop a project management plan but before the project begins.

What’s Covered In A Risk Management Plan?

The fidelity of your risk management plan will vary depending on the nature of your project and the standard operating procedures that your organization uses. 

A project risk management plan seeks to answer:

• What is this project, and why does it matter?
• Why is risk management important for the project’s success?
• What will the team do to identify, log, assess, and monitor risks throughout the project?
• What categories of risk will we manage?
• What methodology will be used for risk identification and to evaluate risk severity?
• What is expected of the people who own the risks?
• How much risk is too much risk?
• What are the risks, and what are we going to do about them?

Depending on the project, this document could be hundreds of pages—or it could be less than a dozen. So how do you decide how much detail to provide? Here are two illustrative examples (but by no means are they the only ways to do it!).

PS. If you’re looking for additional information, we also did a workshop on managing risk that’s available for DPM members .

2 Types Of Risk Management Plans

In this section, we’ll cover 2 common types of risk management plans—a RAID log and a risk matrix.

#1: Simpler Version—Lightweight RAID Log

In its most minimal form, a risk management plan could be a handful of pages describing:

• how and when to assess risk
• the roles and responsibilities for risk owners
• at what point the project risk should trigger an escalation.

Instead of a formal risk register designed to calculate risk severity, a lightweight risk management approach may simply involve maintaining a risk list in your weekly status report .

This list (also known as a RAID log) tracks risks, assumptions, issues, and dependencies so that the project team and sponsor can review and further discuss.

When to use it : this approach could be useful for a small non-technical project being executed by a team of 3-4 people in an organization that does not have a standard approach to risk management.

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#2: Complex Version—Risk Matrix

When an organization already has a culture of risk management, there may be a template to follow that demands a high level of detail. These details may include a full description of the methodology that the organization will follow to perform qualitative and quantitative risk analysis, along with an impact matrix. 

An impact matrix, or risk assessment matrix, shows the relationship between risk factors in calculating risk severity. Risks that are high-probability and high-impact are the most severe.

An organization may design its risk register template to prioritize and assign a numerical severity score to measure the level of risk. 

Additionally, you may need to create a risk breakdown structure to decompose higher-level risk categories into smaller, more specific risk subcategories

When to use it : making a detailed risk management plan isn’t about creating complexity for complexity’s sake—you and your team will be glad to have this level of detail on a large enterprise project that involves larger teams, multiple stakeholders, and high stakes that could have a significant impact on the business.

The concept of enterprise project management has evolved to include digital tools and methodologies.

In terms of tooling, there are some great options available for managing risk on your project. Many organizations favor spreadsheets as part of an enterprise business software bundle, but there are also some providers that support risk management planning specifically. 

Two examples of risk management software are Wrike and monday.com . These tools integrate the entire risk management process with the wider project management plan.

The most important consideration is not the tool used, but rather the discussions you’ll have with your team and your project sponsor about how to navigate risks to increase the likelihood of project success.

How To Make A Risk Management Plan 

Below is a step-by-step guide to developing your own version of a risk management plan. Keep in mind that the nature of these steps may vary depending on the type of project involved, so don’t be afraid to tailor these steps to meet project and organizational needs.

The first 2 steps in the process are preparing supporting documentation and setting the context.

Next, decide how you want to identify & assess risks, and continuously identify those risks.

The next steps in the risk management process include assigning risk owners, populating your risk register, and then publishing it.

Make sure to monitor and assess risks throughout the project, and once the project is over, archive the risk management plan in a way that it can be reused for future projects.

1. Prepare supporting documentation

You’ll want to review existing project management documentation to help you craft your risk management plan. This documentation includes:

• Project Charter: among other things, this document establishes the project objectives , the project sponsor, and you as the project manager. Frankly, it gives you the right to create a project management plan and then a risk management plan within that. If formal project charters aren’t used at your organization, you should at least have this documented in an email or a less formal brief.
• Project Management Plan: not to be confused with the project strategy , this document outlines how you’ll manage, monitor, and control your project, including what methodology to use, how to report progress, how to escalate issues, etc. Your risk management plan should act as a subcomponent of the project management plan.
• Stakeholder Register: it’s good to have a solid idea of who the project stakeholders are before assessing risk. Each of these stakeholder groups presents a different set of risks when it comes to people, processes, and technology. You can also invite stakeholders to identify risks throughout the project and even nominate them as risk owners!

2. Set the context

Once you have your supporting documentation available, use it to frame up the discussion around your risk management plan. Specifically, take the project description and objectives from the project charter and use them to outline the business value of the project and the negative impacts that would result should the project fail .

The introduction to your risk management plan should explain the intent of this document and its relationship to the overarching project management plan. Use this context to drive a conversation about risk management with your team and your project sponsor.

3. Decide with your team how to identify and assess risks

Different methodologies are appropriate for different types of projects. The methods you choose also need to be sustainable for the team to perform throughout the project.

The key here is to have the right discussions and gather input to build consensus with your team and your stakeholders early in the project life cycle. Use these discussions to agree on risk categories, risk response plans, and ways to calculate risk severity.

4. Continuously identify risks

Once you’ve decided on the methodology to use, now the real fun begins—thinking about the things that could go astray during your project!

A great way to do this is to hold a risk workshop—a group session involving your team, key stakeholders, project sponsor, and subject matter experts to identify, evaluate, and plan responses to risks.

In the example below, I have used a simple overview from a sample project. During the workshop, you’d discuss everything in columns E-R and make sure that you have clear, SMART outcomes to put in each of the boxes. (SMART stands for specific, measurable, action-oriented, realistic, and timebound.)

I like to keep a copy of the risk register on my desk during the workshop to make sure that each column is discussed and populated appropriately. After the workshop, add any supporting details to finalize the document.

The project manager’s role during a risk workshop is to facilitate the meeting effectively. This involves brainstorming with stakeholders to evaluate both known risks and possible risks that may not have been considered. It could look something like this:

At the end of the workshop, your goal is to come away with stakeholder alignment on project risks, the desired risk response, and the expected impact of the risks. Stakeholder buy-in is critical for a successful risk response, so time in the workshop is likely to be time well-spent.

5. Assign risk owners

As you identify risks, you should work with the team to assign owners (including yourself). Project managers are responsible for risk management too!

That being said, the project manager can’t own everything. Assigning risk owners can be the most difficult area of risk management to finalize because it requires stakeholder accountability.

Make sure that risk owners have reviewed the risk management plan and are clear on their responsibilities. Follow up with them as you monitor risk throughout the project life cycle.

6. Populate the risk register

Following the risk workshop, finish populating any information required for the risk register . This includes a description of the risk, the risk response category, detailed risk response, risk status, and risk owner.

What’s important to remember during this exercise is ensuring that the risk response reflects the severity and importance of the risk. You can then review the broader risk register to understand any wider correlations that might exist among risks.

7. Publish the risk register

Send around the updated risk register within 48 hours of the workshop to give everyone time to read and process the output.

You can also use the risk register within wider project discussions to explain or define the timeline for a project or specific actions that need to be completed. It’s important to be timely so that the output can be used in other project artifacts.

8. Monitor and assess risks continuously throughout the project

New risks are introduced to a project constantly. In fact, mitigating one risk might create another risk or leave “residual risk.”

If feasible within your project constraints, try to run risk workshops periodically throughout the duration of the project or incorporate risk register reviews into other recurring planning activities. 

Nothing feels quite as deflating as when you swerve to avoid one risk only to drive blindly into another, much bigger risk.

9. Archive your risk management plan in a reusable & accessible format

After your project, it’s a good idea to archive your risk management plan for future reference.

There are many reasons why (in fact, it may be mandatory in your organization), but here’s the main one: while not every risk management plan suits every project, the risk and response strategies may remain applicable. Use past risks to create a foundation for your next project.

Examples Of Risk Management Plans In Action

Admittedly, the word “risk” is itself a bit broad. Not having enough resources to hit the project deadline is a risk. Hurricane season is a risk. Disruption of the space-time continuum is a risk. 

So, where do you draw the line on what types of risks to consider—which risks have a large enough potential impact to require attention, or even a contingency plan?

Here’s one way to think about it:

If the item is related to people, processes, resources, or technology and has any likelihood of threatening project success, you should log it as a risk.

Now, you might not need to do a comprehensive analysis on every risk in your risk register, but you do need to revisit the risks identified and conduct risk monitoring throughout the project. If someone starts testing a time machine near your office, for example, your highly unlikely space-time continuum risk has escalated.

Does this matter?

Yes. To prove it, here’s a simple example of risk management that saved a project:

A colleague was working on a service design project that required in-person research (this was before COVID-19), and on her RACI chart , she had clearly communicated to the client that it was the client’s responsibility to book a meeting space to conduct this research. She had logged a risk with her team that the client might not be able to secure a space.

Two days before the research commenced, the client informed her they weren’t able to secure the space. Luckily, her risk mitigation strategy on this particular risk was to book a backup space at the office, which she had done weeks ago. 

Something that could have stalled the project for weeks had become nothing more than an email that said something like “All good, we’ll use our space."

Here’s another example:

An agency agreed to an aggressive timeline for a highly technical project. The team had raised concerns as the project was being initiated, but leadership still wanted to proceed. The project manager and technical architect logged the timeline risk before the project started, and their risk response strategy was to re-evaluate the project timeline using a Monte Carlo simulation. 

After calculating a pessimistic, optimistic, and likely duration for every project activity on the critical path, they determined mathematically that the project had a 3% chance of hitting the deadline.

The project manager raised this with the client, and the client agreed to re-scope the project and re-baseline the project before getting going. It was too big of a risk for them to take.

Risk Register Template

There are a lot of risk register templates available online, and I would recommend looking at one that fits your needs, rather than one that includes every possible scenario. 

In the risk management plan template available in DPM Membership , we’ve tried to keep the risk register as simple as possible to ensure that you’re able to enter the relevant information for your project.

