What Is Business Risk Assessment And Why Is It Valuable?

It’s a fact that running a business comes with a certain level of risk. That’s why business risk assessment is so important. Effective risk management strategies save companies time, money, and resources, and can prevent regulatory breaches.

In this article, we’ll cover the primary risk management factors to consider and guide you through the process of compiling a business risk analysis for your organization.

What is a Business Risk Assessment?

A business risk assessment is a process companies use to identify potential hazards that could interrupt operations and determine the resulting impacts. A comprehensive list of business risks includes anything that could result in:

• Profit loss
• Loss of customers or market share
• Destruction of company property
• Employee endangerment
• Legal issues
• Interruption to regular operations
• Temporary or permanent shutdowns

By identifying potential business risks in advance, companies can analyze various scenarios, take preemptive steps to mitigate impacts, and ensure operations run smoothly. 

Why is a Business Risk Assessment Important? 

The reasoning behind conducting a business risk analysis is simple. Some hazards have the potential to destroy a business, while others can cause long-lasting damage. So anticipating the possibilities and being prepared is essential. 

There’s often an underlying assumption that risk management strategies are only necessary for large companies and corporations. However, that’s not the case. Arguably, risk management for small businesses is even more critical because they have fewer resources and smaller cash reserves to deal with the aftermath of an unforeseen event or accident. 

The primary benefits of assessing risk and developing a risk management plan include:

• Saving Money – All companies must comply with their state’s workplace health and safety regulations. Lawsuits and fines for non-compliance can be hefty. 
• Avoiding Accidents and Injuries – Safety audits identify ways to improve work processes, signage, and training.
• Employee Satisfaction – Conducting risk assessments demonstrates that you care about your teams and their safety, which boosts morale.
• Protecting Resources – While your first business risk assessment will be the most time and resource-intensive, the process becomes more efficient and easier to refine as you move forward, saving time, money, and physical resources later down the line.
• Improving the Brand Image – Dealing with key risk management factors proactively sends a clear message to staff, stakeholders, and customers that you are a reputable and trustworthy company. 

Risk Management for Small Businesses: How to Perform an Assessment 

Designing an assessment process can be challenging, as there are numerous hazards and possible scenarios to consider and account for. That’s why we’ve put together this handy step-by-step guide.

1. Identify Types of Business Risks 

A risk can be defined as any event with a potentially negative effect. When you’re getting started, it may help to compile an extensive list of business risks split into different categories so you can be as comprehensive in your approach as possible. Examples include:

• Operational risks
• Insurance risks
• Compliance risks
• Security risks
• Physical risks
• Environmental risks
• Technology-based risks

2. Run Threat Scenarios

Under each business risk category, identify specific hazards, determine which assets are at risk in each scenario, and assess the scale of impact. Here are some examples to get you thinking:

Hazards

• Fire or explosion
• Hazardous materials spill
• Workplace violence
• Technology failure
• Power outage‍
• Cybercrime‍
• Fraud‍
• Mechanical breakdown
• Supplier failure

Assets at Risk

• People
• Property
• Vehicles
• Equipment/machinery
• Reputation
• Environment
• Supply chain

Impacts

• Casualties
• Lawsuits
• Fines
• Property damage
• Financial loss
• Suspension of operations
• Loss of customers

3. Mitigate Risks When Possible 

There are four main types of risk management strategies to help you ‘treat’ each risk:

• Risk acceptance – A risk is accepted as unavoidable, and no action is taken. 
• Risk transference – A risk is contracted out to an external party to manage on the organization’s behalf.
• Risk avoidance – Action is taken to eliminate the possibility of a specific event occurring.
• Risk reduction – Steps are taken to minimize the likelihood of a specific event occurring. 

4. Create a Risk Policy Guide

Creating a company policy guide or employee handbook is a great way to outline your policies clearly. Ensure all employees are given a copy, and get them to sign a document stating they have read and understood the content. Be sure to include details on risk reporting processes so you can constantly evaluate and improve your policies. 

5. Insure Against Risks

Many insurers offer risk management policies that provide financial protection in the case of losses due to injury, assets, and revenue loss. Premiums are available to suit the needs of businesses of various sizes and structures. 

6. Revisit Regularly

Business risk analysis is not a one-time process. Risk assessment should be revisited at least annually and at any time your company’s risk portfolio changes.