The 5 Step Process To Identify Risk and Improve Decision-Making If you're thinking of starting a business or are already launching one and want to understand how to calculate business risk to improve your decision-making, this article is for you.
By Christopher Massimine Edited by Micah Zimmerman
Opinions expressed by Entrepreneur contributors are their own.
The process of business risk calculation is identifying potential threats to your business and then analyzing those probabilities to make better decisions. It helps define where and when the likelihood of risk events will impact your company's financial well-being.
Businesses can be impacted by many different types of risks: legal, operational and financial are a few. A company must manage these risks for it to succeed. If a public company does not have enough cash on hand or has no way of accessing additional funds when needed (such as during an economic downturn), it may not survive long enough for its stock price to recover from any short-term losses incurred during these difficult times.
Business risk calculation aims not to anticipate every possible scenario but to narrow down the most likely outcomes so you can plan ahead effectively. This article will discuss how one can calculate own business risks.
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1. Identify and define what kinds of risks you are concerned about
The first step to successfully calculating business risk is to identify and define the kinds of risks that you are concerned about. List all the things that could go wrong in your business and define each. The best way to do this is with a risk matrix. A risk matrix helps you organize your risks into different categories to be easily viewed and analyzed later.
It's essential to list not only the risks you're concerned about but also those that aren't concerning. What we mean by "not concerning" here is any risk that has a low probability of occurring within a set timeframe (e.g., one year) or within a given scenario (e.g., an earthquake). If there's a chance for something terrible to occur due to external factors beyond human control (like floods), then it isn't worth worrying about.
Related: 5 Ways to Minimize Early-Stage Business Risk
2. Make a list of actions that would create greater risk if they happened or would reduce risk if they did not happen
To identify risks, you first need to list your company's actions. For example, if your business is a property management company, you may have employees who occasionally work in potentially dangerous situations, like cleaning up after break-ins at apartment complexes. In this case, working alone at night might cause risk if something happens. Or perhaps you have many empty apartments that have been vacant for several months and are beginning to show signs of neglect from lack of maintenance. If rats or other vermin infest them, then there will be increased health risks for anyone entering those apartments when they become occupied again.
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3. Assign a rank to each action from high-risk to low-risk
Once you have identified all of the actions, assign a risk to each action from high to low. High-risk actions should be reviewed more often, while low-risk actions should be reviewed less often. The higher the risk, the more critical it is to check it. The lower the risk, the less important it is to review it.
For example, if you have an employee handbook that needs to be revised every year and has no policy or procedure changes, this is a low-ranking item. But, if there are new policies or changes in the procedure, this becomes a high-ranking item because of its importance within your business.
4. Create a scatterplot of risk using your data
To calculate business risk, you must create a scatterplot: a graph using risk vs. probability to determine correlations between variables. Use the data from steps 1-3 and put risk on the x-axis and probability on the y-axis.
The purpose of a scatterplot is to visualize the relationship between two variables in a graph. In your case, you will create a scatterplot showing the relationship between risk and probability — two important factors in business decision-making.
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5. Analyze your plot and identify areas of high and low risk for your business
The next step is to identify the risk factors that affect your business. For example, you might calculate that a hurricane would have a low impact on your company because you are located in an area where those storms are rare, and few people could reach your store.
On the other hand, if you were located in an area where hurricanes frequently strike and there is traffic from tourists during storm season, then calculating that a hurricane could have a high impact on your store would be appropriate. You may also consider how long customers or clients can get back into town after a natural disaster strikes. If it takes months for people to return after a storm hits or if they never return (due to permanent damage), this information should also be considered when calculating risk factors for this particular business.
This process will help you better understand what risks might come with opening up shop in different areas based on weather patterns and other environmental factors around where each one is located within each plot.
Takeaways
- Business risk calculation is a process that helps you identify and analyze risks. It is an essential part of business decision-making because it allows you to make informed decisions about your business to increase its chances for success.
- The process of calculating business risk begins with identifying risks and then analyzing them so that you can make an educated decision about how best to proceed with your company.
- Many different types of risks can affect your business. You can use this process to identify the risks you are concerned about and analyze them to make better decisions. This process will help you make better decisions because it enables you to understand where there are areas of high risk or low risk so that you focus on those areas first when making decisions.
Risk analysis can be used to improve the success rate of any enterprise, from small businesses to large corporations or even government agencies. The more knowledge you have about different risks associated with a particular project or product, the better you will be at making smart choices about where your money should go for your business to survive and thrive.