Best Practices For Risk Management Plans

Consider these best practices to help you craft an effective risk management plan:

• Develop the risk management plan during the project planning phase, after you’ve developed the project charter and the project management plan, to give stakeholders the necessary context
• Adapt the format and level of detail of the risk management plan to align with the needs of the project, industry, and organization that you support
• Assign a risk owner to every risk identified in your risk register, and hold them accountable for the risk response
• Continuously identify risks throughout the project life cycle and update the risk register accordingly
• During project closing , archive your risk management plan and use it to inform risk planning on future projects.

What's Next?

Whether you’re a novice project manager or a seasoned pro, having a good risk management plan is vital to project success. And, the key to a successful risk management plan is adaptability. You need to make sure that, with every project you run, you can adapt the risk management plan to your project, industry, and organization.

Dive deeper into these strategies by enrolling in one of these comprehensive risk management courses .

17 Project Risk Management Courses To Take In 2024

Project Risk Management: How To Do It Well & 5 Expert Tips

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How to Conduct a Risk Analysis for Your Small Business

Small business owners take risks every day. But if you put too much at stake, your business bottom line could suffer. To make sure your decisions are sound, conduct a risk analysis for your small business.

What is a risk analysis in business?

A risk is a situation that can either have huge benefits or cause serious damage to a small business’s financial health. Sometimes a risk can result in the closure of a business. Before taking risks at your business, you should conduct a risk analysis.

A risk assessment for small business is a strategy that measures the potential outcomes of a risk. The assessment helps you make smart business decisions and avoid financial issues.

Jason Olsen, serial entrepreneur and founder of Studios 360, Prestman Auto, and Automobia, explained in his article :

The key is to not only use optimism for reasons to take action, but also to utilize risk factors you uncover to guide your decisions. Yes, you must have courage to bet on your ideas, but you must also have the ability to take a thoughtful, calculated approach. It’s nearly impossible to remove all risk in any scenario, but what’s important is to make sure these troublesome areas are always considered and understood.”

Internal vs. external risks

Usually, a risk is either internal or external. Internal risks occur inside of your operations, while external risks occur outside of your business.

Internal risks are often more specific to your business and easier to control than external risks. Examples of internal risks include:

• Financial risks
• Marketing risks
• Operational risks
• Workforce risks

Though you can project external risks, they are usually out of your control. You might need to take a reactive approach to managing external risks. These risks include:

• Changing economy
• New competitors
• Natural disasters
• Government regulations
• Consumer demand changes

How to do a risk assessment

There is no one way to assess business risk. The assessment is not 100% accurate when it comes to judging your level of risk. A small business risk analysis gives you a picture of the possible outcomes your business decisions could have. Use the following steps to do a financial risk assessment.

Step 1: Identify risks

The first step to managing business risks is to identify what situations pose a risk to your finances. Consider the damage a risk could have on your business. Then, think about your goals and the rewards that could come out of taking the risk. Depending on your business, location, and industry, risks will vary.

Step 2: Document risks

Once you have a list of potential business risks, define them in a document. Develop a process to weigh the effect of each risk. Look at how much damage the risk could potentially cause and how hard it would be to recover. Set up a scoring system for risks, from mild to severe.

Step 3: Appoint monitors

Identify individuals at your business who will keep an eye on and manage risks. The risk monitor might be you, a partner, or an employee. Decide how risks should be reported and handled. When you have procedures for risk management, issues can be taken care of smoothly.

Step 4: Determine controls

After understanding potential risks, figure out controls you can use to reduce them. Look at patterns over time to predict your income cycle. And, assess the impact risks have on your business. Look at the significance of a risk as well as its likelihood of occurring at your business.

Step 5: Review periodically

Your business risk assessment is not a one-time commitment. Review risk management processes annually to see how you handle risks. Also, look out for new risks that might not have been relevant in the previous assessment.

Use a risk ratio to gauge risk

A risk ratio shows the relationship between your business’s debts and equity. Business debt creates risk. By comparing debt, or leverage, to equity, you get a better understanding of your business’s level of risk. This can help you set more targeted business debt management goals.

Debt-to-equity ratio

There are different kinds of financial leverage ratios. One common leverage ratio formula is the debt-to-equity ratio . For this ratio, divide your total debt by your total equity. Business equity is equal to your assets minus liabilities and shows your ownership in the business.

Debt-to-Equity Ratio = Total Debt / Total Equity

For example, you have $30,000 in debt and $15,000 in equity.

$30,000 / $15,000 = 2 times or 200%

This means for every dollar you have, you owe two dollars to creditors.

By finding the debt-to-equity ratio, you can see how much capital comes from debt. The more debt you have compared to equity, the bigger your risk level.

Purpose of risk assessments

Risk assessments are an important part of running your business. You can use your business risk assessment for making decisions and financing your business .

A simple risk analysis will help you avoid hazards that could damage your finances. The assessment informs you about the steps you need to take to protect your business. You can see what situations you need to address and avoid.

Beyond internal use, a financial risk assessment can help you prepare to talk with lenders. These individuals want to know your business’s level of risk before giving you money. They look at the likelihood of your business growing and how likely you are to pay back the loan.

Need help keeping track of your business debts, income, and expenses? Patriot’s online accounting software is easy to use and made for the non-accountant. We offer free, USA-based support. Try it for free today.

This article is updated from its original publication date of May 9, 2017.

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Project Risk Analysis: Tools, Templates & Techniques

There are many project risks that can affect your project and, as a project manager, you’re responsible for the risk analysis process. Risk analysis, or risk assessment is essential because it allows project managers to classify project risks and determine which of them should be tracked closely.

What Is Project Risk Analysis?

Risk analysis consists of using tools and techniques to determine the likelihood and impact of project risks that have been previously identified. Therefore, risk analysis helps project managers decipher the uncertainty of potential risks and how they would impact the project in terms of schedule, quality and costs if, in fact, they were to show up. Risk analysis isn’t exclusive to project management and it’s used in other disciplines such as business administration, construction or manufacturing.

No matter what industry you’re in, you’ll always have projects and so, you should use project management software for risk analysis. ProjectManager , for instance, has risk management tools that let you track risks in real time. Keep track of individual risk events and mark their impact, likelihood and overall risk level with a risk matrix. Then assign that risk to a team member and use project dashboards to monitor. Get started with ProjectManager today for free.

How to Analyze Project Risks

At a basic level, there are three things you should consider when assessing project risks : risk probability, risk impact and risk exposure. These three things can be estimated through qualitative and quantitative risk analysis.

Risk Probability

All risks have a certain probability of occurrence, which means they might or might not happen. Estimating risk probability isn’t an exact science, but there are several techniques you can use, such as examining data from past projects. By analyzing similar projects from the past, you can better determine whether there’s a high or low chance of project risk.

Risk Impact

Consider the type of risk and its potential impact on the project. Some risks will bring financial stress, while others might involve resource management issues or delays to the project schedule. To make things simple, you can simply assign levels of impact for your project risks, such as low, medium or high depending on how critical they are.

Risk Exposure

Risk exposure combines risk probability and risk impact in one formula that’s used by businesses to determine whether they’re ready to assume a potential risk or not. This technique can only be used when you can measure the potential losses associated with risk. The risk exposure formula is:

Risk Exposure = Risk impact * Risk probability

So, if a given risk had an impact of $1 million and the probability of that risk was 50%, your risk exposure would equal $500,000.

What Is Qualitative Risk Analysis?

Qualitative risk analysis refers to the risk analysis tools and techniques that rely on expert subject matter opinions, subjective and non-statistical means to assess the likelihood and impact of project risks. A risk matrix is a typical example of a qualitative risk analysis tool.

What Is Quantitative Risk Analysis?

By contrast, quantitative risk analysis is a statistical analysis of project risks. While it takes longer than qualitative analysis, quantitative risk analysis tends to be more accurate as it relies on data. Some examples of quantitative risk analysis tools are linear regression models or the Monte Carlo simulation, both statistical techniques that simulate scenarios and their different outcomes so that managers can better understand how risk can affect their business or project. Let’s take a closer look at some risk analysis tools and techniques you can use.

8 Project Risk Analysis Tools & Techniques

There are several risk analysis methods and tools that help managers through the analysis and decision-making process. Some of these involve the use of risk analysis tools such as project management charts and documents. Let’s dive into these risk analysis methods and how they can help you.

1. Team Brainstorming Sessions

Estimating risk probability and impact is a huge part of risk analysis. As stated, this can be done subjectively, which might lead to error, especially if you do it by yourself as the project manager. To avoid this, you can involve all the team members you consider relevant to get their input on risk likelihood and potential negative consequences.

2. Delphi Technique

The Delphi technique involves a panel of experts on topics that are critical to your project risk. It could be financial experts, lawyers, project management consultants or any other type of professional. This risk analysis method consists of promoting a debate among these experts who ultimately need to reach a consensus on a particular topic, such as estimating the business impact of a risk.

3. SWOT Analysis

SWOT analysis allows managers to understand the current situation of their business or project by looking at its strengths, weaknesses, opportunities and threats. As a risk analysis tool, it lets you note which of your weaknesses might be exploited by others and which external threats might affect your projects, such as economic conditions or the threat of new competitors.

4. Risk Analysis Matrix

The risk analysis matrix assesses the likelihood and the severity of risks, classifying them by order of importance. It’s main purpose is to help managers prioritize risks and create a risk management plan that has the right resources and strategies to properly mitigate risks. Risk likelihood is measured on a relative scale, not a statistical one, which makes it a qualitative risk analysis tool. This tool is also called the probability/consequence matrix by some project managers.

5. Risk Register

A risk register is a crucial project management tool to document project risks. It’s a document that lists all the potential risks that could occur during the project execution phase, as well as critical information about them. It’s meant to be used as input for the risk management plan, which describes who’s responsible for those risks, the risk mitigation strategies and the resources needed. Creating a risk register usually involves several reliable information sources such as the project team, subject matter experts and historical data.

