Risk Assessment When Making Business Decisions

According to Investopedia, business risk “is the exposure a company or organization has to factors that will lower its profits or lead it to fail.” If something has the potential to impede a business from making money or prevent it from achieving its goals, that’s a business risk. Some risks could be internal, like someone in a position of leadership who’s created a situation where the business experiences intensified risk. External threats could be the pricing of materials needed for production, increased competition from other companies or changes to government regulations or local laws. These external risks can be navigated with a well-planned risk management strategy.

How to Identify Risks

The first step to identify potential risks is to develop a risk management strategy. A successful risk management strategy involves identifying risks in the order of importance, assessing what causes the risks and how they could impact the business, examining how those risks can be prevented and what to do if they occur and formulating a contingency plan if those risks transpire.

Professionals in leadership positions shouldn’t adopt a wait-and-see attitude towards risk. When a threat is detected, the problem needs to be addressed immediately to ensure that it won’t become a major issue. If it does, there should be a plan in place to deal with the difficulty. Managers should involve their employees in identifying risks they see or will potentially experience in their department. Methodological training to recognize and deal with risks is a vital part of risk management.

Researching potential for a particular industry or field will help develop a list of steps and solutions to address and solve the risks. Sometimes the same risk will pop up again and again. Having a record of these repetitive risks and their solutions can help management observe patterns that can help a company better prepare to face potential risks.

Common Risks Businesses Face

Some risks are more threatening than others. Some common risks that businesses face can prevent them from achieving their financial goals. Here are a few of the most frequent business risks:

  • Fluctuating markets and economic booms and downturns affect businesses. It’s important to stay on top of trends and plan for an economic slump. It’s recommended that organizations maintain a steady cash flow and utilize a lean budget.
  • Security and Fraud. Hacking and data breaches are a constant threat to online businesses. Ransomware and payment fraud are common risks in today’s business world. This type of risk also influences reputation and public trust. Fraud detection tools, security solutions as well as employee and customer education regarding these issues can help detect security risks.
  • An unexpected event such as a natural disaster, power outage or technical problem can impact the business’s ability to make money and affect its reputation.

Why Is Risk Assessment Important?

Risk assessment is an attentive examination of what might harm a business and prevent it from attaining its goals. It’s important because it can reduce the likelihood of injury, prevent fines and lawsuits and protect the company’s resources. Some of the potential consequences of ignoring risk assessment and management are lawsuits, catastrophic financial losses, theft, damaged or negative reputation, failure to succeed, high employee turnover, customer dissatisfaction, missed opportunities and product failure.

According to AON Risk Solutions, “Operational risk management should be considered not simply as about ensuring that a firm has done its due diligence and adhered to rules, but more about value-creation.” Done right, risk assessment and management can be a path to additional opportunities and profit.

Learn more about the University of Southern Indiana’s online Master of Business Administration program.


Sources:

AON The One Brief: Strategic Decision-Making Through Risk Assessment

Investopedia: Business Risk

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