risk analysis example 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.

Related Posts

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Risk Analysis Template and Step-by-Step Guide (Free Example)

Short Summary

• A risk analysis is a process of identifying and analyzing potential events that may negatively affect individuals, assets, or an organization, and planning how to mitigate those risks.
• It helps you prioritize your security activities and determine your tolerance for different risks. 
• We take you through our step-by-step guide on how to create a risk analysis using our free template with examples of different risks an organization might face. 

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Please note that our risk analysis template and guidance focuses on assessing business risks. If you are doing a GDPR risk assessment, you should see the risk from the point of view of the data subject. The EU has a template and guide you can use to do a Data Protection Impact Assessment for GDPR. 

Table of contents

• Risk analysis example 1
• Risk analysis example 2
• Risk analysis for information security
• Step 1 - Create a scale for the risk assessment matrix
• Step 2 - Start by listing your assets

Step 3 - List threats and vulnerabilities

• Step 4 - Evaluate risks
• Your security risk assessment is complete!

What is a risk analysis? 

A risk analysis is a useful tool for any organisation that wants to anticipate incidents and plan how to mitigate potential risks. It involves identifying and analysing potential events that may negatively affect individuals, assets, or the organisation. A risk analysis can help us make judgements about our tolerance for certain risks so that we can better anticipate them. And most importantly, it makes it possible for us to prioritise our security activities.

" The beauty of risk analysis lies in its ability to unveil vulnerabilities, enabling proactive measures that significantly ease the daily work burden. It transforms uncertainty into a manageable landscape, providing clarity on where attention and resources are most needed ." Nathan Clark, Co-Founder of gate2ai.

 At CyberPilot, we use this IT risk assessment template to help organisations do a risk analysis for information security.

A cyber security risk assessment can benefit your organisation with the following:

Identify vulnerabilities

Provides a good overview

Determine better processes and requirements, which improves planning

Document due diligence

It can also help you understand the probability of theoretical risks happening in real life.

That way, you can better understand how to allocate resources to prevent them. We will give you two examples below.

Listen to our podcast where we go through the risk analysis

A tornado hits your company headquarters and damages all the IT equipment.

While this is certainly a risk that could happen and have a big negative impact, it is unlikely to happen if your area has no history of experiencing tornados. Therefore, your efforts could be better spent thinking of solutions for other risks.

Consequence: HIGH

Likelihood: LOW

A staff member travels with company IT equipment and it gets damaged on the baggage carousel.

While losing the IT equipment of one staff member is not catastrophic for the company, it is more likely to happen if staff travel regularly. And maybe the consequence for losing the specific equipment is not only the cost of the laptop, smartphone, etc., but could also lead to potential data loss or could be one of the breaches against the GDPR that result in a fine . 

Consequence: MEDIUM

Likelihood: MEDIUM

We would suggest spending some time on mitigating this risk.

Ultimately, a security risk assessment can help you weather any storm, or at least be better prepared for it.

For an information security risk assessment, we can start by looking at potential events that can negatively affect your organisation.

Some examples include:

The website crashing

IT equipment being damaged

GDPR violation and fines

Loss of intellectual property

You can ask yourself:

What do those events mean for my company?

What resources and assets would I lose in the event?

What resources and assets would I lose when trying to fix the problems?

What would we do if any of those events happened right now?

In the next session, we will discuss how to create your own risk analysis, using our free risk analysis template as an example.

You can download our template and follow along.

A snippet from our risk analysis template 

First, we determine the scales that we use for our security risk assessment. In our template, you can access the scale in the first tab.

In the risk analysis template, we categorise the risk levels as low, medium, or high. One way of thinking of risk level is how severe the consequences can be for your organisation. Below, we define what each risk level could mean in terms of IT systems.

Low risk  

The system is easily recoverable

The system provides a non-critical service

Medium risk

The system provides a normal service

The system provides a critical service for the entire organisation

You can also take this opportunity to discuss within your organisation how many resources you would have to use to fix these issues if they were to occur. Our IT risk assessment template gives you the opportunity to fill in the time and monetary consequences, so you can consider the full impact of different IT security risks.

As the risks and consequences differ from organisation to organisation with smaller companies also in need of cybersecurity , we highly recommend adopting this section according to your needs. For example, if you are part of a company whose revenue comes solely from the online shop on the website, then the website crashing is considered a much higher risk. In contrast, if your website serves just as a landing page without much functionality or effect on your day-to-day operations, then the website crashing is a lower risk because the consequences are lower.

Fill in the security risk assessment

To complete the risk analysis, our template has different columns to fill in:

Short description

Vulnerability

Performed actions

Consequence

Probability, suggestions for increased security.

Below, we’ll describe each of these categories with examples.

When we talk about assets in this context, we mostly mean assets related to your organisation’s IT. This can include hardware, such a s laptops and mobile devices that your staff use. You might want to consider implementing a device management system, if you do not already have one in place, in order to keep track of your organisations mobile devices . 

Additionally, assets can include the IT services provided by your organisation, such as internal communication systems (e.g., Microsoft Teams of Slack) or customer-facing services like the company webpage. Other than IT assets, we include staff as an asset, as employees have a lot of influence over the state of your information security and can be the biggest defence when it comes to IT-security, which is why it is important that they are aware of the security risks and have received awareness training for complying with the GDPR . We discuss this further in our free e-book on IT security defence if you want to read more.

Finally, if you use IT asset management , then it is very easy to use that document as a reference. You don’t have to list all of your company’s assets, but you can choose the most important or commonly used ones to start with.  

Although self-explanatory, this column can be very useful for defining what you mean when you list different assets. For example, when we list staff as an asset, we can define it as both full-time and part-time employees. You can also define who is not included, for example, consultants, who act as external advisors to the organisation but are not officially part of the organisation.

Defining which department is responsible for each asset is advantageous because it prepares the company to respond when an issue must be fixed. Maybe instead of an entire department, it’s the Data Protection Officer who is responsible. Laying out responsibility is useful for a few reasons.

First, it can give you a better understanding or a refresher of each department or sub department's responsibilities. Second, clearly defined responsibilities can help the organisation react faster when there is a security risk. However, we don’t recommend spending too much time on this column, as responsibilities can easily overlap between departments and change over time. We recommend getting a general understanding and being flexible when it’s time to fix the issue.

Threat 

A threat describes any potential damage to an asset, which could affect the organisation. If there have been any security breaches or incidents in the past, you can list them in this column. For example, ransomware and malware or unauthorised access to confidential data could be considered threats. For instance, the threat of ransomware often occurs through websites, for this reason you should make sure all staff members knows how to brows safely while at work. They may unsuspectedly stumble upon a fake website and accidentally install ransomware, therefore locking access to the organisation’s files and their computer until they pay the cybercriminals. Next, we discuss vulnerabilities that coincide with these threats.

Vulnerability 

Vulnerabilities can be described as the reasons for why threats occur. When it comes to ransomware, vulnerability might occur from staff members unsuspectedly stumbling upon a fake website and accidentally installing ransomware.

While vulnerabilities can also occur through unauthorised access to confidential data. In this case the vulnerability could be somebody forgetting to close the browsing window after a video call, and accidentally showing a customer their internal communications. Knowing how to prevent data breaches through video calls is therefore an easy step to decrease vulnerability. One of the most common security breaches happen due to people sending emails containing personal data to the wrong person. 

Performed actions 

In this section, you write whether you have already done anything to mitigate these risks. For example, if you have experienced losing important files before and now use cloud storage for back-up, that is an example of a performed action. If you use awareness training or phishing simulations to keep IT security top of mind for your employees, you could also list these activities here.

After writing about the threats, you can better assess how big the consequences would be if they were to occur. This is obviously a subjective assessment, but it should be discussed with colleagues. Often, you will find that your colleagues have different perspectives on the consequences. Perhaps the marketing department will put a ‘HIGH’ consequence on something happening to the company website, since that can affect sales. But the IT department would not see it in the same way, as it would not affect the day-to-day operation of the company. That’s why it is important to get a lot of different perspectives when you evaluate the consequences.

Not all risks are created equal. Some could probably happen a few times a month, while some may only happen once every few years. By assessing the probability of threats, you can understand how to prioritise them, and perhaps leave out the ones that you can’t realistically tackle.