6. Decision Tree Analysis

A decision tree analysis consists of mapping out the potential outcomes that might occur after a decision is made. This is a great method to analyze risks in new projects. Create decision trees as you go through your project planning process so you can identify potential risks and their probability and impact along the way.

7. Bow Tie Analysis

This qualitative risk analysis method is used to identify causes and consequences for all potential project risks. The project management team must first identify risks that might affect the project and then think about causes, consequences and more importantly, a risk mitigation strategy for them. It’s a versatile method that can be used in any industry.

8. SWIFT Analysis

SWIFT stands for Structured What If Technique. It’s a risk analysis method that focuses on identifying potential risks associated with changes made to a project plan. As its name suggests, team members have to come up with any “what if” questions they can to find out all the potential risks that could arise.

What Is Risk Analysis?

Risk analysis is the process that determines how likely it is that risk will arise in a project. It studies the uncertainty of potential risks and how they would impact the project in terms of schedule, quality and costs if, in fact, they were to show up. Two ways to analyze risk are quantitative and qualitative. But it’s important to know that risk analysis is not an exact science, so it’s important to track risks throughout the project life cycle.

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Risk Management Plan Template

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Types of Risk Analysis

There are two main types of risk analysis: qualitative and quantitative risk analysis. Let’s learn about these two approaches.

Qualitative Risk Analysis

The qualitative risk analysis is a risk assessment done by experts on the project teams  who use data from past projects and their expertise to estimate the impact and probability value for each risk on a scale or a risk matrix.

The scale used is commonly ranked from zero to one. That is, if the likelihood of the risk happening in your project is .5, then there is a 50 percent chance it’ll occur. There is also an impact scale, which is measured from one to fine, with five being the most impact on the project. The risk will then be categorized as either source- or effect-based.

Once risks are identified and analyzed, a project team member is designated as a risk owner for each risk. They’re responsible for planning a risk response and implementing it.

Qualitative risk analysis is the base for quantitative risk analysis and reduces project uncertainty while focusing on high-impact risks. This allows you to assign a risk owner and plan out an appropriate risk response. Get started with qualitative risk analysis with our free risk assessment template.

Quantitative Risk Analysis

By contrast, quantitative risk analysis is a statistical analysis of the effect of those identified risks on the overall project. This helps project managers and team leaders to make decisions with reduced uncertainty and supports the process of controlling risks.

Quantitative risk analysis counts the possible outcomes for the project and figures out the probability of still meeting project objectives . This helps with decision-making, especially when there is uncertainty during the project planning phase. It helps project managers create cost, schedule or scope targets that are realistic.

The Monte Carlo simulation is an example of a quantitative risk analysis tool. It’s a probability technique that uses a computerized method to estimate the likelihood of a risk. It’s used as input for project management decision-making.

Risk Analysis Methods

There are several risk analysis methods that are meant to help managers through the analysis and decision-making process. Some of these involve the use of risk analysis tools such as charts and documents. Let’s dive into these risk analysis methods and how they can help you.

Bow Tie Analysis

This qualitative risk analysis method is used to identify causes and consequences for all potential project risks. The project management team must first identify risks that might affect the project and then think about causes, consequences and more importantly, a risk mitigation strategy for them. It’s a very versatile method that can be used in any industry.

Risk Analysis Matrix

The risk analysis matrix assesses the likelihood and the severity of risks, classifying them by order of importance. It’s main purpose is to help managers prioritize risks and create a risk management plan that has the right resources and strategies to properly mitigate risks. Risk likelihood is measured on a relative scale, not a statistical one, which makes it a qualitative risk analysis tool.

Related: Free Risk Analysis Matrix Template

Risk Register

A risk register is a crucial project management tool to document project risks. It’s a document that lists all the potential risks that could occur during the project execution phase, as well as critical information about them.

It’s meant to be used as input for the risk management plan, which describes who’s responsible for those risks, the risk mitigation strategies and the resources needed. Creating a risk register usually involves several, reliable information sources such as the project team, subject matter experts and historical data.

SWIFT Analysis

SWIFT stands for Structured What If Technique. It’s a risk analysis method that focuses on identifying potential risks associated with changes made to a project plan. As its name suggests, team members have to come up with any “what if” questions they can to find out all the potential risks that could arise.

Benefits of Risk Analysis

There are many benefits to using risk analysis in your projects. Here are some of the most common ones.

• Avoid potential litigation
• Address regulatory issues
• Comply with new legislation
• Reduce exposure
• Minimize impact

Risk analysis is an important input for decision-making during all the stages of the project life cycle . Project managers who have some experience with risk management are a great resource. We culled some advice from them, such as:

• There’s no lack of information on risk
• Much of that information is complex
• Most industries have best practices
• Many companies have risk management framework

Project Risk Analysis Templates

There are several quantitative and qualitative risk analysis methods. There are several tools that can be used for different purposes. To help, we’ve prepared some free risk analysis templates to help you through the risk analysis process.

Risk Register Template

This risk register template has everything you need to keep track of the potential risks that might affect your project as well as their probability, impact, status and more.

Risk Analysis Matrix Template

This risk matrix template lets you visualize your project risks in one color-coded graph to classify them by likelihood and severity. This allows you to better understand the most critical risks for your project.

Risk Analysis In Project Management

Risk analysis is a fundamental step in the project risk management process, which consists of four main stages.

• Risk identification: First, identify your potential project risks and list them using a risk register.
• Risk analysis: Now, estimate the impact, likelihood and exposure for each risk and assign a priority level based on this information. The higher the priority level, the more resources are allocated to mitigate the risk.
• Create a risk management plan: Create risk mitigation strategies, or contingency plans to alleviate the impact of each project risk you’ve previously analyzed. These details are usually included in a risk management plan.
• Track risks until project completion: Implementing your risk management plan is as important as creating one. Set up project controls to keep track of risk at all times.

Risk Analysis Video

If we’ve caught your attention when it comes to discussing risk analysis on a project, don’t worry. Watch project management guru Jennifer Bridges, PMP, as she helps visualize how to analyze risks on your project.

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How ProjectManager Helps Your Risk Analysis

ProjectManager is online work and project management software that allows you to manage risks alongside your project. Activate the Risk View to create a running list of all of your project risks. Then add descriptions, mark likelihood, impact and level with an embedded risk matrix. Work towards resolutions with your team and add comments along the way.

Project Tracking You Can Trust

It’s hard to recognize risk without a proper project tracking system in place. Across all of ProjectManager’s views, you can monitor progress and communicate with your team as you work together. But, to take it even further, leverage our built-in dashboards and project reports to stay on top of all aspects of your projects, so you’re ready to identify risks as soon as they appear.

Analyzing and resolving risk is a team effort and our software is collaborative to the core. Teams can comment, share files and get updates from email notifications and in-app alerts. There’s one source of truth and you’re always getting real-time data so everyone is on the same page. Get started with ProjectManager today for free.

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Risk Analysis for Startups

Risks are unavoidable in every startup venture, and you cannot always anticipate all possible risks. The only way to face potential dangers is to prepare and reduce the harmful effects of adverse events.

To effectively manage startup risks, you must take your assessment one step further. What you need is to conduct a risk analysis.

There are a lot of uncertainties when it comes to business ventures. The most effective way to protect your business , as well as your employees and customers, is to anticipate possible crises and create a risk management plan.

A tactical risk management plan follows a systematic process. The first step is to identify all risks and assess how they can affect the safety of the business. This step is crucial since it does not merely identify risks but label them according to their urgency. It is also in this step that you will administer strategic risk analysis.

What is Risk Analysis?

Everyone knows the demise of the RMS Titanic. On its maiden voyage, the “unsinkable” ship plunged to the bottom of the ocean. However, the tragedy would not occur if they did not succumb to the pressure of fierce competition.

They could prevent it if they acknowledged the design flaw and anticipated all the worst possible events during the voyage. To put it simply, it could have been prevented if they conducted a thorough risk analysis.

In a business environment, risk analysis is a crucial process of evaluating the probable occurrence of any detrimental situation within an organization or a company. This process shows an estimate of the extent of the impact once the event occurs.

Risk Analysis Benefits

Every startup should always conduct a risk analysis before they make significant decisions. This is because startups are more exposed to potential risks. Here are a few reasons why you should not forego a startup risk analysis:

Accurate Assessment

A lot of entrepreneurs may relate to this, but risks are usually based on gut feelings. Through a risk analysis, this gut feeling becomes quantitative information. It materializes the risk and, in turn, gives startups leaders a chance to plan suitable methods to decrease and mitigate possible impact to the organization.

Create a Strategic Risk Management Plan

Assessment and analysis are one of the primary steps in creating a risk management plan. The output will serve as the foundation and the leading information in creating a tactical strategy to decrease the impact of risks to the startup . If something goes wrong in the risk analysis stage, the succeeding steps could not be as practical as they should be.

Boost Confidence

When you pitch your business to investors and capitalists , one of the things that will enter their minds are multiple adverse situations that can significantly impact your business. Not only them but your employees would also think the same.

With a tactical risk management plan, which is possible by a thorough analysis, you can be confident in pitching your product. At the same time, you assure your employees of the security of the business. When employees feel secure, company morale increases, which boosts productivity.

Risk Analysis vs. Assessment

Though intricately linked to each other, risk analysis and risk assessment are not the same.

In a nutshell, risk assessment is a system itself. This system includes risk-related processes such as identifying, evaluating and reporting. Risk analysis, on the other hand, is a more specific process within the assessment phase. The analysis process focuses more on the quantification of the identified risks.

Comparing the two, the assessment is the general process of identifying external and internal risks, while the analysis is a step further from the former method. The latter combines the probability of the event to happen and its estimated impact.

There are two types of risk analysis approach : qualitative and quantitative. These two approaches are similarly practical depending on the situation and the type of risk identified.

As a starter, a qualitative approach is more subjective, while a quantitative approach is more objective. It is at the business leader’s discretion on what they deem is the best analysis approach to use.

Qualitative Risk Analysis

A qualitative approach is assessing each project risk according to its characteristics. This approach does not deal with calculations, statistics, and numerical ratings.

