There is no business without risk, for every business opportunity comes with some potential hurdles that, if not properly managed, can cause harm to the business. You must learn to manage these risks to succeed in business.

You cannot eliminate all the risks in the business world, but you can manage their impact on your business. This is where risk assessment comes into play. Risk assessment is a critical aspect of sound business strategy involving identifying, analyzing, and evaluating potential hazards, their likelihood of occurring, and their impact on the business, its systems, or its employees.

You must understand some basic foundations to build a solid risk assessment mechanism. In this article, we will guide you in understanding the role of risk assessment in achieving organizational goals and the essential steps involved in risk assessment.

Role of Risk Assessment in Achieving Organizational Goals

1.      Identification of Significant Risks

The primary objective of risk assessment is to recognize and bring into light potential threats that can hinder the business from achieving its goals and strategies. This involves evaluating all aspects of the organization to identify risks.

Assess each department after the other and assess their processes, structure, technology, and functions to identify vulnerabilities, loopholes, weak points, potential threats, and areas that need more improvement.

For continual effectiveness, it should be done regularly. It can be monthly, bimonthly, or annually, depending on the complexity of your business.

2.      Measuring the Impact of Risks

Once you have identified the significant risks, the next step is to assess the extent and degree of their impact on the business operation to determine the appropriate responses. This involves a gradual process where each identified risk is analyzed, and its potential consequence and severity understood. This helps you prioritize the risk accordingly.

The most effective way to prioritize the risk is by using a risk matrix. The risk matrix helps to categorize the risks based on their likelihood and magnitude level, assigning a score. The matrix identifies a high-priority risk that requires quick proactive measures. This helps you know the areas to focus resources to address the most critical issues. Additionally, you can use a risk register to categorize the identified risks and measure their impact.

3.      Shaping Business Strategy

In addition to the above two, risk assessment is crucial in shaping and adjusting business strategies. Insights gained from identifying and measuring risks are used in strategic decision-making and planning to ensure the business is on track to achieve its goals.

Using the risk thresholds to identify key risk areas, you can make more informed decisions and design processes that align with your business risk appetite and strategic objectives. This proactive approach ensures that business strategies are resilient and adaptable, allowing them to navigate uncertainties and maintain a competitive edge. Additionally, incorporating insights from the risk assessment into strategic planning helps businesses achieve their goals while effectively managing potential threats.

Steps Involved in Risk Assessment

Here are the five steps to systematically carry out a risk assessment in your organization.

Step 1: Risk Identification

Ask yourself and the management team, “What are our key business risks?”  To answer this question, you have to assess your business operation to identify potential operational disruptions and evaluate your compliance with standards and policies and your reporting processes for loopholes that can alter the accuracy and reliability of financial and operational reports. Below are some areas to consider when identifying risk.

• Industry: Identify specific risks associated with your industry, such as market volatility or technological advancements
• Economic Conditions: Consider the general economic changes, policies, and conditions that can affect your business, such as inflation rate,
• Regulatory Changes: Assess the degree and extent of the impact of the changes.
• Organization Size and Complexity: The risk that comes with scalability and expansion of business size and operations.
• Operational Strategies and Objectives: Consider what could go wrong and hinder the business from achieving its strategic goals.

Step 2: Risk Analysis

What is the likelihood and magnitude of business risks identified? Is the impact of the risk severe, and how fast will it occur? What risk can cause the most damage to the business? These are questions you need to find answers to. Break down each of the identified risks and analyze them. Here are some procedures that can help you:

• History: Review past issues, errors, and fraud that had occurred in the business. How did it happen? What are the loopholes in the processes or structures that allowed it? This gives you a pointer on how to address current risks.
• Complexity: Assess the complexity of transactions and processes. The more complex the transactions and processes are, the greater the risks involved.
• Quantitative Value: Evaluate the size, volume, and value of the transactions related to various activities, processes and projects of the business. The greater it is, the higher the risks.
• Estimates and Subjectivity: Evaluate the level of estimation and subjectivity involved, as higher levels increase risk unpredictability.

Step 3: Risk Evaluation

A major question to ask your team at this stage is, “Which risks require immediate attention? Assess each identified risk to determine its severity, probability, extent of its potential consequence, the likelihood of it occurring, and cost implications. Also, assess the risk tolerance of the organization to determine the level of risk the organization is willing to accept.

One major tool that can aid you in conducting an effective risk evaluation is a Risk Evaluation Matrix. This tool gives you a visual representation of the risk categorized into different quadrants, such as high, medium, and low, showing the likelihood of the risk occurring against its potential impact.

For more complex risk assessments, you can use risk scoring models. These models assign numerical values to both the likelihood and impact of risks, giving you a more precise evaluation. The scores are used to generate an overall risk score, which is used to prioritize mitigation efforts. Other evaluation tools you can use are scenario planning and Key Risk Indicators (KRIs) to monitor the level of exposure to specific risks.

Step 4: Risk Mitigation

What are the proactive approaches in place to address the identified risks? In this stage, business management should design proactive measures and strategies to avoid or reduce the impact of the risk on the business. It involves approaches such as:

• Risk avoidance: This deals with eliminating the risk by altering the existing process or changing the course of action. For example, you might decide not to invest in a particular market due to high political instability.
• Risk Reduction: If the risk cannot be avoided, look for ways to reduce its impact. Risk reduction involves implementing strategies to lower the probability or severity of a risk. For example, diversifying suppliers, tightening up security measures, etc.
• Risk Transfer: This entails shifting the risk to a third party. This is often done through insurance or outsourcing.
• Risk Acceptance: In some cases, you have to accept the risk because the risk is either too small to warrant mitigation efforts or the cost of mitigation may outweigh the potential loss. For instance, as a large manufacturing company, you can accept the risk of minor equipment breakdowns by opting for scheduled maintenance rather than investing in redundant machinery.

For a risk mitigation plan to be comprehensive and robust, it must involve:

• Prioritizing risks: focusing on the highest-impact risks first.
• Assigning responsibilities: There should be a clear definition of those responsible for implementing the mitigation strategies. If possible, it should be documented.
• Developing contingency plans: Create backup plans in case something goes wrong with your mitigation plan or if it falls. Use scenario planning to develop comprehensive backup plans.
• Monitoring and review: Monitor the mitigation plans to assess their effectiveness.

Step 5: Risk Monitoring

This involves keeping a watchful eye on your business. It involves tracking identified risks, measuring the changes in their impact and likelihood, and assessing the effectiveness of risk mitigation mechanisms.

It’s the final but critical stage in the risk assessment cycle that helps your business take corrective measures as they are due, refine mitigation plans, know when to employ backup plans, improve resilience, and protect the bottom line.

To effectively monitor your business-identified potential risks, you can get a risk register, which offers a centralized repository to input the identified risks, their status, and associated mitigation plans.

Final Words

Don’t let potential hurdles derail your business success—partner with Mac Adebowale Professional Services today to ensure your business stays resilient, adaptable, and ahead of the competition. Our expert team is always ready to guide you. Contact us now at emails@macadebowale.com or macadebowaleadvisory@gmail.com.