How to Identify Business Risks?

To identify business risk is the first and the most important step of risk management process. It is a proactive approach. So, what is the identification of risk?

Identify Business Risks

What is the possible hazard that can occur in future and that is harmful to your business? or maybe, will increase the profit of your business? (Risk means uncertainty. That means anything can happen such as increase or decrease in profit. We will be talking about the negative site.) Some risks are major risks and some are very small. For each of them, you need to be prepared beforehand to face them.

As it is a proactive approach, the identification of risk provides information by which we can take proactive steps before it harms our business operations significantly. It prevents the business from hazardous incidents.

Sources of Risks for Small Business Organizations.

First, the action of human or a team can create risks in a business. Second, a business process or operation can create risks in an organization. Third, a technology change in an industry can create a risk. Finally, Environmental hazard can be a reason to the environmental risk.

Sources of Risks for Investment

Business Risk – a business risk is the measure of risk associated with a particular security. (related to capital market, not related to small business management)
Credit Risk –  the possibility that a bond issuer will not be able to make a payment the bond buyer (Not related to small business management)

Call Risk – It is specific to bond issues. It is the possibility that a debt security will be called before the maturity which may result in a low return from interest.

Inflation Risk – the inflationary risk is the chance that the value of an asset or income will decay as inflation shrinks the value of a country’s currency. (Related to small business)

Different Techniques of Identifying the Risk

Brainstorming: A group of people works together to identify potential risks, causes of occurrence, hazardous incidents, possible failure, etc. Free thinking and talking opportunities should be given to the members of the group. Brainstorming is the most efficient and effective way of finding a concept of potential risk and solution.

Checklists: Checklists are made from historical data. This is the list of hazards, control failures, risks etc. developed from the past data usually. So, the experience of past failure can be used as a preventing instrument. Managers often make these checklists to take proactive decisions.

Interviews: Top level managers should take interviews for the employees from a different level. Employees physically experience different operations of the organization. They may have different issues about risks to discuss.

“What-if” Technique: The technique is applied on “what if” basis. It considers an independent variable depending which an event will occur. Similar to brainstorming, a facilitator here utilizes set of words or phrases to identify risks.

Fault Tree Analysis: This method is also called reverse brainstorming. The technique is used for identifying and analyzing factors that can contribute to a specified undesired event. For example, if you want to improve customer service, state the objective in reverse e.g. “How can we really annoy our customers?”

Scenario Analysis: It is similar to the “What-if” model.  As a scenario, a short story is taken and then it is analyzed thoroughly. It can be used to identify fraud. Scenario analysis is used to trace opportunities for fraudulent incidents. For example, it could be “A group member has just admitted to defrauding, how can this happen?”

Direct Observations: Simply looking around to find out if there is any risk. This is the most common technique to identify business risks in an organization.    This simple technique is used frequently every day. it is used in the workplace by employees who may observe risky situations regularly. It is also used by emergency services when attending to an emergency case. A risk-aware organizational culture and a well-trained staff team will improve the ability of the organization to observe and find out potential risks and implement proactive solutions.

Surveys: It is same as structured interviews. But it involves a larger number of people as it is a survey. Surveys can be used to collect a broad set of data, ideas, opinions and thoughts across a range of areas. Survey is one of the topmost ways for risk managers to assess the business risk.

Incident Analysis: Incidents are the occurrences that just have happened. Tracing such kinds of incidents and thoroughly analyzing them find out if there is any chance of experiencing any financial loss is known as incident analysis. A business management is always responsible for conducting incident analysis to assess the current risks.

Negative Effects of Wrong Assessment of Risk

First, a sudden occurrence of an unexpected incident may result in a certain financial lose, may result in cost increase. Second, negative performance of employees or teams may take place. Finally, if it is a manufacturing firm, it may lose its capacity control.

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