Instead, qualitative analysis requires a written definition of possible business hazards and an extensive evaluation of the extent of the impact. Then, countermeasures are recorded to react to when the occasion arises quickly.

A qualitative approach has three scaling categories in which the identified risks may fall based on the severity of their impact: low, medium, and high. The SWOT analysis and Cause and Effect diagrams are examples of qualitative risk analysis approaches.

Quantitative Risk Analysis

Another analysis approach that you should consider is the quantitative risk analysis . Under this approach is a more numerical estimate of the risk of the organization. The quantitative approach calculates the probabilities of project objectives.

Manage Risks with Full Scale

Risk analysis is an essential process in creating a risk management plan. Without a comprehensive report, business leaders cannot determine the most critical risks with high failure probability. Then, there is no strategic counter-plan. As a result, the business is not all set once the situation ensues.

Do not make your maiden voyage your last; conduct a thorough risk analysis for your startup to be ready for any possible risks. If software development is part of your risk management strategy, Full Scale can help you with that.

Full Scale is an offshore software development center offering development solutions for startups. Our CEOs, Matt DeCoursey and Matt Watson, have been helping a lot of businesses take the first step to scale up.

As successful entrepreneurs, they acquired extensive knowledge in the art and science of entrepreneurship. They experienced a lot of challenges and faced many risks in all of their business ventures.

Start planning the future of your business and be ready for any challenges coming your way. Talk to us now and book a FREE consultation.

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How to Perform Business Risk Mitigation: Strategies, Types, and Best Practices

By Kate Eby | March 23, 2023

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Successful companies are always identifying, lessening, and eliminating business risks. We’ve gathered tips from industry experts on how they do this. We also provide risk assessment templates and step-by-step guidance on business risk mitigation.

Included on this page, you’ll find the main ways companies should respond to risks , best practices for business risk mitigation , a step-by-step process for performing good risk mitigation, and templates that can help guide you in assessing and dealing with business risks.

What Is Risk Mitigation?

Risks can pose a threat to a project or a business. Risk mitigation is the process of eliminating or lessening the impact of those risks. Teams can use risk mitigation in several ways to help protect a business.

Project leaders might use project risk management and mitigation to ensure the success of a specific project. Business leaders might use business risk mitigation — sometimes as part of overall enterprise risk management or enterprise risk assessment — to protect the long-term health of a company.

Why Is Risk Mitigation Important?

Risk mitigation is important because risks sometimes turn into realities. If your project team or business leaders haven’t figured out ways to deal with and lessen those risks, they can have a hugely negative impact on a project or business.

“Business risk mitigation is important because it helps organizations to identify and address potential risks that could impact their operations, reputation, or bottom line,” says Andrew Lokenauth, a former finance executive with Goldman Sachs and JP Morgan, an adjunct professor at the University of San Francisco School of Management, and the founder of Fluent in Finance . “By proactively managing risks, organizations can minimize disruptions and protect their assets, stakeholders, and long-term viability.”

Here are some of the top reasons that business risk mitigation is important:

• Maintain the Existence and Profitability of a Business: Some risks can torpedo the very existence of a business — especially if they happen when the business hasn’t prepared for them. Business leaders must identify and assess risks and figure out ways to lessen or eliminate high-priority risks.
• Maintain a Business Reputation for Stability: Some risks, when they happen, can  damage a company’s customer relationships. Business leaders want customers to be able to trust the stability of a business. Preparing for risks helps ensure that stability. 
• Keep Internal and External Stakeholders Happy: Both employees and external stakeholders want a business to succeed and be prepared for negative risks. Making sure your team performs good risk management — including risk mitigation — will give internal and external stakeholders confidence that the business is ready for any negative events.

• Keep Your Staff and Others Safe: The mitigation measures you need for weather events will also protect the safety of your staff and others. Mitigation measures against problems such as fire damage can also protect staff and customers. 
• Avoid Negative Societal and Economic Impacts: In some cases, risks to your organization can have large societal and economic impacts. Examples include risks to the operations of utilities, government agencies, or internet companies. Perform solid risk mitigation to prevent these negative risks or lessen their impact.
• Know That No One Else Will Do It for You: Many people believe that certain risks just won’t happen or that some government agency or other group is monitoring the situation and will assist if there is a problem. That is often not true. “This is typical of most Americans — not even just business heads or business leaders — that you don’t think it’s gonna happen to you,” says Andresen. “You think if it does happen, it's not going to be that bad, and that you're going to get help from somewhere else. And all of those things are patently false.”

What Are the Types of Risk Mitigation?

When people talk about the types of risk mitigation, what they’re often referring to are types of risk responses or risk response strategies. Risk mitigation is one possible risk response, but it is not the only one.

Another important thing to remember is that not all risks are negative. There are positive risks — or opportunities — that can happen for your business as well. Experts have outlined five primary ways to respond to negative risks and five primary ways to respond to positive risks, both of which are important to the long-term health of a company.

These are the five primary risk response strategies for dealing with negative risks:

• Mitigate: Risk mitigation involves taking steps to reduce the likelihood or impact of a risk. 
• Transfer: Leaders can choose to transfer a risk to another entity. Buying insurance is a good example of transferring risk. You still take steps to prevent fires at your property, but when you buy fire insurance, the insurance company assumes much of the financial risk if a fire happens.
• Accept: In some cases, it is simply not possible or economically feasible to avoid or mitigate risk. Leaders might choose to accept certain risks that are too costly to try to affect or that are unlikely to happen.“It may not be possible or practical to avoid or reduce a risk,” Lokenauth says. “In these cases, organizations may choose to accept the risk and manage it as it arises.”
• Escalate: In project risk management — though not often in business risk mitigation — leaders choose to escalate certain risks. This response involves providing information on the risk to top organizational leadership, so they can make a decision. This is usually the response to a significant risk that would require significant costs to mitigate.

These are the five primary risk response strategies for positive risks:

• Share:   If your company chooses to share a positive risk, that means it will work with another company or entity to take advantage of an opportunity. Sharing positive risk can increase the likelihood and impact of opportunities. However, they also require that the company split the resulting benefits. 
• Exploit: When a company chooses to exploit a positive risk, it devotes special attention and resources to making sure an event happens.
• Enhance:  Companies can enhance positive risks by improving the likelihood that it will happen. This is different from exploiting a risk, because the possibility still exists that the opportunity will never arise. 
• Accept: If your company understands that a positive risk might happen, it might prepare to act on it without investing resources to try to increase the chances that it will happen.
• Escalate: As with escalating negative risks, your team can escalate positive risks to company leadership to make decisions about which strategy to implement. This is common when teams identify opportunities that could have enormous benefit to the company but might take a large investment to enhance or exploit.

You can learn much more about risk assessments, and the primary ways that project managers and organizations can respond to both negative and positive risks, in this essential guide to project risk assessments .

Risk Mitigation Strategies

Businesses use a number of strategies to help them respond to business risks. These can include overall risk and contingency planning, as well as tactical moves, such as hiring a risk manager or outside risk management consultant.

Here are some overall risk response strategies teams can use:

• Risk Management Planning: Teams will very often produce a risk management plan for individual projects, but they can also create a risk management plan for an entire enterprise. This plan should describe how your team plans to identify, assess, respond to, and mitigate risks to the organization. You can learn much more about risk management plans and planning and can download risk management plan templates .
• Contingency Planning: Contingency planning is usually a part of project risk management, but teams can create contingency plans for their entire organization. Contingency plans include specific actions your team will take if a risk actually happens. The contingency plan might include extra funds or extra staff to respond to a risk.
• Business Continuity Planning: Business continuity planning is the most common risk response strategy that organizations use to deal with risks to the entire enterprise. For specific projects, organizations will more often use strategies such as contingency planning and project risk management planning. The goals of business continuity planning are to identify important risks to the organization and make plans for what the organization will do to lessen or eliminate those risks.

You can learn much more about business continuity plans . You can also download business continuity plan templates .

• Setting Aside Contingency Reserves: These are funds an organization sets aside to help it deal with and mitigate important risks if they happen.
• Employing a Risk Manager: Many organizations choose to employ a full-time risk manager to oversee the organization’s entire risk management program. This role may involve helping with project risk management, or overseeing the more general management of risk and compliance across an organization.
• Contracting with Outside Consultancies: Many organizations contract with outside risk experts to help with risk assessments and business continuity planning.
• Employee Training: Forward-thinking organizations also conduct employee training and drills to bolster their contingency and risk mitigation plans. The training helps employees understand what they should be doing if a risk happens. You can learn more about such training and drills as part of contingency plans. 
• Product Testing: For software and technology companies especially, it’s important to do product testing throughout the development of a product. That testing will lower the risk that your organization will have to spend extra money to fix problems or to repeat development work.
• Following Information Security Best Practices: Information security issues are a huge risk for many organizations. Most organizations understand the importance of good information security practices, such as implementing strict password policies and two-factor authentication requirements.

Risk Mitigation Best Practices

Experts recommend following certain best practices for business risk mitigation. Some best practices include being proactive in identifying and assessing risks and making management policies clear to all stakeholders.

