A business risk assessment enables you to identify possible hazards and their consequences.
In order to remain in business and stay ahead of your competition, it’s crucial to reduce business risks, purchase insurance, and establish disaster recovery plans. Risk assessments are especially necessary for small businesses.
A report by the U.S. Small Business Administration found that up to a quarter of small enterprises are unable to recover from disasters.
This is why it’s crucial for vulnerable companies to spot potential problems, so they can make plans of how to eliminate or deal with them. Risk assessment plans are also reliable when insurance isn’t sufficient to cover potential risks.
Stages in a Risk Assessment
Risk assessment goes hand in hand with a business impact analysis. While a risk assessment enables you to identify potential problems, a business impact analysis determines how these risks will affect your business. The main steps involved in risk assessment and business impact analysis are identifying hazards, identifying the assets that are at risk, and analyzing the impact.
Identifying hazards involves listing the range of risks your company is likely to face. These include mechanical breakdowns, fires, cyber-attacks, and acts of nature. On the other hand, identifying the assets that are at risk involves listing down the assets that are likely to be damaged by the potential hazards. Some of the assets affected by business risks include customers, employees, buildings, the environment, and a business’s reputation.
The final step in a risk assessment plan is to determine the extent of the damage. In this last phase, you’ll estimate the extent of damage that will affect your assets. For example, you stand to lose money in a lawsuit in case of a workplace-related injury. You may also be fined for failing to comply with industry regulations or lose customers after a cyber-attack that steals client data.
Types of Risks
There are different ways of identifying risks. Risks can be classified as physical risks, business risks, location risks, human risks, technology risks, and strategic risks.
1. Physical Risks
The most common physical risk is building risk. Fires and explosions are good examples of physical risks. To manage physical risks and their effect on employees, you need to ensure all employees know the business’s address, so they can give directions to a 911 operator when an emergency arises.
Additionally, employees should know all building exits and be trained in emergency protocols. You also need to ensure the building has fire alarms, smoke detectors, and a sprinkler system.
2. Business Risks
The most common business risk is a hazardous material risk. This involves spills or accidents. Some of the risks involved with hazardous materials include acid, toxic fumes, toxic dust, gas, and poisonous liquids. People working with these materials need to be well-trained in handling them safely.
You need to have a plan on how to handle the effects of hazardous risks. This may include having a fire department hazardous material unit on speed dial. You can get valuable information on prevention and control measures from local fire departments and government agencies.
3. Location Risks
Some of the location risks you’re likely to face include storm damage, fires, floods, tornados or hurricanes, earthquakes, and natural disasters. Employees need to be familiar with the streets surrounding your business.
Additionally, your work vehicles should be sufficiently fueled so your staff can easily drive out and away during emergencies. You should also consider having property or liability insurance to minimize the cost of location risks.
4. Human Risks
One common human risk is alcohol and drug abuse in the workforce. If you’ve employees struggling with drug or alcohol abuse, you need to refer them to treatment or counseling and rehabilitation programs. Some other human risks include embezzlement, fraud, and theft.
You need to put in place measures that prevent these occurrences. For example, you can develop a double-signature system for invoices, checks, and payables verification. You should also have a policy of stringent accounting procedures to identify cases of fraud and embezzlement.
Human risk also involves illness or injury among your employees. The best way to address this risk is to have well-trained back-up personnel to take up the work of employees who are absent because of illness or injury.
5. Technology Risks
The most common technology risk that your business is likely to face is a power outage. One of the most appropriate measures against this type of risk is having a reliable power back-up system. For example, you can invest in an auxiliary gas-driven power generator. For computers, you can invest in back-up batteries.
Additionally, you need to make provisions for power surges. For this risk, you need to have surge-protection devices to prevent the destruction of equipment and loss of documents. You also need to have offline and online data back-up systems for protecting critical documents.
6. Strategic Risks
Financial institutions, like credit unions or banks, face strategy risks when they lend money to consumers. On the other hand, pharmaceutical companies face this risk when developing a new drug. Therefore, strategy risks are specific to a particular industry. Make sure to set priorities when it comes to the cybersecurity of financial institutions like credit unions and banks.
If your business is exposed to a substantial strategy risk, you can minimize the negative effects by establishing infrastructures that can support high-risk undertakings. A system designed to control the costs arising when a risky project fails may include the diversification of projects, the ability to meet the cost of new ventures affordably, and a comprehensive mechanism of reviewing and analyzing potential projects based on future returns.
Benefits of Risk Assessment
There are many benefits of risk assessment for your business. First of all, a risk assessment plan helps you make risk-based decisions. Additionally, it helps organizations formulate strategies with these potential risks in mind.
A risk assessment enables companies to brace themselves against risks. When you understand your business’s potential risk, you’ve a competitive advantage and are able to make savings that would otherwise be used for mitigating damages. Moreover, in this techno-survey business world, risk assessment is the best way to protect your business from cybercriminals. By anticipating cybersecurity threats, you’ll maximize opportunities and improve your chances of achieving operational and strategic goals.
Furthermore, risk analysis enables companies to create a risk-awareness culture. This way, the entire workforce understands that risks exist at all levels of the enterprise. Overall, it helps improve operational efficiency by reducing the expenses and cycle times of a risk analysis.
Risk assessment is an indispensable tool for successful businesses. It involves identifying potential threats to your business and creating policies that help prevent these risks or recover quickly from their effects. The risks you’re likely to face as a business owner will depend on the activities your industry deals with.
A risk assessment plan begins with the identification and classification of risks. After identifying potential risks, you should determine the assets that are affected by these threats. Finally, you need to calculate the extent of damage that these risks are likely to cause.
The plan should then include measures of preventing or minimizing the damage caused by these threats. In the business world, the higher the risk, the higher the possible rewards. Since risks cannot be avoided, the best way for a business to thrive in the face of threats is to develop a risk assessment policy.