What is a risk analysis?

In business, risk analysis can be used to your advantage to ensure that an action your company is taking will have as little risk as possible. But what is the clear definition of risk analysis? In this short article, we look to answer that for you, as well as shred some light on some of the ways you can use risk analysis in your company.

Risk analysis is the review of any particular risks that may be associated with an event or action. It can be applied to work projects, security issues, any IT systems your company may be running, as well as the risk of certain events. You could even calculate the risk of hiring or firing certain individuals, based on an algorithm that looks at their skills and past performances.

When a company or individual starts the process of a risk analysis, they must first consider what could go wrong with the event or process that they’re writing the risk analysis for. A risk analysis will attempt to estimate the extent of the impact that will be made when the event in question happens, as well as the likelihood of the event, itself, actually occurring.

A risk analysis can be either quantitative or qualitative.

A quantitative risk analysis is build on a model which uses simulation or deterministic statistics to assign numerical values to the risk that would occur. The inputs fed into the risk model are typically assumptions and random variables. For any given input, the model will calculate various outcomes, and these outcomes can be plotted onto a graph, or used for scenario analysis by risk managers.

A small note before we continue: A risk manager is an individual typically in the financial world who attempts to analyse potential losses in investment. They then take the appropriate action based on their findings.

Qualitative risk analysis does not identify or evaluate risks with numerical ratings, it involves a written definition of the risk’s uncertainties, an evaluation of the impact the risk could make if it was carried out, and countermeasure plans in case of a negative impact.

Both types of risk analysis have their merits, and any business or company of any size should have a minimal risk analysis in place. Once potential threats are identified, the risks that come from those threats need to have measures in place to ensure that if there is any fallout from the risk event, the company will not suffer too badly.

Risk can come from anywhere in a company; there can be security risks from a company’s IT system, risk of hiring new employees, risk of a manger deciding to leave etc. The best course of action a company can take if they are concerned about risk is to make an itemised list which includes their concerns for future risks (especially if there are any large plans in the works), and start managing the risks before they have the change to occur. Financial risks, in particular, could be devastating for a company.

January 2020
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