Here are some important best practices for business risk mitigation:

• Create a Strong Culture of Risk Management: It’s important that your organization and its leaders understand the importance of investing in solid risk management. Avoid the temptation to believe that risk management is not important or necessary. “Humans want to avoid risks, so we want to even avoid the discussion of risks,” Contreras says. “Good risk management forces you to have those discussions. You have to face them and look them in the eye, then make some decisions on how you're going to handle them. Don't let it fall by the wayside.”
• Involve Stakeholders: Make sure you communicate with and involve stakeholders in your risk management work. That means asking for their input as you identify and assess risks.
• Create a Clear and Transparent Risk Management Framework and Policy: Your organization should outline the basics of its risk management program in a risk management policy. Everyone in your organization should have access to and understand that policy. “A risk management policy should outline the organization's approach to risk management, including the roles and responsibilities of different stakeholders; the processes for identifying, analyzing, and responding to risks; and the methods for monitoring and reviewing the effectiveness of risk management efforts,” Lokenauth says.
• Be Proactive: It is vital for any organization to be proactive and aggressive in identifying and planning for risks. Lokenauth recalls a time when he worked for a large company in New York that wasn’t prepared for all risks. When Hurricane Sandy hit in October 2012, the firm had no place for its employees to work. “We were home for a week or two getting paid, and we weren't doing any work,” he says. “Things weren't getting done. It took them about a week or two to send us laptops. And then it took another week to try to figure out where to put us, to rent some space in Jersey City. If they had a plan in place for a thing like that, it would have been better. “It's important to be proactive about identifying and addressing potential risks rather than waiting for them to occur,” he says. Contreras adds that a business leader’s perspectives on risks can affect how an entire company approaches risk — either to the company’s benefit or to their detriment. “Small and medium-sized businesses are usually led by one big leader,” he says. “That leader’s perspective can really sway the business — and maybe not in a good way. The leader might be super optimistic, always thinking, ‘Yeah, we can do this.’ But the leadership team really needs to look at things and ask, ‘What if it doesn’t go?’ What would be the downside here? What are the things that can go wrong?’ So you want to get people in a room and start thinking negatively. ‘What are the things that can go wrong? And what can we do about them? What can we do to mitigate them?’”
• Be Comprehensive: It’s important that your organization thinks about risks in all areas. Avoid focusing only on what leaders think might be the most obvious areas for risk. “It's important to develop a comprehensive risk management plan rather than focusing on individual risks in isolation,” Lokenauth says.

• Conduct Employee Training or Drills: Risk mitigation isn’t finished once a company writes a contingency plan. Leaders must also train employees to perform the actions outlined in the plan. They must also determine whether that contingency plan is going to be effective by performing drills. You can learn more about training and drills in contingency planning.
• Continuously Monitor Possible Risks: Too many organizations perform one risk assessment, then believe they are finished — sometimes for a year or two or more, experts say. However, risks are constantly changing, and organizations need to continually identify and assess new risks to avoid costly oversights. That means requiring routine risk assessments and creating a culture that is always monitoring and addressing new risks. “You want to establish policies on how you identify and monitor risks, and you want to monitor them every month,” Lokenauth says. That can be as simple as making sure your risk department works through a monthly checklist of risks that you are tracking and what’s happening with them. It also means watching for new risks or for changing circumstances around current risks, experts say.
• Make Changes Where Needed: When your organization’s continual assessment shows that a new risk has arisen, or that an older risk is changing, it must make changes in its risk response plan. “If you grow as a company, you now have a different footprint in which you need to assess your risk,” Andresen says. “If you shrink — again, you have a different footprint. You might not need the same control measures or countermeasures, and you can put that money somewhere else.”
• Communicate Your Risk Management Plans: It’s vital that your organization communicates often and effectively with organization leaders, employees, and other stakeholders about the organization’s risk management work.

What Is the Risk Mitigation Process?

Experts sometimes use the term risk mitigation process to describe how organizations identify, assess, and prepare to lessen or mitigate risks. More often, experts use the term risk management to describe that work.

Here are the seven basic steps of the risk management process:

• Identify All Possible Risks: Gather a team or multiple teams to offer input on all possible risks to your organization. You might do this through formal meetings or gather input in other ways. “The first thing you would do is have every department do their risk analysis — but not in a silo,” Andresen says. “You do want them talking to each other. Because you’ll get some people being inspired by the others. You’ll get others validating the risk of others. And you get a whole operating picture of the entire company: ‘Where are we weak? Where are we strong?’” Lokenauth suggests using such options as “brainstorming sessions, risk assessments, or reviewing industry data” to identify risks. Ask everyone involved — internally and externally — to think broadly about all possible risks. Your team can use a questionnaire to assess potential risks to your organization and analyze its risk culture.
• Analyze Risk Probability and Impact: After your team identifies all risks, it will need to assess each risk’s probability and the potential impact on your business. “You have to figure out what exactly is the most vital piece of your ability to conduct your business, then figure out the risks to that,” Andresen says. “Then you have to look at internal and external risks. What are the internal risks that you can encounter? And what are your external risks that you could potentially encounter? How do you want to solve for them? ”Contreras notes that your team can also assess the top risks for various departments within your organization, along with various kinds of risks. “If, say, it's a supplier risk, what are the top three suppliers that we should be concerned about?” he says. “And what are the top three infrastructure risks? What are the top three HR staffing risks that we have?”
• Prioritize Risks: Once your team has studied and assessed the probability and potential impact of each risk, it must then prioritize which risks are most important to address. “As the likelihood becomes very high — let's say over 50 percent — then you decide, ‘OK, we need to do something to mitigate that,’” Contreras says. “Then the second determination would be: ‘What's the cost?’ If it’s high likelihood and high dollars, those are the ones you do want to focus on — the more likely it is to happen and the more obvious the cost impact.” For example, a risk that could cost your organization millions of dollars will take priority over a risk that would cost them thousands at most. Similarly, a risk that is almost certain to happen will take priority over a risk that has almost no chance of happening.
• Create Response Plans: Create plans to deal with or lessen the effects of the most important risks. Your organization likely won’t have the resources to mitigate every risk your company identifies. That’s why you prioritize the most important risks to face. “The next step is to develop responses to address the important risks,” Lokenauth says. “This may involve implementing controls or safeguards to prevent the risk from occurring, transferring the risk to a third party, or accepting the risk and managing it as it arises.” Lokenauth adds that your team should consider the costs to your organization of mitigating even the high-priority risks. If mitigating a high-priority risk will be prohibitively expensive, an organization might decide to simply accept that risk, while mitigating lower-priority risks.
• Track and Monitor Risks: Remember that business risk mitigation is an ongoing, evolving process. Continually track risks and potential changes in risk probability or impact. Contreras suggests that risk teams hold regular meetings to assess and monitor risks. “You probably should make it monthly — where you revisit the risks, and you're either changing the probability, or you're taking some out because they didn't happen, or some of them occurred,” he says. “Now, it becomes not a risk, but an issue — a problem that you have to begin to solve.”
• Monitor Mitigation Measures: Your organization should also monitor its mitigation measures. Monitor how and whether your teams are implementing risk mitigation measures. In addition, monitor how the mitigation measures are working and what risks have already occurred.
• Report to Organization Leaders: Regularly report to organizational leaders about ongoing risks and mitigation measures.

Example Risk Response Plan

Download a Sample Business Risk Response Plan for  Excel | Microsoft Word

Download this completed example business risk response plan that can help your team understand how to write a risk response plan for your organization. This plan includes sample data, with components such as include risk, risk severity, description of mitigation plans for that risk, and if and how those mitigation plans are working. Use this template as a starting point, and customize it to create your own business risk response plan.

Risk Mitigation by Departments and Broad Areas

Teams can assess business risks by department, such as operations or sales. They can also assess them by broad categories, such as technical risks or compliance risks. This will help organizations avoid costly oversights during risk mitigation.

Organizations might assess risk in various departments, such as the following:

• Human Resources

They might also assess risks in broader, thematic areas. Those areas might include:

• Compliance Risks: There can be risks in areas where laws or government rules require certain actions and issue penalties for noncompliance.
• Management Risks: There can be risks surrounding a company’s management, such as a key leader leaving the company.
• Operational Risks: Risks can arise based on the operational structure of your organization, such as how it sources materials or hires staff members.
• Overall Costs Risks: Some risks threaten to significantly increase your company’s costs to operate.
• Reputational Risks: Some risks relate to your company’s image and reputation among customers or clients.
• Resources Risks: There can be risks to the resources your company needs to operate.
• Strategic Risks: Some risks involve a company’s overall business strategy.
• Technical Risks: There can be risks related to technology your company is using or producing.

Your team might also consider doing what is called a PESTLE analysis . In this analysis, your team considers the overall business environment and potential risk in six areas: political, economic, social, technological, environmental, and legal. 

Tip: You might see this type of analysis written as a PESTEL analysis . Both acronyms indicate the same six areas but are written in a different order.

PESTLE Analysis Template

Download a PESTLE Analysis Template Excel | Microsoft Word

Download this template to help guide you through a PESTLE analysis. This analysis helps your team focus on and think about risks to the business in six broad areas. Use the empty columns to list potential risks to your organization in each category and summarize your risk mitigation plan.

Risk Mitigation Tools

A variety of tools are available to help your team assess and mitigate risks. These include risk management plans and assessments. Many companies also use risk assessment frameworks (RAFs), which specifically measure IT risks.

These are some tools that can help all companies with risk management and risk mitigation:

• Risk Assessment Matrix: A risk assessment matrix can help your team calibrate risks based on probability and likelihood.
• SWOT Analysis: A SWOT analysis can help your team analyze threats to your organization, along with strengths, weaknesses, and opportunities.
• Root Cause Analysis: A root cause analysis can help your team determine the root cause of an issue or problem affecting your company. 
• Business Impact Analysis: A business impact analysis is a process that teams work through to assess the possible effects of major interruptions to an organization’s operations. Most often, these potential interruptions are events such as natural disasters, major accidents, or other emergencies.

These are some common RAFs that IT experts use:

• Factor Analysis of Information Risk (FAIR)
• Committee of Sponsoring Organizations of the Treadway Commission (COSA) Risk Management Framework
• Control Objectives for Information Technologies (COBIT) from the Information Systems Audit and Control Association
• Operationally Critical Threat, Asset, and Vulnerability Evaluation (OCTAVE) Framework from Carnegie Mellon University
• Risk Management Framework from the National Institute of Standards and Technology (NIST)
• Threat Agent Risk Assessment (TARA), created by Intel

Risk Mitigation vs. Contingency

A risk mitigation plan might include a contingency reserve or contingency. While the risk mitigation plan includes many elements, the contingency is simply a reserve of funds, time, or other resources that can help mitigate certain risks.