After filling in the previous sections, you will have gained a better understanding of each asset and the risks associated with them. In this section, you can use your answers from the previous sections to write down suggestions for increased security.

When every section is filled in with the assets and the threats you can think of, you will have a better overview of the risks to your IT security. From the risk analysis, you will be able to see which threats are more likely to happen and the consequences if they occur. Of course, you can keep this document handy and update it regularly. It can even be a document you consistently refer to, like your IT Security Policy and Acceptable Use Policy . We hope that this blog has helped you understand what a security risk assessment is and how to do one yourself. As a matter of fact, we use this risk analysis template to help many organisations who want to have a better understanding of the security risks to their IT assets. If you would like to get some help with putting together your risk analysis, we are happy to have a talk about it. Download our template here and you can contact us at [email protected] .

People also asked

What is a risk analysis.

Risk analysis is a procedure that involves identifying, assessing, and evaluating potential risks and their impact on an organisation, project, or system. It entails examining the probability of a risk occurring, its consequences, and devising strategies to prevent or mitigate those risks.

What does a risk assessment include?

A risk assessment typically includes identifying potential hazards, evaluating the likelihood and potential impact of those hazards, determining existing controls, and making recommendations to reduce or eliminate risks. It may also include prioritizing risks, setting risk management goals, and creating an action plan to implement those goals.

What are the steps of risk analysis?

The steps of risk analysis include identifying and assessing potential risks, evaluating the likelihood and impact of those risks, determining risk tolerance and prioritisation, developing risk mitigation strategies, implementing controls and monitoring effectiveness, and periodically reviewing and updating the risk management plan. You can also watch our video about how to fill out a risk analysis right here

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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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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

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Everything You Need to Know About Risk Analysis: Components, Types, and Methods

• Ossian Muscad
• August 2, 2022

Last Updated on March 26, 2024 by Ossian Muscad

Every business faces risks, and it’s its job to identify and manage them. Risk analysis is a vital part of this process—it’s used to assess what could happen, the likelihood of it happening, and how you can manage it effectively. Risk analysis aims to identify potential risks and then determine their likelihood, impact, and severity.  You can then use all the information you gathered to develop a plan to mitigate those risks. This article will discuss the components of risk analysis, examples, and the different types and methods. We will also provide examples to see how risk analysis is performed in practice!

What is Risk Analysis?

Risk analysis is a multi-step process that businesses use to identify, assess, and manage risk. The first step is to identify the potential risks that could affect your business—this can be done through brainstorming sessions with your team or by conducting a SWOT analysis. 

Once you have identified the risks, you need to determine their likelihood, impact, and severity. To do this, you will need to gather data and information about the risks. This can be done through historical data, surveys, interviews, or market research. 

Once you have all the information, you can develop a risk management plan. This plan will involve mitigating the risks so that they are less likely to happen or have a smaller impact if they do occur.

Risk Assessment Vs. Risk Analysis: What’s the Difference?

Risk assessment and risk analysis are integral parts of an organization’s risk management process, yet they serve distinct functions. Risk assessment is primarily focused on identifying and evaluating risks to determine their impact and likelihood of occurrence. It involves systematically examining all aspects of risk and potential hazards that could affect the organization’s ability to meet its objectives. This step is crucial for recognizing which risks are significant and, therefore, should be prioritized for action.

On the other hand, risk analysis goes deeper by taking the identified risks from the risk assessment phase and analyzing them in detail. This involves a more in-depth examination of each risk, including the possible causes, the likelihood of their occurrence, their potential impact on the organization, and identifying ways to mitigate or eliminate these risks. Risk analysis employs both qualitative and quantitative methods to estimate the severity of each risk and to develop strategies for managing or avoiding these risks.

So, while risk assessment is about identifying and prioritizing risks based on their potential impact, risk analysis focuses on understanding these risks’ intricacies and forming strategies to mitigate them. Both are crucial to creating a comprehensive risk management plan that safeguards an organization’s assets and ensures its ongoing viability.

Types of Risk Analysis

Understanding the different types of risk analysis is crucial for organizations to implement the most appropriate strategy to minimize potential threats and their impacts. Each method offers a unique perspective and analytical approach, allowing for comprehensive assessments and targeted risk management plans. Here, we will explore five key types of risk analysis:

Risk-Benefit Analysis

Risk-benefit analysis involves comparing the risks associated with potential actions with the benefits those actions may bring. It’s commonly used in decision-making processes where safety and potential gains are both significant concerns. This type of analysis helps organizations weigh the advantages against the possible risks, facilitating more informed decisions. It’s particularly prevalent in sectors like healthcare, where treatment side effects need to be balanced against therapeutic benefits, and in project management, when determining whether the potential outcomes of a project justify the investment and potential risks.

Needs Assessment

A Needs Assessment is focused on identifying and prioritizing an organization’s or project’s needs. This analysis helps understand what needs to be done to move from the current state to a desired state. By identifying these gaps, organizations can prioritize actions, allocate resources more effectively, and mitigate risks associated with neglecting critical needs. It is an essential process for strategic planning and resource management.

Failure Mode and Effect Analysis (FMEA)

Failure Mode and Effect Analysis (FMEA) is a systematic, step-by-step approach for identifying all possible failures in a design, manufacturing, or assembly process or a product or service. It is designed to identify potential failure modes, determine their effect on the operation of the product, and identify actions to mitigate the failures. By analyzing failures before they occur, FMEA helps prevent potential problems, reduces the risk of failure, and ensures higher quality and reliability of the product or service.

Business Impact Analysis

Business Impact Analysis (BIA) is critical for understanding the potential effects of disruptions to critical business operations. It involves identifying vital business functions and processes and the potential impact of disruption to these areas, whether through financial loss, loss of reputation, or legal implications. BIA is crucial for disaster recovery and business continuity planning, ensuring that organizations can maintain essential functions during and after a disruptive event.

Root Cause Analysis

Root Cause Analysis (RCA) is a method used to identify the underlying reasons for a problem, focusing on correcting the root causes rather than just treating the symptoms. It involves investigating the patterns of negative effects, finding the cause-and-effect relationships responsible for those patterns, and implementing solutions to prevent recurrence. RCA is commonly used in problem-solving and quality improvement initiatives and can be applied across various industries and disciplines.

Methods of Risk Analysis

Risk Analysis is an essential process in any organization’s risk management strategy, as it helps identify potential threats and evaluate their impact on operations. By employing various risk analysis methods, organizations can develop strategies to mitigate these risks effectively. Here, we will introduce and detail five critical risk analysis methods: Qualitative Risk Analysis, Quantitative Risk Analysis, Bow Tie Analysis, SWIFT Analysis, and Decision Tree Analysis.

Qualitative Risk Analysis

Qualitative Risk Analysis is a method that assesses and prioritizes risks based on their severity and likelihood using a non-numerical approach. This process involves subjective measures, often relying on the expertise and experience of the project team and stakeholders. It’s typically used in the early phases of projects or when quantitative data is lacking. By categorizing risks into levels such as “high,” “medium,” or “low,” stakeholders can identify which risks require immediate attention and resources to mitigate. Here’s how to perform a qualitative risk analysis:

• Identify Risks : Begin by compiling a comprehensive list of all possible risks that could impact the project or organization. This step involves brainstorming with project teams and stakeholders and using historical data.
• Assign Probability and Impact : For each identified risk, assign a probability of occurrence and an impact level should the risk materialize. These are typically categorized as high, medium, or low.
• Rank the Risks : Based on the assigned probability and impact, rank the risks to prioritize which ones require immediate attention. This ranking helps in focusing resources on the most critical risks.
• Develop Mitigation Strategies : For the highest-ranked risks, develop strategies to either mitigate the impact or decrease the probability of the risk occurring. This may involve contingency planning or preventive measures.
• Monitor and Review : Establish a process for ongoing monitoring of identified risks and the effectiveness of mitigation strategies. This step includes updating risk assessments as the project progresses or as new information becomes available.

