How to Do a Risk Assessment

Are you the owner of your own business? Do you want to know how to do a risk assessment for a small business? Do you know most of the people fail to do their businesses because they do not assess their business risk, or they really are not aware of assessing risks but risk assessment is really an easy work to do. Today, I will explain how to do a business risk assessment.

Before going to details, I want to tell you that you need to know everything about your business such as your product details, which variables affect your sell, who are your buyers, how do they perceive the value of your product, your management team and their skills, future needs of capital for your business, and the sustainability of your product’s market. If you know all of these things clearly, risk assessment will be easier for you.

How to Do a Risk Assessment

Now I will explain every step of risk assessment process with an example. What is a risk? It is an unwanted event that can take place without any prior notice e.g. a storm or flood that can reduce your sales. Remember one thing, you will not be able to avoid every risk, but you can be aware it before any unwanted thing takes place.

First, Search For a Possible Hazard

Find out some possible unwanted event that can or has the bigger possibility of taking place in near future. Check the weather reports, check the newspapers if there is any negative news on an economy, assess the demand of your product in the market, or talk with your employees to know those unwanted events beforehand. Sometimes you employees are aware of things which you perhaps can’t see.

For an example, there can be a big storm or flood. We will use “storm” for our example.

Second, find-Out Who Will Be Affected Mostly

Find which part of your business or people will be affected. Your sales can fall drastically. Maybe you will still have the market demand, but you cannot produce or transport the products as you did before.

let’s go back to our storm example. Because of that storm and flood, diseases spread and so the demand of medicine increased. But because of the bad transportation, you can not transport the medicine to the destination. Or the worker of the manufacturing area was affected, and they can not continue the work anymore, now you have to stop producing your products.

Third, check the ways of solution, if your potential backup is enough to manage everything in future.

Measure how much the hazard may harm. Will you be able to reduce the risk with your current resources or technologies? Or you will be needing more? It’s the time you determine the exact precautions and plan the correct steps which will help you come out of bad situations. Here you calculate if the risk is huge, medium or low. For the storm and flood example, calculate how much lose you perhaps will bear. Is it huge? If it is, do you have a proper backup plan? Now ask yourself two questions.

  • Can I come out of the hazard without making any loss?
  • If not, how much loss I can reduce and survive the situation?

Fourth, record all of your findings.

If you have less than five employees then you need not to writing anything, though you should write it because making note always gives great advantage always. But if you have more than five employees, you must note every finding on the potential risks, and the steps likely to be taken. If the storm takes place, what will be your possible steps to come out of that bad situation? How will you be manufacturing and selling medicine take place?

Make the assessment suitable and sufficient by conducting a proper check. Show clearly all the related things such as who will be possibly affected, how many people will be affected, reasonable precautions, and risk is reduced.

Finally, review the assessment frequently.

Do check properly repeatedly and change or add things if necessary. You will be making a new investment, and making decisions frequently for your business. Analysis everything properly if there is any new risk associated with the new investment or recently taken decisions. Make the right decisions to avoid those risks.

Every year lots of small businesses fail because of less knowledge of risk assessment, and reduction. Most of the business people do not assess the risk associated with their businesses, and as a result, those go bankrupt. If effective steps are taken beforehand, and risk assessment is done in advance then the risk of failure will be reduced vastly.


Further Reading:

faizul

Sheikh Faizul Haque, the founder of GotAbout, graduated from North South University, Bangladesh. His major was Finance and Accounting. Faizul has been writing in business blogs since 2013, also has a strong interest in Behavioral Finance, Risk Management, and Portfolio Management.