Risk Mitigation vs. Risk Management

Risk mitigation is one part of the entire risk management process. When your organization performs risk management, it will perform risk assessments that might call for risk mitigation.

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• Risk management
• Risk assessment and planning

Assess and manage risk

On this page

1. Decide what matters most

2. consult with stakeholders, 3. identify the risks, 4. analyse the risks, 5. evaluate the risk, 6. treat risks to your business, 7. commit to reducing risk.

All businesses face risk. It's important to understand the risks to your business and find ways to minimise them. A risk management plan helps you to do this by detailing how you deal with risks to your business. By spending time and resources developing your strategy for managing risk, you’ll provide a safe workplace and reduce the chances of negative impacts on your business.

Consider these steps to help identify, analyse and evaluate risks in your business.

Before you create a risk management plan, think about which areas of your business it will refer to. For example, you might only be interested in hazard-based risks. Some of the internal and external things to think about when creating your plan are:

• social, cultural, political and regional issues
• economic, technology and competitive trends
• government policies and law
• your business aims, policies and strategies.

Find out more about types of risk to your business.

Your risk management plan will be more specific and useful if you ask for feedback from the people, businesses or organisations you deal with.

Stakeholders can include:

• employees, contractors and sub-contractors
• clients, customers and suppliers
• business financiers, investors and insurers
• your local communities and local media
• government agencies.

Consulting with stakeholders will help you to:

• work out what your business considers as high and low risk
• get support for your risk management plan
• bring together different views and areas of expertise
• keep your risk framework up to date
• respond to unexpected risks.

Working out the risks to your business could be as easy as thinking about what could go wrong, and how and why it could happen. You might also need to do some research into:

• past events and risks
• possible future changes to your business environment, such as changes in economic trends
• social and community issues that could affect your business
• find out how to conduct market research .

To identify risks, you can also:

• look at hazard logs, incident reports, customer feedback and complaints, and survey reports
• review audit reports such as financial audit reports or workplace safety reports
• do a strength, weaknesses, opportunities and threats (SWOT) check for your business
• discuss business issues with your staff, customers, suppliers and advisers.

Download our risk analysis template

Use our risk analysis template to identify the potential risks your business might face and how you can control or minimise these risks.

Risk analysis template

After identifying the risks to your business, it’s time to work out which ones are urgent. Our risk analysis template helps you to do this.

To analyse the risks of an event, you should first look at the:

• likelihood of the risk happening
• consequence/damage if the risk happened.

Work out a rating system for likelihood and consequence. For example, you could have ratings of:

• 1 to 4 for likelihood (1 for highly unlikely and 4 for highly likely)
• 1 to 4 for consequence (1 for low and 4 for severe).

Use these ratings to work out the risk level.

Calculate risk level

To work out the level of risk for an event, use this formula:

Risk level = likelihood x consequence

Based on our example above, the lowest risk level you could get is 1 (1 x 1), and the highest risk level you could get is 16 (4 x 4). You can use the risk levels to rank your risks from least urgent to most urgent.

Risk criteria set a standard to assess risks to your business. To set your risk criteria, state the level and nature of risks that are acceptable or unacceptable in your workplace. Our risk assessment template provides an example of a risk level guide to help you evaluate risks.

To evaluate risk, compare the level of risk for various events against your risk criteria. You should also check if your existing risk management methods are enough to accept the risk.

When to accept risk

Your strategy for managing risk may be more than just deciding whether to accept the risk or not. If your business is part of a bigger supply chain that involves retailers, distributors or primary producers, you can spread the risk across a number of areas.

Sometimes businesses choose to accept risks and not spend any resources on avoiding them. You might decide to accept a level of risk for the following reasons:

• The cost of treatment is much higher than the potential results of the risk.
• The risk level works out to be very low.
• The benefits of taking the risk greatly outweighs the possible damage.

Your evaluation will have helped you to identify any risks that need to be treated. Develop a plan to treat risks, so you can:

• identify each risk type and the level of risk to your business
• suggest strategies to treat each risk
• create timeframes for each strategy
• decide who's responsible for specific parts of the plan
• work out resources required such as money, staff and external help
• schedule future action such as regular checking and updating of risks, if needed.

Committing to quality risk management can help you create a stable business that prepares for unexpected events.

As a business owner, it's a good idea to:

• make sure your business aims link to your risk management plan
• clearly describe your risk management plan to everyone in your business
• show support for risk management
• set up a way of measuring the success of your risk management plan
• regularly check that your way of measuring is giving you useful information
• make it clear who's responsible for what
• provide enough resources at all levels of your business
• ask for feedback from everyone in your business, including customers and suppliers
• use feedback to update your plan
• explain risk management to new employees and in training programs.

Find out about the different types of business risk and risks you must manage.

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Why Having a Risk Management Plan is Important for Small Businesses

David Galic

10 min. read

Updated October 29, 2023

Taking the plunge and deciding to start your own small business isn’t something that’s for everyone. Have you ever wondered why that is? 

Why would some people prefer to work for others instead of themselves? One of the main reasons is security. If the business you are working for goes under, the worst thing that will happen is that you will be out of a job and looking for a new one. 

If the business you own and run fails, you stand to lose far more. Simply stated, starting a small business is a risky endeavor and one in which very few things are guaranteed.

All businesses, big and small, face a large variety of potential risks. However, one can say that every risk is amplified for small business owners, simply because every loss of money and financial pitfall can potentially cripple a small company, which can’t be said for large corporations. 

That’s why putting a risk management plan together should be one of the first steps that any would-be small business owner takes on their entrepreneurial road. 

What is risk management? 

Risk management is a process. This process includes identifying your business risks, evaluating them, and then deciding how to deal with them. 

Did you know that 42% of startups fail because there was no market demand for what they were trying to sell? This might sound like a risk that should have been identified in the earliest stages of the business, but you’d also be surprised at how many businesses don’t perform the proper market research that’s needed to identify such a risk. 

The process of putting together a risk management plan should result in the creation of a plan that your business will be able to follow in order to expose itself to the least amount of risk possible. This plan will enable your company to set up procedures that will help you avoid risks that are avoidable and minimize the impact of risks that are not. 

Risk management is also a cyclical process that never really ends. Risks need to be reevaluated continuously as your business changes and grows. Let’s take a more in-depth look at the process of putting together and implementing a good risk management plan. 

• How to put together a strong risk management plan

If you want to boil it down to the most essential steps needed to put together a solid risk management plan for your small business, there are three main steps that need to be taken: identification, evaluation, and mitigation. 

Identification 

This part of the process asks business owners to put together a list, as exhaustive as possible, of the potential risks that can affect their businesses. These risks can be related to your business strategies and how effective they are, risks related to your business’s day-to-day operations, regulatory risks related to laws and compliance, reputational risks, financial risks, and more. 

Evaluation 

Once you have identified your risks, it’s time to analyze them. What’s most important to take into consideration during this phase of the process is how likely these risks are to occur and how severe the consequences will be if they do occur. Knowing the possible impact of your risks helps you make a decision on how to mitigate them. 

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Mitigation 

This is the stage of your plan in which you’re recommending concrete actions that need to be taken in relation to each risk that you have identified. 

Risk management is an ongoing process

As mentioned earlier, this process never really ends as long as your business is running. Your risk management plan and the way in which you are implementing it needs to be continuously monitored and tweaked over time in order to make sure that you are always protecting your business as thoroughly as possible. 

Now that you know how to put together a risk management plan, let’s take a look at some of the most common ways businesses can face their risks in the mitigation process. 

Common risk management tactics 

Once your small business has identified your risks and analyzed their potential impact, the mitigation part of the process requires you to make a decision on how to face and tackle each of the possible risks that you have identified and evaluated. 

Generally, there are four tactics that are most commonly employed:

Risk avoidance 

If you’ve evaluated a risk as being potentially volatile and you see a chance of it doing great financial damage to your business if you take the risk and it doesn’t pan out, then it’s probably a risk that is best avoided. For example, if you’re running an ice cream shop, you could be contemplating adding baked goods or other sweets to your menu. If you’ve done some research among customers and you haven’t seen much of an interest, it might be best to avoid taking that risk at this time. 

But as mentioned earlier, all risks should be periodically revisited. This means that while this idea might be an incredibly risky one at this time, it might not be as risky several years from now if your ice cream business is steadily growing and you’re seeing steady increases in revenue annually that make this type of decision to expand your offer less of a financial risk, simply because you have more money to spend on optimizing your business.  

Risk reduction

Reduction basically means doing everything you can to make a risk less risky. To use the same ice cream shop example, if you’re not ready to experiment and add other products that aren’t ice cream to your shop but you still want to take a certain amount of risk in the hopes of improving your sales, there are smaller risks that you can take to do that. 

For example, you could simply add new ice cream flavors and toppings to your offer. By doing so you have taken a risk by changing your menu, but you have not done anything drastic that could potentially put you into a disastrous financial hole if the move doesn’t pan out. 

Risk acceptance 

In the above example, you’ve reduced your risk by modifying your offer in a minor way, and by adding new flavors and topping to your menu, you’ve defined this risk as an acceptable one to take. Acceptance is the best way to deal with risks that can’t cause you much damage, even in worst-case scenarios.

Transference of risk

Whenever you hear someone talking about buying business insurance, they are talking about risk transference. When your small business purchases a policy from an insurer, they are essentially paying to transfer risk to a third party. No matter how big or small your business is, purchasing business insurance to mitigate various business risks is practically unavoidable. 

• The role of insurance in risk management

Once you’ve identified and evaluated your risks, you’ll be able to better understand which risks should be transferred to an insurer. For starters, a majority of small businesses that are just starting out will usually buy a Business Owner’s Policy, known as a BOP. 

This is basically an insurance policy bundle that gives you three policies; general liability insurance, property insurance, and business interruption insurance. BOPs are popular because they give small businesses a good amount of basic coverage while paying significantly less than they would pay if they wanted to buy those three policies separately. 