Quantitative Risk Analysis

Quantitative Risk Analysis involves the use of numerical data to analyze and evaluate the potential impact of identified risks on project objectives. This method quantifies risks in terms of cost and time, applying statistical techniques to calculate the probability of achieving project goals. It provides a more objective basis for decision-making compared to qualitative analysis, allowing for effective prioritization and resource allocation to address high-impact risks. Here’s how to perform a quantitative risk analysis:

• Collect Data : Gather relevant data on the risks that have been identified, including historical data, industry benchmarks, and expert judgments. This data will form the basis for the analysis.
• Model the Risk : Use statistical models to represent the probability distributions of the risks. Tools such as Monte Carlo simulations or decision tree analyses are commonly used to model risk scenarios and their outcomes.
• Quantify Risks : Assign numerical values to both the probability of each risk occurring and its potential impact on the project. This typically involves calculating the Expected Monetary Value (EMV) for each risk.
• Prioritize Risks : Analyze the quantified data to prioritize the risks by their potential impact on project objectives. This helps identify which risks require the most attention and resource allocation.
• Develop Response Strategies : For each of the high-priority risks, develop specific strategies to mitigate, transfer, avoid, or accept the risk based on the analysis. Incorporate these strategies into the project plan and allocate resources accordingly.

Bow Tie Analysis

Bow Tie Analysis is a visual tool used to identify and manage the potential causes of risks (threats) and the impacts they may have (consequences), connecting them through risk scenarios (hazards). This method helps in visualizing complex risk scenarios clearly and is useful in both preventing risks from occurring and mitigating the effects if they do occur. It emphasizes proactive risk management by identifying both preventive and reactive measures to deal with risks effectively. Here’s a step-by-step guide on how to perform a Bow Tie Analysis:

• Identify the Hazard : Start by pinpointing the central hazard or risk scenario you want to analyze. This is the event or situation in the middle of the bow tie that has the potential to cause harm or impact the project or organization.
• List Potential Causes : On the left side of the bow tie, list all the possible causes that could lead to the central hazard. These are known as threats and should cover a wide range of potential initiating events or conditions.
• Determine Consequences : On the right side of the bow tie, outline all the possible consequences that could result if the central hazard occurs. It’s crucial to consider both direct and indirect impacts.
• Develop Preventive Controls : For each identified cause on the left side, develop preventive controls or measures that can be put in place to either eliminate the cause or reduce the likelihood of the hazard occurring. These are your risk management strategies for preventing the hazard.
• Establish Measures : For each consequence listed on the right side, establish mitigative measures or responses to reduce the impact or severity if the hazard does occur. This includes planning for emergency responses, recovery strategies, and other post-event actions to manage the outcomes effectively.

SWIFT Analysis

SWIFT Analysis (Structured What-If Technique) is a risk identification method that uses structured brainstorming sessions to predict what might go wrong in a given scenario. It’s particularly useful in the early stages of project planning and design, where assumptions about the system or process are tested against possible failures. SWIFT Analysis encourages a team-based approach to identify unexpected risks, making it an effective tool for comprehensive risk assessment and prevention strategies. Here’s how to perform a SWIFT Analysis:

• Define the Scope : Begin by clearly defining the scope of the analysis. This includes identifying the system, process, or area to be examined and setting the boundaries for what will be included in the SWIFT session. It’s crucial that all participants have a clear understanding of the focus area.
• Assemble the Team : Gather a multidisciplinary team that has knowledge and experience relevant to the area being analyzed. The diversity of perspectives is key to identifying a wide range of potential issues. Ensure the team includes individuals with a mix of expertise, including operations, safety, and management.
• Conduct Brainstorming Sessions : Facilitate structured brainstorming sessions with the team to speculate about potential problems and what-if scenarios. Encourage open discussion and consider using prompts to explore various dimensions of the process or system. Record all ideas for further analysis.
• Identify Risks and Causes : From the brainstorming output, identify specific risks, their causes, and potential failure modes. For each risk, discuss the likelihood of occurrence and possible consequences. This step may involve grouping similar risks and identifying patterns.
• Develop Mitigation Strategies : For each identified risk, develop strategies to mitigate, eliminate, or manage the risk. This could involve redesigning parts of the system, implementing new procedures, or enhancing training and awareness programs. Prioritize the actions based on the risk level and allocate resources to address the most critical issues first.

Decision Tree Analysis

Decision Tree Analysis is a graphical representation of decisions and their possible consequences, including risks, rewards, and resource costs. This method helps in making informed decisions by systematically laying out the different strategic options available and exploring the potential outcomes of each. It is especially effective for evaluating conditional decisions, underlining the path that offers the highest likelihood of success based on the calculated risks and rewards. Decision Tree Analysis is beneficial in complex decision-making environments where multiple choices and uncertain outcomes are involved. Here’s how to use this tool:

• Define the Decision Problem : Begin by clearly identifying the decision that needs to be made. Clarify the objectives and determine the timeframe and context within which the decision takes place. This foundational step is critical to formulating a relevant decision tree.
• Identify Alternatives and Outcomes : List all possible alternatives for the decision at hand. For each alternative, identify potential outcomes, including favorable and unfavorable scenarios. Consider both immediate outcomes and those that may occur as a result of further decisions.
• Structure the Decision Tree : Draw the decision tree using squares to represent decision points, circles for chance events (outcomes), and triangles for end points (final outcomes). Start with the main decision, branching out to alternatives and their corresponding outcomes.
• Assign Probabilities and Values : For each chance event, assign a probability based on available data or expert estimation. Additionally, assign a value or utility to each final outcome, which could be in terms of cost, revenue, benefit, or other quantifiable measures relevant to the decision problem.
• Analyze and Choose the Best Path : Calculate the expected values for each decision path by multiplying the value of outcomes by their probabilities and summing these for each path. The path with the highest expected value represents the statistically best decision. Consider performing sensitivity analysis to understand how changes in probabilities or values impact the decision, offering insights into the decision’s robustness under uncertainty.

Risk Analysis Examples

 Businesses of all shapes and sizes use risk analysis across multiple industries. To incorporate risk analysis, you should find a risk analysis example that’s specific to your industry. Here are some risk analysis examples that are relevant to three major industries: manufacturing, construction, and transport logistics:

Construction Risk Analysis Example

The owner of a construction company wants to build a new factory. They conduct a risk analysis to assess the risks of the project. The risk analysis includes looking at the project’s cost, the potential for delays, and the risk of accidents. The construction company decides to proceed with the project. However, they take measures to mitigate the risks by ensuring a contingency fund for delays and increasing safety measures on the construction site.

Manufacturing Risk Analysis Example

A risk analysis is conducted at a car manufacturing plant. It looks at the potential risks of producing a new car model. These risks include the cost of production, the risk of faulty components, and the risk of accidents. The risk analysis concludes that the project is feasible. However, the company has decided to mitigate the risks by increasing the budget for quality control and implementing new safety measures.

Transport Logistics Risk Analysis Example

A risk analysis is conducted by a transport company that wants to start shipping goods overseas. The risk analysis looks at the potential risks of the project because these risks include the cost of shipping, the risk of damage to goods, and the risk of delays. The risk analysis concludes that the project is feasible. However, the company has decided to take measures to mitigate the risks by taking out insurance for their shipments and increasing their contingency fund.

How to Incorporate Risk Analysis into Your Business

Incorporating risk analysis into your business strategy is crucial for navigating uncertainties and ensuring long-term success. By identifying potential risks before they manifest, your organization can develop effective strategies to mitigate or eliminate them, thereby safeguarding your operations and financial stability. Here are five practical tips on how to seamlessly integrate risk analysis into your business operations:

• Establish a Risk Management Team : Form a dedicated team responsible for risk management within your organization. This team should consist of individuals from various departments who bring diverse perspectives and expertise. Their primary role will be to continuously identify, assess, and manage risks, ensuring that the organization is always prepared for potential challenges.
• Implement a Risk Identification Process : Develop a systematic process for identifying risks that could affect your business. This involves regularly reviewing internal processes, market dynamics, regulatory changes, and external factors that could pose threats or opportunities. Effective risk identification serves as the foundation for the subsequent analysis and mitigation efforts.
• Adopt a Quantitative Risk Analysis Approach : Utilize quantitative methods to evaluate the potential impact of identified risks on your business. This can include financial modeling, scenario analysis, and probability assessments. Quantitative analysis provides a data-driven basis for understanding the magnitude of risks and prioritizing mitigation efforts accordingly.
• Develop a Risk Mitigation Plan : For each significant risk identified, devise a strategy to mitigate, transfer, avoid, or accept the risk based on its severity and likelihood. This plan should outline specific actions, assign responsibilities, and set timelines. Regularly review and update the mitigation plan to reflect changes in the business environment or the organization’s risk tolerance.
• Foster a Risk-Aware Culture : Encourage an organizational culture that understands and appreciates the importance of risk management. Provide training and resources to ensure that all employees are equipped to recognize and report potential risks. A risk-aware culture empowers employees to act proactively, significantly enhancing the organization’s overall resilience to threats.

