Ways in which risk assessment help identify potential business disruptors
Risks are integral to businesses. There is a range of risks that can cause a range of damages to an organization, business niche, or individual. In fact, business risk is a comprehensive expression that includes strategic investment risks, the risk from loans or mortgages, risk from investing in stocks, bonds and mutual funds, etc.
Entry of new competitors in the market, breach of data security, product recalls, operational risks, etc. are some of the other risks associated with a business.
To take a decision regarding investments in stocks and bonds, advancing loans to customers, mortgages, investments in acquiring companies, or implementation of better IT or other infrastructure for business processes and so on entail risk assessment.
Proper and diligent assessment helps the organization calculate their risk in a certain venture with a certain degree of accuracy. The better the risk analysis, the lesser are the chances of catastrophic incidents in business operations or negative returns in investments.
Risk assessment is performed before planning. In fact, planning an investment or transaction depends on proper risk analysis.
Why it risk assessment needed?
Calamities (natural or manmade), breach of data integrity, employee theft, product recall, operational hazards, etc., may be a one off occasion, but entail a huge cost to the company. Those who have gone through the risk assessment process will agree that risks crop up from nowhere.
In fact, there are several potential risks lurking in the different areas of operation, investment planning, infrastructure, and other areas of a business. Top managements must have a firsthand knowledge about the comprehensive set of risk-prone areas throughout the organization.
This helps them mitigate the associated risks to some extent and prevent catastrophic failures, breaches, product recalls, investment blunders, etc. In fact, the business needs to assess the perceived risks in various niches of its operation, organization, and investment.
Indexes for assessing risks in various industries
There are various techniques and indexes that industry bodies employ for risk assessment in a certain field. For example, take portfolio managers—This breed of managers manage stock and real estate portfolios of high net-worth individuals.
Risk assessment in these two different niches is quite different. Real estate investment for high stock portfolio is geared toward a sustained income generation. So the risk assessment in these cases entails different factors and indexes.
Similarly, risk assessment in the case of loans to individuals entails calculation of credit history. The same for loans to corporate entities entails a calculation of credit rating. The basic difference between these two scenarios is that credit rating is generally done by reputed rating agencies, whereas credit history check is done by the lender himself.
Advantages of risk assessment
There are a number of advantages that accrue to a client through risk assessment.
Customer specific risk profile: Individuals will have a risk profile based on his or her earnings, loans, mortgages, collaterals, etc. Once the profile is ready, the risk analyst marks a risk category against it. This risk score will dictate further investments or the customer’s loans.
If the risk is high, the customer’s investment portfolio needs to be planned in such a way that it is geared toward assured regular earning. Moreover, if the risk is less, the investment portfolio can be tuned to larger growth for higher return.
Follow up on identified risks
In most of the cases, risk assessment leads to the identification of risks in processes, infrastructure, human resources, etc. These factors could not have been noticed otherwise. So it offers them an opportunity to mitigate the risk factors at normal times. This ensures that business disruption can be prevented to some extent. Also, if there is a crisis in the management, processes, or IT infrastructure of a business, the management can calmly deal with it since they are aware of the vulnerabilities and strengths.
Steps of risk assessment
Identification of risks
Risk assessment is a prolonged exercise that demands finesse in various aspects of business management. You need to have a team of professionals who are well versed with various business processes, human, IT infrastructures, etc. Only qualified experts can identify specific risks—they have to uncover potential risks and describe them to business managers.
On identifying the risks, these have to be analyzed in detail for their occurrences and consequences.
Ranking risks is made on the basis of risk analysis.
Risk factor mitigation
Risk factor mitigation or risk response planning is the final stage of risk assessment. The risk assessment team will pick up the highest ranked risks and escalate it to a certain level. A strategy is then formulated to mitigate these risks.
If you conduct a risk assessment the right way and adhere to specific industry standards, there is a strong likelihood that you will not only minimize risks but also enhance opportunities.