Naturally, the price of your BOP depends on your business’s risk profile, but no matter what that price is, it’s still going to cost you less than having to buy general liability, property, and business interruption policies separately.  

Let’s take a look at some of the risks that a BOP would typically cover:

General liability 

Covers claims related to third-party property damage or bodily injury. If a customer injures themselves in your store and takes you to court as a result, this insurance policy would cover your legal costs and eventual settlements.

Commercial property insurance 

Weather damage, natural disasters, and fires are examples of unexpected and usually unavoidable risks that can cripple your business. If you purchase property coverage, your insurer will cover the cost of property, inventory, and equipment damage in the case of severe weather, vandalism, electrical fires, power outages, and other risks that are often out of your control.

Business interruption insurance

If your business burns down in an electrical fire, property insurance will help you rebuild and reopen. But what will you do until then? Business interruption insurance will cover expenses such as loss of income, wages, rent, and loans so that you can keep your business afloat while you’re getting back on your feet and not making any money. 

Insurance needs are different for every business

Just as there is an unlimited number of business risks, there is also a myriad of insurance products that were created to mitigate many of them. Obviously, no two businesses have the same risk profile. 

For example, a risk management plan for a law firm and one created for a real estate firm will be completely different. Even in the case of two retail businesses, for example,  the risks that these businesses face are dependant on how many employees they have, whether they sell online or in physical stores, what types of products they sell, and a slew of other factors.  

This is why it’s important to talk to an experienced broker that is familiar with your small business’s specific industry in order to get quality recommendations on coverage that will protect your business as holistically as possible from risks that are both severe and usually out of your control. 

• The benefits of proper risk management

The most obvious benefit of putting together a good risk management plan is that it helps you to avoid risks that could negatively impact your business . However, another great thing about proper risk management is that it can result in positive effects on other aspects of your business as well, for example: 

Better finances 

When your business has a strong risk management plan and executes it well, you’re able to avoid some pitfalls that could have hurt your business’s bottom line if the risks hadn’t been identified and avoided or mitigated. Furthermore, banks and other financial institutions are much more likely and willing to offer loans to companies that are properly managing and transferring their risk. 

A stronger brand 

A business that manages its risks properly is often a successful, stable, and prosperous one. When a small business is proactive about managing its risk, it is sending a clear message to employees, partners, and customers that they are dealing with professionals who take its success and reputation seriously. 

Increased efficiency 

The risk evaluation process can also uncover areas of your business that are being run inefficiently. This then enables you to fix problems that might be leading to a decrease in the quality of the product or service you offer. Risk identification practices can often uncover inefficient financial processes as well and areas where you might be leaking money unnecessarily. 

A risk management plan is vital to the success of your business 

Performing risk analysis and putting together a risk management plan for your small business helps you to learn more about your business and also enables you to get to know yourself, your business partners, and your customers even better. 

These added benefits only amplify the importance of creating a plan for managing the many risks that can affect your business and most importantly, putting that plan into action and keeping it updated as your business grows and evolves over the years. 

David Galic is the Senior Content Writer at Embroker, an industry-leading digital brokerage. Starting his career as a journalist, David has spent the last decade working with tech startups to provide small businesses with technology that makes their jobs and lives easier and more efficient.

Table of Contents

• What is risk management? 
• Common risk management tactics 
• A risk management plan is vital to the success of your business 

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Risk Assessment: The Best Way to Identify Your Biggest Threats

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The threat and risk assessment or TRA is one of the cornerstones of business continuity methodology. Today, we’ll talk about what it is, why it’s important, and how to do one.  

Related on MHA Consulting: Weighing the Danger: The Continuing Value of the Threat and Risk Assessment

Defining the TRA 

In business continuity management (BCM), a threat and risk assessment is a study where you identify and assess the factors that have the potential to damage your organization or interrupt your critical business processes. 

More specifically, a risk assessment should do the following: 

• Identify conditions or situations that may cause a business process outage 
• Determine the probability of the occurrence of each threat 
• Pinpoint the threats and hazards across all areas, including human, natural, and technological 
• Determine ways to eliminate or control the risk and prevent impacts and outages 

The risk assessment should also assess the mitigation level of the identified threats. This involves looking at the measures that are in place to protect against the threat and seeing how much risk remains after they are taken into account. 

The Risk Assessment vs. the BIA 

Many people who are new to business continuity are confused about the difference between the threat and risk assessment (TRA) and the business impact analysis (BIA). 

Both are fundamental aspects of BCM methodology. The BIA is better known. Almost every organization does BIAs. Not enough perform TRAs. 

BIAs identify and prioritize the organization’s most critically time sensitive business processes. They show what the organization should protect in order to limit the damage that would be caused by an outage or event. The identification and prioritization of business processes is done by the team performing the BIA in consultation with departmental experts and senior executives. The final results represent their collective judgment about what processes are most critical. 

The TRA looks at threats that could potentially strike the organization and disrupt the processes analyzed in the BIA. 

The BIA is about business processes. The TRA is about trouble. 

The BIA looks at what might be impacted, and the TRA looks at what does the impacting. 

Both are required to understand the organization’s situation and develop a sound BCM strategy. 

Completing a Risk Assessment  

The process of completing a threat and risk assessment can be divided into three phases: preparation, assessment, and analysis. Each phase is made up of several steps as shown below. 

As part of the preparation phase of the TRA, you should gather the following information: 

• Maps of your facilities (GIS maps with layering is best) 
• History of recent events (say within the last five years) 
• List of high-value assets  
• Information on key infrastructure locations (power, water, data/voice network, etc.) 
• Relevant threat list based on location and past history  
• FEMA weather-based history (hurricanes, floods, earthquakes, etc.) 
• Use of facilities for high-profile events 
• Maximum population of facilities at peak time 

The assessment phase involves the following: 

• Schedule interviews of key personnel  
• Interview personnel to determine level of mitigation in place for their key areas of responsibility (to include emergency plans, backup power, network resiliency, business continuity, disaster recovery, stakeholder communications, evacuation planning, active shooter preparation, hazardous material spills, community readiness, ability of community to respond to an event, etc.) 
• Interview department leaders and senior executives to learn their understanding of risk/threats,  level of mitigation currently in place, and most pressing concerns 
• Tour high value assets and assess the level of mitigation and hardening 
• Tour key infrastructure areas (power, water, network, etc.) and assess the level of mitigation and hardening 
• Determine what high value assets need to have the most hardening 
• Include technology and process threats as part of the discussions  

Finally, we come to the analysis phase:  

• Assess level of mitigation based on results of the interviews 
• Document critical exposures and opportunities for improvement 
• Prioritize exposures and opportunities for improvement 
• Determine the most relevant threats to the organization  then focus on the top five 
• Document management report and mitigation plan over the next 18 to 24 months 
• Review report and mitigation plan with management 
• Integrate the risk assessment with the BIA 

Devising a Sound Strategy 

The threat and risk assessment is one of the central pillars of BCM methodology. It identifies and assesses the human, natural, and technological threats that have the potential to strike the organization, interrupting its critical business processes. 

The TRA also looks at existing risk mitigations to arrive at a fuller understanding of the organization’s exposure. Together with the BIA, the risk assessment enables the organization to devise a sound business continuity strategy, thus providing optimal protection to the organization and its stakeholders. 

Further Reading 

For more information on risk assessment and other hot topics in BC and IT/disaster recovery, check out these recent posts from MHA Consulting and BCMMETRICS: 

• The Risk Management Process: Manage Uncertainty, Then Repeat  
• Every Single Day: Make Risk Management Part of Your Company’s Culture  
• Don’t Just Hope: Choosing Strategies to Mitigate Risk  
• Weighing the Danger: The Continuing Value of the Threat and Risk Assessment  
• The Top 7 Risk Mitigation Controls, in Order  

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A risk management plan can help minimise the impact of risks that could weaken your cash flow or damage your brand. It will also help create a culture of sensible risk awareness and management in your business.

Our Crisis planning template and checklist includes a risk management plan:

Follow these steps to create a risk management plan that's tailored for your business.

1. Identify risks

What are the risks to your business?

For example:

• data breach
• contamination
• power outage

Some risks will cause major disruption while others will be a minor irritation.

2. Assess the risks

Assess the risks that you've identified.

Try to estimate the:

• potential severity of each risk
• likelihood that it might happen

Prioritise your risk planning based on the results of your assessment.

3. Minimise or eliminate risks

Some risks are preventable, so eliminate or minimise these where possible. For some risks, it might be as simple as installing an alarm system or buying extra personal protective equipment (PPE).

Check your insurance

Insurance is one way to reduce the impact of an event or disaster.

For example, business interruption insurance can make sure that you receive your average earnings for the insured period until you're able to start operating again.

Make sure your insurance is enough to cover you in the event of a significant disruption to your business.

4. Assign responsibility for tasks

Identify what needs to happen if a crisis or disaster occurs and who is responsible for each action. Having clear directions is one of the simplest and most powerful tools for a fast recovery.

5. Develop contingency plans

Come up with contingency plans for how you'll continue or resume your operations if a crisis occurs. Your contingency plan is basically your 'plan B' for risks that you can't avoid completely.

Your contingency plans will depend on the:

• type, style and size of your business
• extent of the damage

6. Communicate the plan and train your staff

People in or connected to your business must be aware of the strategies you've put in place to mitigate or recover from a disaster situation.

To do this:

• Decide if you'll communicate by phone, email, text or other means.
• Create procedural statements.
• Inform the relevant people (such as staff, suppliers, contractors and service providers).

Next, train your staff in your procedures and have them practise. This way if a disaster occurs, the process can take over and guide the staff.

7. Monitor for new risks

Risks can pop up during day-to-day operations, so it's important to know how to identify potential risks before they escalate.

Continuously monitoring for risks will help you develop realistic and effective strategies for dealing with issues if they occur.

More From Forbes

Risk management in a nutshell: a guide for business owners.

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Jochen Schwenk is CEO of Crisis Control Solutions LLC & Schwenk AG, an expert in risk and crisis management for the automotive industry.