Frequently Asked Questions (FAQs)

Q1: can risk analysis be applied to all types of businesses.

Yes, risk analysis is a versatile tool that can be applied to all types of businesses, regardless of their size, industry, or market. It helps identify potential risks, assess their impact, and calculate the best course of action to mitigate those risks.

Q2: How often should a business conduct risk analysis?

Risk analysis is not a one-time activity. It should be an ongoing process, with the frequency of analysis depending on the business’s environment, the nature of its operations, and the pace of change within its industry. Typically, it’s advisable to perform risk analysis annually or whenever there are significant changes in the business environment or operational processes.

Q3: Who should be involved in the risk analysis process?

While having a dedicated risk management team is ideal, the risk analysis process should involve key stakeholders across various departments of the organization. This includes finance, operations, HR, IT, and any other department that plays a critical role in the organization’s functioning. Involving a diverse group ensures a comprehensive identification and assessment of risks.

Q4: What is the difference between a quantitative and qualitative risk analysis?

Quantitative risk analysis uses numerical values and mathematical models to evaluate the impact of risks, including statistical methods to estimate probabilities and outcomes. Qualitative risk analysis, on the other hand, relies on judgment, intuition, and experience to assess the severity and likelihood of risks, often categorizing them into levels such as high, medium, or low.

Q5: How do you prioritize risks identified during risk analysis?

Risks are typically prioritized based on their potential impact on the business and their likelihood of occurrence. This can be done using tools such as a risk matrix, which plots the severity of the impact against the likelihood, allowing businesses to focus their efforts on managing the most critical risks identified.

Q6: What should be done after the risks have been analyzed and prioritized?

After risks have been analyzed and prioritized, the next step is to develop and implement a risk mitigation plan for the most significant risks. This plan should outline the strategies to mitigate, avoid, transfer, or accept risks, detailing the actions to be taken, assigning responsibilities, and setting deadlines. Continuous monitoring and review of the risk management plan is essential to adapt to any changes in the business environment or operations.

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In the fast-paced, dynamic world of business, risk management is not just a necessity but a strategic imperative. By adopting a comprehensive approach to identify, analyze, mitigate, and monitor risks, businesses can protect their assets, ensure sustainable growth, and stay ahead in competitive markets.

Cultivating a risk-aware culture and conducting regular risk assessments are key to building resilience against unforeseen challenges. Remember, the goal is not to eliminate all risks but to understand and manage them effectively, turning potential vulnerabilities into strategic opportunities for advancement and success.

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Fundamentals of risk assessment: methods and tools used to assess business risks.

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

In the intricate tapestry of the modern business landscape, every thread is intertwined with an element of risk. From startups navigating the treacherous waters of market entry to conglomerates expanding their global footprint, understanding and adeptly managing these risks has become a distinguishing factor between fleeting success and enduring resilience.

As the pace of innovation surges and the global marketplace transforms, the significance of comprehensive risk assessment is only magnified. As a top expert in risk and crisis management, I've served major clients as well as numerous smaller firms in Europe and the U.S. Here's my guide for businesses.

Key Components Of Risk Assessment

Risk assessment stands as a cornerstone in strategic business decision-making, demanding a structured and meticulous approach to ensure effectiveness.

1. Identify

At the heart of this process is the task of identifying risks. This involves recognizing and describing potential pitfalls that a business might face. Recognizing these risks early ensures that businesses can allocate resources and strategize aptly without being caught unprepared.

2. Quantify

Following the identification phase, businesses need to quantify the risks, gauging both their potential impact and likelihood.

Employ tools such as statistical models, analyses of historical data and simulated scenarios as they can all provide valuable insights in this dimension. It's through this quantification that businesses can discern which threats merit immediate attention and which can be set aside for later.

3. Prioritize

Once quantified, the next logical step is to prioritize these risks. Here, businesses rank and evaluate the identified risks, determining which should be addressed first based on their significance.

Instruments like risk matrices , which juxtapose the likelihood of a risk against its impact, play a crucial role in this assessment phase. Not every risk poses an immediate threat, and thus it's essential to ensure the most significant risks are addressed immediately, streamlining resources for maximum efficacy.

4. Evaluate

Subsequent to prioritization, a comprehensive evaluation of these risks is essential. This phase requires businesses to weigh the magnitude of each risk against their inherent risk appetite.

Compare industry benchmarks, past experiences or predetermined thresholds to decide the most appropriate way to address each threat. This step is pivotal in ensuring that risk management efforts are in harmony with a company's overarching objectives and risk tolerance levels.

5. Mitigate And Manage

Mitigating and managing risks forms the next stage. Strategic decisions come into play, determining how each identified risk should be addressed. Depending on the nature and magnitude of the risk, businesses might opt to transfer the risk through mechanisms like insurance, change their business processes to avoid it entirely, put in place safeguards to diminish its effect, or even accept it outright.

Effective risk management, in this regard, becomes a dual-edged sword; while it safeguards against potential adversities, it can also pave the way for opportunities, enabling growth and improvement.

6. Monitor And Review

Risks are inherently dynamic, fluctuating with time and circumstances. Regular audits, feedback mechanisms and even third-party reviews ensure that strategies employed remain effective and that emergent risks are identified promptly.

This continuous monitoring helps businesses stay nimble, adjusting their strategies to the evolving landscape of risks, better ensuring both survival and prosperity in an uncertain world.

Methods Of Risk Assessment

1. qualitative assessments.

The qualitative assessment is predominantly based on descriptive, nonnumerical data, and it shines in scenarios where garnering accurate numerical data is challenging. One of its significant advantages is its capacity to harness the power of expertise, intuition and experience to scrutinize risks.

There are several techniques under this umbrella. For instance, SWOT analysis delves into both the internal and external elements that might influence a project or business. It identifies the strengths, weaknesses, opportunities and threats.

The expert judgment method seeks insights from those with specialized expertise. Another technique, the Delphi method , orchestrates a structured dialogue among a panel of experts. This communication continues in multiple rounds until a consensus emerges.

2. Quantitative Assessments

The quantitative assessment employs numerical data. By leveraging statistical, financial or numerical analyses, it provides a more systematic and data-centric perspective on potential risks.

Techniques in this category include the Monte Carlo simulation , which uses an algorithm that hinges on constant random sampling to deduce numerical outcomes. Decision trees provide a visual representation of decisions and their possible results. Additionally, sensitivity analysis explores how varying values of one variable can influence another.

3. Additional Assessments

Scenario analysis empowers businesses by laying out an array of potential future situations. It aids in sketching the best-case, worst-case and the most-probable scenarios, enabling firms to visualize and weigh the potential risks and rewards.

Stress testing dives deep into analyzing potential vulnerabilities in any given system. It designs models that emulate challenging, often drastic conditions. A classic example of its application is in the financial realm , where banks deploy this method to unearth potential weak points in their financial statements.

The comparative risk assessment offers a comparative perspective. By juxtaposing potential risks against a benchmark or another risk, businesses can determine which threats deserve immediate attention, especially when resources are sparse and setting priorities becomes vital.

A hybrid method epitomizes adaptability. Realizing that no single technique can capture the entirety of risks, many entities interweave both qualitative and quantitative strategies. This amalgamated approach furnishes a richer, more detailed depiction of the risk environment surrounding a business.

Navigating Risk

To make an informed decision on which assessment method to employ, decision-makers should consider the nature of the risk, available data and desired depth of analysis.

Whether leaning toward qualitative methods that harness expertise and intuition or quantitative techniques that provide data-centric insights, the key is to choose a method (or combination thereof) that aligns with the specific context and objectives of the business, ensuring both its survival and prosperity amid uncertainties.

In essence, managing risk boils down to four strategies: avoiding it, mitigating its impact, transferring it, or simply accepting it. The chosen approach depends on the nature and magnitude of the risk in question.

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What Is Risk Analysis?

Understanding risk analysis, how to perform a risk analysis.

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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

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.   Assessing risk is essential for determining how worthwhile a specific project or investment is 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 risks that are identified, such as market risk , credit risk, currency risk, and so on, can be reduced through hedging or by purchasing insurance.

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

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. Inputs that are mostly assumptions and random variables are fed into a risk model.

For any given range of input, the model generates a range of output or outcome. The model's output is analyzed using graphs, scenario analysis , and/or sensitivity analysis by risk managers to make decisions to mitigate and deal with the risks.

A Monte Carlo simulation can be used to generate a range of possible outcomes of a decision made or action taken. The simulation is a quantitative technique that calculates results for the random input variables repeatedly, using a different set of input values each time. 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 on a global scale might want to know how its bottom line would fare if the exchange rate of select countries strengthens. 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 variance of the portfolio. 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. Qualitative analysis 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 occurring.

Examples of qualitative risk tools include SWOT analysis , cause and effect diagrams, decision matrix, game theory , etc. 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. This metric is most commonly used by investment and commercial banks 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 with the assumption that returns will be repeated, especially where it concerns risk. As a historical example, let's look at the Nasdaq 100 ETF , which trades under the symbol QQQ (sometimes called the "cubes") and which started trading in March of 1999.

In January 2000, the ETF returned 12.4%. But 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 keep in mind 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

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.

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

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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Sample Risk Management Plan Template

Identify the project scope and objectives, identify the stakeholders, define the roles and responsibilities of the stakeholders, identify potential risks involved.

• 1 Technical
• 2 Environmental
• 3 Financial
• 4 Organizational

Analyze the identified risks

Prioritize the risks based on their impact and likelihood, approval: prioritized risks.

• Prioritize the risks based on their impact and likelihood Will be submitted

Develop risk mitigation strategies

Document each risk and their respective mitigation strategy, communicate the risks and mitigation strategies to stakeholders, implement the risk mitigation strategies, monitor and track the progress of risk mitigation, review and update the risk management plan, approval: updated risk management plan.

• Review and update the risk management plan Will be submitted

Present the final risk management plan to the stakeholders

Approval: final risk management plan.

• Present the final risk management plan to the stakeholders Will be submitted

Implement the final risk management plan

• 1 Allocate resources
• 2 Communicate plan to team
• 3 Monitor progress
• 4 Document changes
• 5 Evaluate effectiveness

Review the effectiveness of the risk management plan

• 1 Highly effective
• 2 Somewhat effective
• 3 Not effective
• 5 In progress

Approval: Effectiveness of the Risk Management Plan

• Review the effectiveness of the risk management plan Will be submitted

Update and maintain the risk management plan

Take control of your workflows today., more templates like this.

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What is Risk Analysis? Types, Process, Examples, Templates

Home Blog Project Management What is Risk Analysis? Types, Process, Examples, Templates

In a world of constant change and uncertainty, businesses and individuals alike must contend with risks of all shapes and sizes. Risk analysis offers a structured approach to identifying, understanding, and mitigating the potential challenges that could derail projects, investments, or operations. By proactively assessing risks, organizations can make better-informed decisions and protect their hard-earned assets. This article delves into the essential components of risk analysis qualitative, explores different types of risk analysis methods, outlines the key steps involved in the process, and provides illustrative examples and templates. If you're looking for tools and knowledge to help your organization navigate risk, consider exploring Project Management training and certification programs which incorporate risk analysis techniques.

What is Risk Analysis in Project Management?

Risk analysis is a disciplined process within project management that involves the identification, assessment, and proactive mitigation of potential events that could compromise project objectives. It provides a structured approach for teams to evaluate the likelihood and potential impact of risks, allowing for informed decision-making throughout the project lifecycle.

Why Is Risk Analysis Important?

Risk analysis is a fundamental aspect of effective project management, offering numerous advantages:

• Enhanced Decision-Making: Thorough risk analysis arms project managers with the insights necessary to make strategic decisions regarding resource allocation, contingency planning, and timeline adjustments.
• Proactive Problem-Solving: By anticipating potential risks, project teams can develop robust mitigation or avoidance strategies, reducing the likelihood of disruptions and delays.
• Resource Optimization: Risks can jeopardize a project's budget, timeline, and personnel. Risk analysis facilitates proactive planning which helps safeguard these crucial resources.
• Stakeholder Confidence: A well-defined risk analysis plan instills confidence among stakeholders, demonstrating a comprehensive approach to project execution and a commitment to success.

Types of Risk Analysis

Risk analysis methodologies differ to address varied project requirements and industry contexts. 

Here's an overview of key types:

• Qualitative Risk Analysis: Employs structured assessment of the probability and potential impact of identified risks. This method often uses prioritization matrices or scales, incorporating expert judgment.
• Quantitative Risk Analysis: Leverages numerical analysis and statistical modeling to quantify risk outcomes, such as potential budget overruns or schedule delays. Monte Carlo simulations are a common technique within this category.
• Failure Mode and Effects Analysis (FMEA): A proactive approach focused on identifying potential failures within designs or processes. FMEA helps teams prioritize risks based on severity, likelihood of occurrence, and detectability, facilitating the development of mitigation strategies.
• Scenario Analysis: Explores the potential impact of various "what-if" scenarios on project outcomes. This technique is particularly useful when external variables outside the project team's control could significantly influence success.

Projects often benefit from combining risk analysis qualitative and risk analysis quantitative methods throughout their lifecycle. The optimal approach depends on the project's complexity, data availability, and the nature of its specific risks. Risk analysis templates and specialized software can enhance the accuracy and efficiency of the process.

Steps in the Risk Analysis Process

Risk analysis is a systematic process that helps project teams make informed decisions and proactively manage uncertainty. While specific steps may vary, a common framework includes:

• Risk Identification: Thoroughly brainstorm potential events or conditions that could jeopardize project objectives. Consider internal and external factors, and involve a diverse range of stakeholders.
• Risk Assessment: Analyze each identified risk by examining its likelihood of occurrence and its potential impact on the project. This step may involve both qualitative risk analysis (using scales or matrices) and quantitative risk analysis, where numerical data is used.
• Risk Prioritization: Focus resources on the risks deemed most significant. Prioritization helps ensure a strategic approach to risk management, addressing the most impactful risks first.
• Risk Response Planning: Develop strategies to address each prioritized risk. Typical response categories include:
• Avoidance : Eliminate the risk by altering the project plan
• Mitigation : Reduce the risk's probability or impact
• Transfer : Shift the risk's burden to a third party (e.g., through insurance)
• Acceptance : Acknowledge the risk and prepare a contingency plan
• Risk Monitoring and Control: Implement your response plan, track risks throughout the project, and adjust strategies as needed. This ensures the process remains dynamic and responsive to changing conditions.

Risk Analysis Example: Construction Project

Consider a construction company embarking on a new commercial building project.

Below are the techniques of risk analysis to improve their chances of success:

• Risk Identification: The team brainstorms potential risks like weather delays, supply chain disruptions, labor shortages, changes in building code regulations, or budget overruns.
• Analysis: They assess each risk's probability and its potential impact on the project's schedule, budget, and quality. Techniques for risk analysis might include simple matrices or more sophisticated modeling tools.
• Mitigation: The team pre-orders critical materials and develops alternative sourcing options.
• Contingency: They build extra time into the schedule and secure a line of credit for potential budget overruns.
• Acceptance: They acknowledge smaller risks and factor in potential costs or delays.
• Monitoring: Throughout the project, identified risks are regularly tracked and response plans are updated as circumstances change.

This proactive approach, central to project risk analysis, applies across industries. Software projects might address risks of feature scope creep or cybersecurity threats. By implementing sound risk analysis methodologies, organizations make informed decisions and increase their chances of project success. To enhance your risk analysis skills, explore Best PRINCE2 Foundation and Practitioner training .

Risk Analysis Template

A risk assessment template empowers you to proactively manage workplace safety. By identifying risks before they cause harm, you can create a work environment where everyone feels protected and accidents are less likely to happen.