Risk management is a critical component of daily life and, of course, running any business, regardless of its size or industry. It involves anticipating potential challenges and implementing strategies to either prevent or mitigate their impact.

While risk management can seem daunting, as someone who specializes in risk management for the automotive space, I've found it fundamentally revolves around four basic strategies: avoidance, reduction, transfer and acceptance. These strategies are universal, and, in my experience, every decision about managing risk falls into one of these categories. For the purposes of this article, the examples below are simplified, so keep in mind that in the real world, such decisions require a thorough assessment of your specific situation.

Four Basic Strategies To Cope With Risk

1. avoidance.

The first strategy, risk avoidance, involves taking steps to completely eliminate the risk. This strategy is about making decisions that steer you clear of potential dangers altogether. However, it’s important to note that while avoidance is the most effective way to prevent negative outcomes, it often means forgoing opportunities that come with inherent risks.

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Example: A software company is considering entering a market known for its strict and frequently changing regulations. The potential legal complications and costs associated with compliance are high. By deciding not to enter this market, the company avoids these risks altogether.

2. Reduction

The second strategy is risk reduction, which focuses on minimizing either the likelihood or the impact of the risk. Unlike avoidance, which eliminates the risk, reduction involves taking actions that reduce the chances of the risk materializing or lessening its effects if it does.

Example: A manufacturing company is concerned about workplace injuries. Instead of avoiding the manufacturing process altogether, which is not feasible, the company implements safety training programs, installs protective gear and regularly maintains equipment to reduce the risk of accidents.

3. Transfer

Transferring the risk means you're shifting the risk to another party. This is often done through contracts or insurance. This strategy doesn’t eliminate the risk but rather moves the financial burden or responsibility for managing it to another entity.

Example: A retail business that operates in multiple locations might purchase insurance to cover potential damages from natural disasters like floods or earthquakes. In doing so, the financial risk associated with these events is transferred to the insurance company.

4. Acceptance

The final strategy is risk acceptance, which involves acknowledging the risk and choosing to bear the consequences if it occurs. This approach is often used when the cost of avoiding, reducing or transferring the risk outweighs the potential impact of the risk itself.

Example: A startup launching a new product might recognize the risk of low initial sales due to limited brand recognition. Instead of spending heavily on marketing to avoid this risk, the company might accept it, understanding that slow sales are a part of their growth strategy.

How To Start With Risk Management In Your Organization

If you’re new to risk management or uncertain about how to implement it in your organization, it’s best to start small and gradually expand. Begin by focusing on the areas you directly manage—whether that’s a department, project or a particular segment of the business.

1. Identify and list the risks.

First, you'll need to identify the risks that could impact your department or project, such as financial risks, operational risks, strategic risks or external risks like market changes. Engage your team in this process to ensure you capture a broad range of potential issues.

To identify risks effectively, I often suggest starting by asking your team, "What could potentially go wrong at each phase of this project?" and, "Are there any external factors that might disrupt our operations?" Another useful approach is conducting a SWOT analysis, which involves identifying strengths, weaknesses, opportunities and threats. This exercise can help bring to light both internal and external risks that might not be immediately obvious but could impact your project or department.

2. Evaluate the risks.

Once risks are identified, determine how likely those risks are to occur and how they could impact your objectives. Then, prioritize risks based on these factors. In doing so, you can focus your efforts on managing the most significant threats.

When it comes to evaluating risks, one best practice is to use a risk matrix. This tool helps you assess both the likelihood and the potential impact of each risk, so you can prioritize them accordingly. I also recommend involving a cross-functional team in the evaluation process. These team members can provide different perspectives, which leads to a more accurate assessment of the risks and their potential consequences.

3. Allocate each risk to a strategy.

After evaluating the risks, the next step is to assign each risk to one of the four risk management strategies I shared above: avoidance, reduction, transfer or acceptance. It’s crucial to remember that each risk will only fit into one of these categories. Deciding which strategy to use for a specific risk involves considering a few key factors, including:

• The severity of the potential impact;

• The cost and feasibility of mitigation;

• How much risk the organization is willing to tolerate.

For example, if a risk could significantly disrupt operations but is too expensive to avoid or transfer, reducing the risk might be the best course of action. Conversely, smaller risks with less impact might be better handled by simply accepting them.

By applying these strategies, you can manage risks effectively in any part of your organization. Remember, each situation is unique, and the best strategy will depend on a careful assessment of the specific circumstances and potential impacts of the risks your team is facing. As you become more familiar with these strategies, you’ll likely find that risk management becomes a natural part of your decision-making process. As a result, you can steer your organization through uncertainties with greater confidence.

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• | Resources
• | Guide: Fraud Risk Management: What It Is and How the Process Works

span]:text-green font-bold text-4xl md:text-77 xl:text-[4.5vw] 2xl:text-120"> Resources

Guide: fraud risk management: what it is and how the process works.

• September 18, 2024

Fraud has evolved to be more sophisticated and prevalent than ever before. According to the Federal Trade Commission, consumers lost over $10 billion to fraud in 2023. As consumer technologies continue to advance, fraudsters have evolved to committing highly elevated and organized cybercrime. Companies need to prioritize detecting and preventing internal and external fraud attacks to keep their customers’ information safe and protect their businesses from financial losses. 

Conducting a fraud risk assessment is the first step any company can take to proactively mitigate fraud, regardless of industry. In this article, we’ll cover the key elements of fraud risk assessments, including what they are, how they work, and why they are essential to any fraud protection strategy. 

What Is a Fraud Risk Assessment and How Does It Work?

The goal of a fraud risk assessment is to identify a company’s exposure and vulnerabilities to fraudulent activity. The assessment is always customized to the organization’s industry, functional requirements, and risk tolerance. Leaders of each department should conduct their own risk assessments to determine likelihood of fraud. Risk assessments should be updated regularly to reflect changes in fraud trends and the evolving business environment.  

A fraud risk assessment should address five key areas of opportunity for fraud: 

• Financial Reporting :  Intentional misrepresentation of financial information, such as overstating revenues or understating expenses and losses
• Misappropriation of Assets :  Impacting company assets through means such as larceny, embezzlement, and fraudulent disbursements
• Illegal Acts & Corruption :  Violation of laws and regulations, bribery, or the illicit use of intelligence, intellectual property, etc.
• Non-Financial Reporting : Intentional misrepresentation of performance metrics or operational reporting
• Regulatory Compliance : How a company complies with regulatory requirements and standards

Assessing Your Fraud Risk

While the process will vary depending on the organization’s size, industry, and who’s conducting the assessment, below are five key steps that any company can take to conduct their own fraud risk assessment. 

1.  Identify Risks  Identify where fraud can occur across the organization, whether internally or externally, and collect detailed information about weaknesses in operational processes, tools, or employee habits. This will highlight what’s missing in your fraud management strategy so you can adjust accordingly. 

2. Analyze Risks  Analyze the likelihood of fraud occurring as well as the severity of how that fraudulent activity will impact the organization. Determining the consequences of fraud will give you an idea of what fraud protection strategies should be prioritized to prevent financial or reputational losses. 

3. Respond to Risks  Take action to mitigate the risk of fraudulent behavior, whether by restructuring operational processes, reevaluating common business practices, or eliminating services that have more risk than they are worth.

4. Monitor Risks  Monitoring risks is crucial to preventing fraudulent activity, especially as fraudsters continue to evolve their skills and take advantage of digital services. It’s essential to adapt and adjust your fraud prevention plan whenever necessary to ensure detection of fraud at all levels of the business.

5. Report Risks  Report your findings in your fraud risk assessment so that the company can implement controls wherever they’re lacking. Ensure that whoever conducts the assessment remains objective and can suggest solutions to mitigate fraud risks in a way that’s clear and measurable.

Why You Need a Fraud Risk Assessment

By conducting a risk assessment, your organization can use the knowledge gained from the evaluation to employ controls that prevent fraudulent behavior, both internally and externally. This will help you prevent unnecessary financial losses while protecting your customers from data theft. Investing in fraud risk management will give consumers the confidence to do business with you long-term, leading to happier customers and an improved reputation. 

Be proactive about mitigating fraudulent behavior by partnering with an expert in fraud protection . Download our Fraud Risk Management guide below.

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EU competitiveness: Looking ahead

Introduction

Today, Europe stands united in its pursuit of inclusive economic growth, focusing on 

• sustainable competitiveness
• economic security
• open strategic autonomy
• fair competition

They all serve as pillars of prosperity. 

The vision that drives Europe forward is to create conditions where businesses thrive, the environment is protected, and everyone has an equal chance at success.

Sustainable competitiveness should make sure businesses are productive and environmentally friendly. Economic security ensures that our economy can handle challenges and protect jobs. With open strategic autonomy, Europe is not just open for business; but is shaping a better, fairer world.

Way forward for EU’s competitiveness

Europe's strong system of rights and values offers equal opportunities and leads the way in social inclusion. Our institutions, economic frameworks, and commitment to the rule of law create an environment where businesses can thrive and people can prosper. Top-notch infrastructure and a skilled workforce give Europe its competitive edge.

In a changing world with new challenges, the European Union is focused on staying competitive and prosperous. We're working hard to maintain our leadership globally and to make sure we have control over our own future.

Therefore Europe needs to look further ahead and set out how to remain competitive. 

This is why Mario Draghi – former European Central Bank President and one of Europe's great economic minds – was tasked by the European Commission to prepare a report of his personal vision on the future of European competitiveness. 

The future of European competitiveness: Report by Mario Draghi

The report looks at the challenges faced by the industry and companies in the Single Market. 

The findings of the report will contribute to the Commission’s work on a new plan for Europe’s sustainable prosperity and competitiveness. And in particular, to the development of the new Clean Industrial Deal for competitive industries and quality jobs, which will be presented in the first 100 days of the new Commission mandate.

• 9 SEPTEMBER 2024
• 17 SEPTEMBER 2024

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Strengthening European competitiveness

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