Template 1 – Download the Risk Analysis PDF here!

Template 2 – Download the Risk Assessment Form PDF here  

How to Perform Risk Analysis?

Risk analysis is a systematic process for identifying, assessing, and prioritizing potential risks that could impact a project or business. It is an essential component of effective project management and helps to proactively manage uncertainty. Earning a project management professional certification course can equip you with the knowledge and skills to perform risk analysis effectively.

Here are the general steps involved in the risk analysis process:

• Identify Risks: Brainstorm and list all potential risks that could affect your project or business. This could include internal risks, such as resource limitations or scope creep, and external risks, such as economic downturns or natural disasters.
• Assess Risk Impact and Likelihood: For each identified risk, estimate the likelihood of it occurring and the potential impact it could have on your project or business. This can be done qualitatively (using a scale such as high, medium, or low) or quantitatively (using numerical values).
• Prioritize Risks: Based on the likelihood and impact assessment, prioritize the risks. Focus on addressing the high-likelihood, high-impact risks first.
• Develop Risk Mitigation Strategies: Develop plans to mitigate or avoid the identified risks. This could involve developing contingency plans, taking steps to reduce the likelihood of the risk occurring, or minimizing the impact of the risk if it does occur.
• Monitor and Update Risk Analysis: The risk analysis process is ongoing. As the project progresses or the business environment changes, you will need to monitor and update your risk analysis to ensure it remains accurate and relevant.

Challenges in Risk Analysis

The risk analysis process is a powerful tool to help us anticipate and mitigate potential issues. However, the process itself can be riddled with challenges that can compromise its effectiveness.

Some common obstacles in the risk analysis process include:

• Subjective Interpretations: Risk assessment often involves evaluating likelihood and impact. These judgments can be subjective, leading to inconsistencies between different individuals or teams. To overcome this, establish clear scoring guidelines and involve multiple perspectives in the evaluation.
• Limited Data: Decision-making in risk analysis relies heavily on available data. Inaccurate or insufficient data can hinder reliable risk assessments. Mitigate this by continuously gathering and updating information.
• Dynamic Risk Landscape: Risks are not stagnant. Economic shifts, evolving technologies, and changes in regulations can create new risks or alter the severity of existing ones. This requires staying updated on external factors and regularly updating your risk analysis.
• Communication Gaps: If the results of a risk analysis are not communicated effectively across the organization, it can fail to drive necessary action. Use clear visualization tools and tailored communication strategies to improve understanding.
• Ignoring "Unknown Unknowns": It is impossible to predict all potential risks, particularly those unprecedented or "black swan" events. While impossible to fully eliminate, you can improve preparedness by conducting scenario analyses and fostering a risk-aware culture in your organization.

Successfully navigating these challenges is crucial for reaping the full benefits of risk analysis. If you're looking to gain expertise in techniques of risk analysis, a Project Management training and certification course can provide you with the skills necessary to excel at risk analysis.

Benefits of Risk Analysis in Project Management

In the complex world of project management, risk analysis serves as an indispensable compass. By systematically identifying and evaluating potential roadblocks, risk analysis offers several advantages.

Following are the advantages of risk analysis in Project Management:

• Enhanced decision-making: Risk analysis helps you make informed decisions based on a deeper understanding of risks and their potential impact on your project goals.
• Proactive risk mitigation: Early identification of risks allows you to proactively develop mitigation strategies, reducing the likelihood of surprises and delays.
• Improved resource allocation: By understanding risk exposure, you can prioritize resources and efforts to address the most critical risk areas.
• Increased project success rates: Risk analysis fosters better preparedness and enables timely interventions to reduce the likelihood of failure.
• Enhanced stakeholder communication: A well-documented risk analysis format promotes clear communication of project risks to all stakeholders, fostering transparency and collaboration.

By embracing risk analysis format, you can create a more resilient and informed approach to project management, increasing your chances of delivering successful outcomes.

Risk Analysis Tools & Techniques

To effectively manage project risks, choosing the right risk analysis tools and techniques is crucial. Here's an overview of some widely used approaches:

Qualitative Risk Assessment

These techniques rely on subjective evaluations of risk likelihood and impact.

Tools include:

• Probability and Impact Matrix
• Risk Registers
• SWOT Analysis [https://www.investopedia.com/terms/s/swot.asp]
• Quantitative Risk Assessment: Employs numerical analysis and data-driven modeling.

Methods include:

• Monte Carlo Simulation [https://www.investopedia.com/terms/m/montecarlosimulation.asp]
• Decision Tree Analysis [[invalid URL removed]]
• Sensitivity Analysis

Other Common Techniques

• Delphi Technique: Gathers expert opinions through questionnaires for risk forecasting.
• Root Cause Analysis: Helps identify the underlying causes of risks.

The choice of risk analysis tools & techniques depends on factors such as project complexity, data availability, and desired level of precision. It's often beneficial to use a mix of qualitative and quantitative techniques for a comprehensive risk analysis.

Difference Between Risk Assessment and Risk Analysis

While both are crucial components of risk management, risk assessment and risk analysis serve distinct purposes. Here's the breakdown in table format:

• Risk Assessment: Identifying a potential supplier delay as a risk to the project timeline.
• Risk Analysis: Calculating that there's a 60% chance of the supplier delay occurring, and if it does, it could extend the project by three weeks.

Risk assessment lays the foundation by detecting potential hazards, while risk analysis dives deeper to quantify and prioritize those risks. Together, they provide the insight needed for proactive risk management in your projects.

Risk analysis is a cornerstone of effective project management. It empowers you to answer the critical question: what is the purpose of a risk analysis? By systematically identifying potential roadblocks and their likelihood of occurring (risk assessment), you gain valuable insights to prioritize and plan mitigation strategies (risk management analysis). This proactive approach helps you make informed decisions throughout the project lifecycle. A robust risk analysis evaluation ensures your chosen methods effectively address potential issues.

Fortunately, you don't have to start from scratch. Many resources are available, including risk analysis sample templates to guide you through the process. Remember, consistent use is key. By integrating risk analysis into your project management practices, you gain a significant advantage in navigating project uncertainties and achieving success. If you wish to enhance your ability to manage projects effectively, consider earning a Project Management training and certification from KnowledgeHut .

Frequently Asked Questions

A risk analysis checklist is a tool that provides a structured list of potential risks across different project categories (e.g., technical, schedule, budget). It helps you brainstorm potential issues, guides the assessment of their likelihood and impact, and ensures you consider all relevant risk areas.

The three core steps of risk analysis are:

• Risk Identification: Brainstorming and documenting all potential risks that could affect your project.
• Risk Assessment: Analyzing each identified risk to determine its probability of occurrence and its potential impact on project outcomes.
• Risk Response Planning: Developing strategies to mitigate, avoid, transfer, or accept identified risks.

Key principles of effective risk analysis include:

• Proactive: Anticipate risks before they become problems.
• Systematic: Follow a structured process for consistency.
• Collaborative: Involve diverse perspectives.
• Iterative: Revisit and update your analysis as the project evolves.

Here are some common ways to identify risks in a project:

• Brainstorming: Engage project team members and stakeholders.
• Reviewing Historical Data: Examine past projects for recurring risks.
• Using Checklists: Employ industry-specific risk checklists.
• Conducting Expert Interviews: Consult experienced professionals.

Rajesh Bhagia

Rajesh Bhagia is experienced campaigner in Lamp technologies and has 10 years of experience in Project Management. He has worked in Multinational companies and has handled small to very complex projects single-handedly. He started his career as Junior Programmer and has evolved in different positions including Project Manager of Projects in E-commerce Portals. Currently, he is handling one of the largest project in E-commerce Domain in MNC company which deals in nearly 9.5 million SKU's.

In his role as Project Manager at MNC company, Rajesh fosters an environment of teamwork and ensures that strategy is clearly defined while overseeing performance and maintaining morale. His strong communication and client service skills enhance his process-driven management philosophy.

Rajesh is a certified Zend Professional and has developed a flair for implementing PMP Knowledge Areas in daily work schedules. He has well understood the importance of these process and considers that using the knowledge Areas efficiently and correctly can turn projects to success. He also writes articles/blogs on Technology and Management

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How to Highlight Risks in Your Business Plan

Tallat Mahmood

5 min. read

Updated October 25, 2023

One of the areas constantly dismissed by business owners in their business plan is an articulation of the risks in the business.

This either suggests you don’t believe there to be any risks in your business (not true), or are intentionally avoiding disclosing them.

Either way, it is not the best start to have with a potential funding partner. In fact, by dismissing the risks in your business, you actually make the job of a lender or investor that much more difficult.

Why a funder needs to understand your business’s risks:

Funding businesses is all about risk and reward.

Whether it’s a lender or an investor, their key concern will be trying to balance the risks inherent in your business, versus the likelihood of a reward, typically increasing business value. An imbalance occurs when entrepreneurs talk extensively about the opportunities inherent in their business, but ignore the risks.

The fact is, all funders understand that risks exist in every business. This is just a fact of running a business. There are risks that exist with your products, customers, suppliers, and your team. From a funder’s perspective, it is important to understand the nature and size of risks that exist.

• There are two main reasons why funders want to understand business risks:

Firstly, they want to understand whether or not the key risks in your business are so fundamental to the investment proposition that it would prevent them from funding you.

Some businesses are not at  the right stage to receive external funding  and placate funder concerns. These businesses are best off dealing with key risk factors prior to seeking funding.

The second reason why lenders and investors want to understand the risk in your business is so that they can structure a funding package that works best overall, despite the risk.

In my experience, this is an opportunity that many business owners are wasting, as they are not giving funders an opportunity to structure deals suitable for them.

Here’s an example:

Assume your business is  seeking equity funding,  but has a key management role that needs to be filled. This could be a key business risk for a funder.

Highlighting this risk shows that you are aware of the appointment need, and are putting plans in place to help with this key recruit. An investor may reasonably decide to proceed with funding, but the funding will be released in stages. Some will be released immediately and the remainder will be after the key position has been filled.

The benefit of highlighting your risks is that it demonstrates to investors that you understand the danger the risks pose to your company, and are aware that it needs to be dealt with. This allows for a frank discussion to take place, which is more difficult to do if you don’t acknowledge this as a problem in the first place.

Ultimately, the starting point for most funders is that they  want  to invest in you, and  want  to validate their initial interest in you.

Highlighting your business risks will allow the funder to get to the nub of the problem, and give them a better idea of how they may structure their investment in order to make it work for both parties. If they are unsure of the risks or cannot get clear explanations from the team, it is unlikely they will be forthcoming when it comes to finding ways to make a potential deal work.

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• The right way to address business risks:

The main reason many business owners don’t talk about business risks with potential funders is because they don’t want to highlight the weaknesses in their business.

This is a fair concern to have. However, there is a right way to address business risk with funders, without turning lenders and investors off.

The solution is to focus on how you  mitigate the risks.  

In other words, what are the steps you are taking in your business as a direct reaction to the risks that you have identified? This is very powerful in easing funder fears, and in positioning you as someone who has a handle on their business.

For example, if a business risk you had identified was a high level of customer concentration, then a suitable mitigation plan would be to market your products or services targeting new clients, as opposed to focusing all efforts on one client.

Having net profit margins that are lower than average for your market would raise eyebrows and be considered a risk. In this instance, you could demonstrate to funders the steps you are putting in place over a period of time to help increase those margins to at least market norms for your niche.

The process of highlighting risks—and, more importantly, outlining key mitigating actions—not only demonstrates honesty, but also a leadership quality in solving the problems in your business. Lenders and investors want to see both traits.

• The impact on your credibility:

Any lender or investor  backs the leadership team  of a business first, and the business itself second.

This is because they realize that it is you, the management team, who will ultimately deliver value and grow the business for the benefit for all. As such, it is imperative that they have the right impression about you.

The consequence of highlighting business risks in your business plan with mitigations is that it provides funders a real insight into you as a business leader. It demonstrates that not only do you have an understanding of their need to understand risk in your business, but you also appreciate that minimizing that risk is your job.

This will have a massive impact on your credibility as a business owner and management team. This impact is more acute when compared to the hundreds of businesses they will meet that omit discussing the risks in their business.

The fact is, funders have seen enough businesses and business plans in all sectors to instinctively know what risks to expect. It’s just more telling if they hear it from you first.

• What does this mean for you going forward?

Funders rely on you to deliver on your inherent promise to add value to your business for all stakeholders. The weight of this promise becomes much stronger if they can believe in the character of the team, and that comes from your credibility.

A business plan that discusses business risks and mitigations is a much more complete plan, and will increase your chances of securing funding.

Not only that, but highlighting the risks your business faces also has a long-term impact on your character and credibility as a business leader.

Tallat Mahmood is founder of The Smart Business Plan Academy, his flagship online course on building powerful business plans for small and medium-sized businesses to help them grow and raise capital. Tallat has worked for over 10 years as a small and medium-sized business advisor and investor, and in this period has helped dozens of businesses raise hundreds of millions of dollars for growth. He has also worked as an investor and sat on boards of companies.

Table of Contents

• Why a funder needs to understand your business’s risks:

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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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• Risk Assessment

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.

Create your own Risk Assessment checklist

Build from scratch or choose from our collection of free, ready-to-download, and customizable templates.

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.

Risk Assessment Templates

Risk assessments are traditionally completed through checklists, which are inconvenient when reports and action plans are urgently needed. Streamline the process with SafetyCulture, a mobile app solution. Get started by browsing this collection of customizable Risk Assessment templates that you can download for free.

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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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] .

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How to Make a Risk Management Plan (Template Included)

You identify them, record them, monitor them and plan for them: risks are an inherent part of every project. Some project risks are bound to become problem areas—like executing a project over the holidays and having to plan the project timeline around them. But there are many risks within any given project that, without risk assessment and risk mitigation strategies, can come as unwelcome surprises to you and your project management team.

That’s where a risk management plan comes in—to help mitigate risks before they become problems. But first, what is project risk management ?

What Is Risk Management?

Risk management is an arm of project management that deals with managing potential project risks. Managing risks is arguably one of the most important aspects of project management.

The risk management process has these main steps:

• Risk Identification: The first step to managing project risks is to identify them. Use data sources such as information from past projects or subject matter experts’ opinions to estimate all the potential risks that can impact the project.
• Risk Assessment: Once the project risks are identified, prioritize them by looking at their likelihood and level of impact.
• Risk Mitigation: Now it’s time to create a contingency plan with risk mitigation actions to manage your project risks. You also need to define which team members will be risk owners, responsible for monitoring and controlling risks.
• Risk Monitoring: Risks must be monitored throughout the project life cycle so that they can be controlled.

Even one risk can jeopardize the entire project plan . There isn’t usually just one risk per project, either; there are many risk categories that require assessment and discussion with stakeholders. That’s why risk management needs to be both a proactive and reactive process that is constant throughout the project life cycle. Now let’s define a risk management plan.

What Is a Risk Management Plan?

A risk management plan defines how the project’s risk management process will be executed. That includes the budget , tools and approaches that will be used to perform risk identification, assessment, mitigation and monitoring activities.

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Risk Management Plan Template

Use this free Risk Management Plan Template for Word to manage your projects better.

A risk management plan usually includes:

• Methodology: Define the tools and approaches that will be used to perform risk management activities such as risk assessment, risk analysis and risk mitigation strategies.
• Risk Register: A risk register is a chart to document the risk identification information.
• Risk Breakdown Structure: This is a chart that identifies risk categories and the hierarchical structure of project risks.
• Risk Assessment Matrix: A risk assessment matrix allows teams to analyze the likelihood and the impact of project risks so they can prioritize them.
• Risk Response Plan: A risk response plan is a project management document that explains the risk mitigation strategies that will be employed to manage risks.
• Roles and responsibilities: The risk management team members have responsibilities as risk owners. They need to monitor project risks and supervise their risk response actions.
• Budget: Have a section to identify the funds required to perform risk management activities.
• Timing: Include a section to define the schedule for the risk management activities.

How to Make a Risk Management Plan

For every web design and development project, construction project or product design, there will be risks. That’s the nature of project management. But that’s also why it’s always best to get ahead of them as much as possible by developing a risk management plan. We’ve outlined the steps to make a risk management plan below.

1. Risk Identification

Risk identification occurs at the beginning of the project planning phase, as well as throughout the project life cycle. While many risks are considered “known risks,” others might require additional research.

Create a risk breakdown structure to identify project risks and classify them into risk categories. You can do this by interviewing all project stakeholders and industry experts. Many project risks can be divided into risk categories, like technical or organizational, and listed out by specific sub-categories like technology, interfaces, performance, logistics, budget, etc. Additionally, create a risk register to share with everyone interviewed for a centralized location of all known risks revealed during the identification phase.

It’s easy to create a risk register using online project management software. For example, use the list view on ProjectManager to capture all project risks, add their priority level and assign a team member to own identify and resolve them. Better than to-do list apps, you can attach files and tags and monitor progress. Track the percentage complete and even view risks from the project menu. Keep risks from derailing projects by signing up for a free trial of ProjectManager.

2. Risk Assessment

In this next phase, review the qualitative and quantitative impact of the risk—like the likelihood of the risk occurring versus the impact it would have on the project—and map that out into a risk assessment matrix

First, you’ll do this by assigning the risk likelihood a score from low probability to high probability. Then, map out the risk impact from low to medium to high and assign each a score. This provides an idea of how likely the risk is to impact project success as well as how urgent the response will need to be.

To make it efficient for all risk management team members and project stakeholders to understand the risk assessment matrix, assign an overall risk score by multiplying the impact level score with the risk probability score.

3. Create a Risk Response Plan

A risk response is the action plan taken to mitigate project risks when they occur. The risk response plan includes risk mitigation strategies to mitigate the impact of project risks. Doing this usually comes with a price—at the expense of your time or your budget. So you’ll want to allocate resources, time and money for your risk management needs before creating the risk management plan.

4. Assign Risk Owners

Next, assign a risk owner to each project risk. Those risk owners become accountable for monitoring the risks assigned to them and supervising the execution of the risk response if needed.

Related: Risk Tracking Template

When creating the risk register and risk assessment matrix, list out the risk owners, that way no one is confused as to who will need to implement the risk response strategies once the project risks occur, and each risk owner can take immediate action.

Be sure to record the exact risk response for each project risk with a risk register and have the risk response plan approved by all stakeholders before implementation. That way, there’s a record of the issue and the resolution to review once the project is finalized.

5. Understand Your Triggers

This can happen with or without a risk already having impacted the project—especially during project milestones as a means of reviewing project progress. If they have, consider reclassifying those existing risks.

Even if those triggers haven’t been met, it’s best to come up with a backup plan as the project progresses—maybe the conditions for a certain risk won’t exist after a certain point has been reached in the project.

6. Make a Backup Plan

Consider your risk register and risk assessment matrix a living document. Project risks can change in classification at any point, and because of that, come up with a contingency plan as part of the process.

Contingency planning includes discovering new risks during project milestones and reevaluating existing risks to see if any conditions for those risks have been met. Any reclassification of a risk means adjusting your contingency plan.

7. Measure Your Risk Threshold

Measuring your risk threshold is all about discovering which risk is too high and consulting with project stakeholders to consider whether or not it’s worth it to continue the project—worth it whether in time, money or scope .

Here’s how the risk threshold is typically determined: consider your risks that have a score of “very high”, or more than a few “high” scores, and consult with your leadership team and project stakeholders to determine if the project itself may be at risk of failure. Project risks that require additional consultation are risks that have passed the risk threshold.

To keep a close eye on risks as they raise issues in the project, use project management software. ProjectManager has real-time dashboards embedded in our tool, unlike other software that require teams to manually build them. We automatically calculate the health of projects, checking if teams are on time or running behind. Get a high-level view of how much you’re spending, progress and more. The quicker the risk is identified, the faster you can resolve it.

Free Risk Management Plan Template

This free risk management plan template will help prepare your team for any risks inherent in the project. This Word document includes sections for your risk management methodology, risk register, risk breakdown structure and more. It’s so thorough, you’re sure to be ready for whatever comes your way. Download the template today.

Best Practices for Maintaining Your Risk Management Plan

Risk management plans only fail in a few ways: incrementally because of insufficient budget, via modeling errors or by ignoring your risks outright.

Your risk management plan is constantly evolving throughout the project life cycle, from beginning to end. So the best practices are to focus on the monitoring phase of the risk management plan. Continue to evaluate and reevaluate your risks and their scores, and address risks at every project milestone.

Project dashboards and other risk-tracking features can be a lifesaver for maintaining your risk management plan. Watch the video below to see just how important project management dashboards, live data and project reports can be for keeping projects on track and budget.

In addition to routine risk monitoring, at each milestone, conduct another round of interviews with the same checklist you used at the beginning of the project, and re-interview project stakeholders, risk management team members, customers (if applicable) and industry experts.

Record their answers, adjust the risk register and risk assessment matrix if necessary, and report all relevant updates of your risk management plan to key project stakeholders. This process and level of transparency help identify any new risks to be assessed and shows if any previous risks have expired.

How ProjectManager Can Help Your Risk Management Plan

A risk management plan is only as good as the risk management features you have to implement and track them. ProjectManager is online project management software that lets you view risks directly in the project menu. You can tag risks as open or closed and even make a risk matrix directly in the software. You get visibility into risks and can track them in real time, sharing and viewing the risk history.

Tracking & Monitor Risks in Real Time

Managing risk is only the start. You must also monitor risk and track it from the point that you first identified it. Real-time dashboards provide a high-level view of slippage, workload, cost and more. Customizable reports can be shared with stakeholders and filtered to show only what they need to see. Risk tracking has never been easier.

Risks are bound to happen no matter the project. However, if you have the right tools to better navigate the risk management planning process, you can better mitigate errors. ProjectManager is online project management software that updates in real time, giving you all the latest information on your risks, issues and changes. Start a free 30-day trial and start managing your risks better.

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Risk Analysis

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Risk analysis plays a vital role in every individual, business, or any entity’s risk plan Examples . Even in small business, having a risk analysis as basis for business decisions and investments helps avoid any issue into becoming unmanageable or difficult to solve. Simply put, prevention is always better than any cure or the relative cost that comes along with the solution.

Most risk analysis in connection with business analysis involves market analysis or understanding the current market that you are in. Examples of different kinds of risk analysis are found in this page. All of them are available for download by clicking the link below the file.

Business Risk Analysis Template

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Investment Risk Analysis Example

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Qualitative Risk Example

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How to Perform Risk Analysis

Risk analysis is plainly the identification and evaluation of existing and potential risks involved in your business or business activities. It is often either quantitative or qualitative. Quantitative and qualitative risk analysis examples in PDFf can be found in the page to further explain this type of risk analysis which is useful in making risk assessments , work plan , and action plan .

What to Include in Your Risk Analysis

The first and most important step in risk analysis is the identification of risks. Risks can come from different sources in or surrounding your business. Make sure to:

• Create a list of all existing and possible risks from all possible sources including people, operations, procedures, social, and natural environment.
• Include an estimation of the risk and possible outcomes of the risk.
• Make suggestions on the management and prevention of the risk.
• Share your risk analysis results and suggestions. This would greatly help in creating awareness within the organization; thus, further preventing occurrence of such risks.

Quantitative Analysis

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Environmental Risk

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What is Risk Analysis in Project Management?

Risk analysis in project management is the evaluation and management of risks involved or associated with a project which is described in basic terms as project analysis. When a good project analysis has been done, the odds of completing a certain project in relation to budget, time, and performance are high.

An example of a project risk analysis can be found in the page. It shows a guide to successful project management from the association for project management. This file is in Free Analysis examples format and can be accessed by clicking on the download link button below the example.

Guidelines for Risk Analysis

• Identify the threats or risks and estimate the possibility of occurrence
• Identify ways of managing risks
• Identify possible impact involving the occurrence of the risk in relation to cost or safety

The financial analysis example found in the page discusses in further detail the topics involving financial risks or business risks that may greatly aid managers in their next project proposal , business proposal, action plan for safety or work and risk plans.

The environmental risk analysis sample in this case, describes the approach in conducting risk analysis and other important factors involved in the assessment. Feel free to access the file by clicking on the download link button below it.

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